Resources > How Judges Evaluate Plans

Several of the 1998 MIT $100k judges have volunteered to share their mental models (criteria) for evaluating business plans.

• Omar H. Khudari
• Bradley Feld
• Edmund R. Pitcher, Testa, Hurwitz & Thibeault
• Dan Schwinn, Avidyne
• Dan Roach, Coopers & Lybrand
• Adam Honig
• E. Robin Plumer, Wolf, Greenfield & Sacks
• Leon H. Leibman

Omar H. Khudari

I think overall business idea and market opportunity are the same thing.

I once heard a talk by a partner from TA Associates, a big venture capital firm in Boston. The speaker told the following story: TA once endeavored to analyze the factors that contributed to the success or failure of a business venture in their experience. They divided the companies they had ever invested in into four numbered groups. Group 1 consisted of companies that had created large profits for the investors. Group 2 consisted of companies that created small profits for the investors. Group 3 consisted of companies that had lost small amounts of money for the investors, and group 4 was the companies that left big, smoking holes in the ground.

TA then attempted to discern a pattern. What factors caused companies to end up in their ultimate group? The answer surprised them. They had expected the sole determining factor to be the quality of the management team. In fact, this turned out to be true for groups 2, 3 and 4. That is, companies in group 2 had better management teams and companies in group 4 had worse management teams. However, the sole factor that determined whether a company ended up in group 1 was the market opportunity.

Companies with great market opportunities were the only companies that ended up making tons of money for the investors. They were also able to grow themselves out of most mistakes their management made.

What is a great market opportunity? Certainly the potential market must be large. Preferably, there should be no entrenched competitors. This generally only happens in the case of very new markets, usually created by the emergence of new technologies. A barrier to entry to new competition is also important.

The first thing I look at when evaluating an investment opportunity or judging a business plan is the market opportunity. Is the potential market large? Can this company take a large share of the market? Are there any entrenched competitors? Although it may be unwise to rely on my own subjective judgement too heavily, I do tend to ask myself, "Would the prospective customer really buy this product or service?"

After the market opportunity, I look at the management team. It is difficult to judge the quality of a team from a written plan. Of course, the clarity and organization of the plan, itself, is an important indicator of how well a person thinks. Also, there are occasions when a person's resume alone indicates a unique qualification for a job. With student submissions, I don't expect to see what matters most to me: past success running a business.

I score the individual sections based on how convincing a case they make for the investment opportunity. I look for a thorough, honest assessment of competitive companies and/or technologies. I also like to see good research into market size and customer needs, etc. In general, if a plan presents a convincing case that the investment will be profitable, I will score the overall plan highly, even without a huge market opportunity.

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Bradley Feld, Partner, Softbank

Overall Business Idea

My intellectual bias is towards software / Internet related technologies.  In these cases, I immediately look for an "analog analog" of the business - the "non-digital" business equivalent.  The team's understanding of the analog analog and how it impacts their business is key.  I am highly skeptical of businesses that rely on fundamental technology shifts and do not believe in businesses that rely on different purchaser behavior than the analog analog.

Non software / Internet businesses are more difficult for me to evaluate since I have little business experience outside this domain.  Subsequently, I usually try to figure out who the customers are an how they would react to the business's products and/or services.

Opportunity Statement/Elevator Speech

I have to be able to read this once and understand what the business is about.  Included in this, I want to know what kind of business this is, what the products and services are, who the customer is, and what the realistic (instead of overall) market opportunity is.  I also want to know why the founders are uniquely qualified to build this business.

Market Opportunity and Strategy

More important than anything else, I want to clearly understand who the customer is, why they'll buy the product or service, and what they are going to be willing to pay.  I also want to understand how the company is going to access this customer base.  Finally, I want to understand the overall market size ("total accessible market") and the expected market penetration after several years.

Competitive Position

What are the different competitor categories?  Who are the specific competitors within these categories?  Why is this company better?

Product

I need to understand the product or service.  I do not want to see a lot of technical details - rather I want to understand the value of the product or service.

Execution: Financial/Operational/Team

I want to understand who is on the management team, how they've thought about their respective roles, who is missing from the team, and why this team is uniquely qualified to create this business.  I also want to understand the path of development of the business is over time, the amount of financing required, and the ultimate exit strategy (along with justification of the exit strategy - e.g. just saying that we'll do an IPO doesn't mean anything - why do you think you'll be able to do an IPO?).

Presentation of Executive Summary

How early on in the summary did I go from "reading mode" to "skimming mode".  This is a very precise indication of my level of interest.

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Edmund R. Pitcher,  Testa, Hurwitz & Thibeault

Reality:  The plan should convince the reader that it actually can be executed.  This involves a convincing story of how the product will actually accomplish its purpose (will it actually work?), and how the proprietors of the plan intend to design, manufacture and market it.  The plan should explain why the reader should believe that this team has or can obtain the
experience and expertise necessary to make it happen.  It should ruthlessly assess risk and outline how  to deal with it.

Size:  The plans should outline a business that in the medium term, 3-6 years, can have sales of at least 10-100MM, and preferably also the potential (with luck, hard work and professional execution) to have a value in excess of , say, 300MM.  Lifestyle business plans are less favored, although they may present an excellent opportunity, and warrant serious
consideration.

Market:  The plan should demonstrate the existence or likely emergence of markets sufficient to support the sales and valuations outlined above.

Margins/Exclusivity:  The plan should explain how gross margins on product/service sales will be maintained in the face of competition.

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Dan Schwinn, Avidyne

Quick Review

When looking through a plan, I try to quickly find the things that might disqualify it from further consideration. This way, I can save time if I am reviewing a plan I would never fund. After looking for the obvious disqualifications, I then study the plan in more detail to see if I can really understand the gestalt of the idea. Only 1 out of 10 (or even 25) plans survives the quick review.

Questions that need to be answered positively in the quick review:

1. Is the market segment one that is relatively easy to make money in? i.e. is this pushing the snowball up the hill or down the hill?
2. Does the plan show a detailed understanding of the potential customer
3. What is the secret sauce behind the plan
4. Does the overall business model make sense
5. What is the scale of the target market? Plans that show 50% market share with $10mm in sales can not provide a return on investment that is worthwhile.
6. What are the barriers to entry and what makes the team think that somebody else won’t do the same thing quickly and better?
7. If there are strong entrenched competitors, there better be something incredibly novel about the plan to displace the competitors.
8. Simple analysis of numbers – are the capital requirements, growth, and profitability reasonable? (i.e. if a plan indicates $50MM in sales with 40% profit in 3 years with $1mm invested, its likely not reasonable)
9. Does the team have specific knowledge and experience that make them appropriate for this venture
10. Who are these people on the team? Are there obvious and immediate reasons why they should be disqualified?
11. Is the investment scenario reasonable?
12. Attention to detail and form. If the plan has typos, misspellings, bad grammar, etc (especially with current technology), it is immediately disqualified.

Detailed Review

At this point, I am trying to really understand a few different scenarios as to how the business might develop, and understand the competitive advantages and hurdles for success clearly.

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Dan Roach, Coopers & Lybrand

Overall Business Idea

Needs to be as simple as possible, describing the need you’ve identified in the marketplace and how you’re going to solve it. There are plenty of bits of technology or solutions running around in search of a problem to fix. You need to have both together, i.e. a problem and a solution. This is much harder than it sounds.

Opportunity Statement/Elevator Speech

Team and then market – it is almost a given that the technology works, it’s the selling and the personnel who can do it that differentiates one plan from another, as well a successful businesses.   I personally find the structure of the plan secondary to a clear elucidation of the opportunity and how to grab it. Don’t just have a parallel processing software solution to enable existing servers to run faster, cheaper, etc.   Have identified a market first, such as banking or the financial trading industry.   Here’s an example: "We have a team from the software and financial services industry, ready to go today.   Here’s our idea: Banking and financial trading applications need systems that are fast, cheap and 110% reliable.  Our software/server combinations make current applications obsolete with an improvement in performance by a factor of 100 and reliability by 1,000, a cost 100% less than current systems and infinitely scalable." We talk about the opportunity first and the technology second.

Market Opportunity and Strategy

In clear statements, tell me how you got to the market quantification you did, and why your strategy will work. What was the source of the research, and what personal expertise does the team have. If you don’t know, say so, but you better have a plan in place to find out.
Competitive Position

Why is your solution the best, i.e. if you’ve written a word processing software, you need to prove to me why it’s the best and how that can be maintained. What is your advantage, technology?  That’s tough to maintain for more than a year or 2, and you’ll need to prove it works.  Distribution?   That can be leveraged though partnerships, OEM agreements, etc.  Team? You may be able to attract an industry leader who will bring a competitive advantage through their presence.

Product

Needs to be what consumers will buy. For example, you’re a software company that makes tools for Java and HTML. If you’re selling into a corporate MIS department, that will require a different product strategy than shrink-wrapped software for sale at K-Mart, and your product in terms of performance, features and price will need to match the market.

Financial/Operational

These are almost secondary in importance to the above, in that you can start a company and get rolling with minimal infrastructure. The financial statement projections should mirror the assumptions in sizing the opportunity, and will provide the reader some account of your sophistication as you look out over the next few quarters. cPersonally, I don’t pay a whole lot of attention to anything beyond a couple of years.   I do look at the financials to see if assumptions are reasonable, such as cash needs, burn rate, the amount of headcount to add, salary expense, costs to support the product, costs of R&D to keep up, etc.

Presentation of Executive Summary

Include at least:

• Team
• Opportunity
• Amount $$  needed
• Exit strategy
• Assumptions on market size
• Thumbnail financials for 5 years
• Distribution

3 pages max

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Adam Honig

My Mental Model begins with understanding the clarity of vision of the proposed venture.  Building and running a business is an extremely hard thing to do, and the best way to strengthen your odds is to be very, very focused on what you are trying to achieve.  This is best expressed in what your organization’s goals are, who your ideal customers are, your ideal employees, etc.

Then I would look at the viability of the business model of the proposed venture.  How will the company derive revenue, and how can it consistently grow the top line of the business?  What expenses are necessary for the delivery of the product and service, and what sort of fixed or overhead costs are the entrepreneurs projecting for the entity?  How and when will the company breakeven, and what happens if it doesn’t?  If the company is successful in growing revenue and profits, what type of return can we anticipate for potential investors?  I put special emphasis on the question what is the size of the opportunity we are attacking?  If it is really, really large can we realistically attempt to conquer it?  If it is really small, should we bother?

Next, I would apply the 99% perspiration rule and attempt to discern the operational savvy of the entrepreneurs.  This is probably the hardest aspect to judge based on a written plan.  Certainly the resumes will help, and I will also evaluate the strength of the written material as an important data point on how well our team can execute.

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E. Robin Plumer, Wolf, Greenfield & Sacks

Overall Business Idea

Does the idea serve an existing need in the industry? If yes, is the product/service tailored to meet that need? Is execution of the idea technically feasible, i.e., does the team have a realistic idea of the time/money/skills necessary to bring the product/service to market?

Opportunity Statement/Elevator Speech

Does this section clearly and concisely state the purpose of the business and describe the product/service in a way that can easily be remembered and conveyed to a third party.  Are the advantages of investing in this business immediately apparent?

Market Opportunity and Strategy

Has the team researched the market and reached conclusions about the size of the market/acceptance of their product/service that are supported by facts. Are the assumptions reasonable in view of what is known about the market ? Does the factual support for the assumptions re: market size/product acceptance have a broad basis, i.e., multiple sources of information rather than anecdotal information from a single source.

Competitive Position

Has the team accurately characterized the competition for their particular product/service? If no competition at present, has the team considered who will be the first entrants into this market and whether their product/service could easily be designed around by a competitor? Is patent or other intellectual property protection available for the product/service? If yes, what steps has the team taken to protect their rights? Does the team have a realistic understanding of patent law, costs for obtaining patent protection, activities that may jeopardize their potential patent rights in the product/service.

Product

Does the reader have a good grasp of exactly what will be sold  (not to the extent of knowing technical details but to the extent of knowing what the product does)  after reading the executive summary?  Does the Opportunity Statement present multiple reasons for entering this market, only some of which are problems that are solved by the product/service, i.e., is the product/service tailored to solve all of the problems that are the basis for this business opportunity.  Is the product too speculative, e.g., is significant product development required in a field in which the results are not predictable?  Is this a one-product company or are other products in the pipeline, i.e., has consideration been given to a second/third generation of products?

Execution: Financial/Operational/Team

Does the team have the necessary skills to execute the business plan.  If not, does the team recognize what additional skills are needed? Is the team a team in name only - i.e., is it apparent what role the team members will play or does it appear that the individuals were included only for  "resume’ value"?   Do the team members have experience that is relevant to the execution of the business plan?

Presentation of Executive Summary

Is the Summary well organized into sections with appropriate headings?  Does each paragraph in a section pertain to that section? (If not, edit to remove unnecessary information.)   Has the summary been carefully reviewed to correct careless errors that  can detract from the substance of the summary? Can any of the data be presented graphically to facilitate evaluation of the information?  Is a photo/image of the product available for inclusion? Does the summary include superlatives? (If yes, delete these unless they are supported by facts.) 

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Leon H. Leibman

Overall Business Idea

When I am presented with a new plan I focus on the team and their prospective business.

 Do they know the business area? Are they committed? Are they realistic about the product, its market and its competition and threats? Will they work well together when the "tough times " come? Collectively, do they possess the relevant experience? Are they realistic about their limitations and where they need help? Is there a team member who plays the role of "the paranoid partner"? Are they open to ideas? Are they imaginative? Do they "check out" – are their references solid? Are there any commitments or obligations that will keep individual members from staying the course? Can I work with each of the members? Will I enjoy the time spent with each member of this team?

Since my experience is with software, software services, data base (content) development and publishing, and value added information services, ideas in these areas are "involuntarily favored".

When I am assessing the business I first look for:

1. A clear definition of the product/service.
2. A thorough description of the market, its size and its growth rate.
3. Sufficient information for me to understand the need and why the proposed business will meet that need.
4. Customer knowledge. Has one or more team members worked in this market area so there is intimate customer familiarity? Has there been some customer research, whether formal or informal?
5. Competitive knowledge. Very few ideas have no competitors. Who are they now? Who could enter the market quickly once they learn of this idea? What barriers to entry exist? What barriers are created by this new business? What are the competitive edges the new company will have? Are they sufficient to allow the business to grow rapidly in the face of competition?
6. Pricing knowledge. Is it a cost based pricing strategy? Or is there a thorough understanding of value delivered to the customer, the quantification of this value and the translation of this into a market driven pricing strategy?
7. Marketing knowledge. Have advertising, promotion, distribution channels and sales strategies been thought through so that their costs can be assessed and the approaches tested?