A lot of founders are confused by what an operating plan is, so let’s start there. Your operating plan is a numbers-and-milestones driven timeline covering the amount of time you can reasonably predict. This is not your hopes-and-dreams hockey stick growth chart; you do need that, both for the pitch process and your own planning purposes, but in this case, we are trying to build a plan, as realistic as you can make it. Your operating plan should “click” into the hockey stick/five-year financial model, so that a potential investor can easily draw a line from where you are today, to where you’ll be in a few months, to where you’ll be in several years.
As the founder, think of it this way: If you were asked to place your hand on a bible and swear that you think you can execute to this plan within 10% of the numbers you’ve presented, you should be able to say a confident ‘yes’. Of course, you also have to balance this with what your investor wants to see. If the next six months of your startup are looking lackluster, that might indicate that you need to rethink how you run your business, both in terms of growth and ambition. In other words, if you are too conservative the VC may consider you too low growth/not exciting enough - what our FP&A team calls “modeling yourself out of a transaction.”
The corollary of this is that your operating plan should cover the amount of time you can reliably predict with some degree of confidence. If your operating plan covers the next 5 years of your startup, we can tell you one thing: It’s going to be grossly inaccurate; If you are able to predict the next 5 years, you should be a stock trader, not a startup founder!
In a nutshell, to an investor, the operating plan answers the question “If I invest $5m into your company, what does that buy me?” The extension of that is that when you reach the end of your operating plan successfully, does your business have enough traction or proof-of-concept in order to raise your next round of funding? Think of your fundraising as a bridge to your next set of milestones that unlock the next stage of the business. We often say “Make sure you are building a bridge, not a pier” - in other words, make sure you raise fast enough and spend slowly enough to get to where you need to go.
It’s worth noting that, confusingly, there are often two different things referred to as an ‘operating plan’ in this context. One is your working operating plan - the financial and KPI dashboard you use to operate your business as the founder. The other is an abridged operating plan that you can include in your pitch deck. This article focuses on the latter.
What goes on your operating plan
Your operating plan should include major milestones, such as product launches and fundraising activities. It should also include the most important non-financial key performance indicators (KPIs). This will include your head count, your user growth, and other similar metrics.
In addition to the milestones and KPIs, include the top-level financial numbers that back up the milestones in question. That means operating expenses, with your largest expenses broken out separately. This would typically be your staff costs and your inventory cashflow, if you’re running a physical-goods business. If you have large non-staff R&D costs, break those out, too. If your business is generating income, include that on your operating plan as well. Here are a few things that most investors would like to see on your plan, but bear in mind that this is generic advice; your business may not need all of them, or it may need metrics or information that is specific to your company, market, or industry.
- Your hiring plan - who are you hiring, when, and what do they cost? Include the plan for your options pool. How much equity do you need to reserve for future hiring?
- Tie your hiring plan to your milestones. If your marketing team grows 5x but your marketing budget only doubles, are you sabotaging your own efforts?
- What is your expected revenue, and how is this revenue represented in your plan?
- What is your expected cost of goods sold (if relevant) or other direct costs (server costs, platform subscriptions, etc) of delivering your product?
- When do you next need to raise funding?
- Include any product milestones - product launches, major version releases, and other product-related activities
- Key performance metrics and goals you mean to hit along the way. Falling short on these can help as an early warning system, and over-performing might mean that you need to hire or grow faster than you were planning to.
Of the above, it is particularly important to pay attention to your options pool; your investors may try to use this as a negotiating tactic. Keeping your options pool as small as possible means that VCs don’t risk getting diluted by your staff - but at the same time, if you reserve too little for future hiring, you may discover it becomes hard to attract the caliber of staff you need to be successful.
Time horizon and granularity
Your operating plan is a plan, but it isn’t a projection. It makes a lot of sense that you can make a highly qualified guess for the next 6-12 months, so it makes sense to include that. We like to break it down to quarterly figures.
Also, ensure to round your numbers to two significant figures. If your spreadsheet says that you’ll do $56,739.13 of revenue two quarters from now, that’s great, but that’s a strangely accurate number to put on an overview plan. Round it to $57k and call it a day - it makes the numbers easier to read and talk about, rather than stumbling over needlessly accurate figures.
Remember that your hiring and fundraising plan needs to run all the way until you run out of cash, so you can have visibility on the financial health of your business. It’s also worth highlighting that the further into the future you are predicting, the less accurate your predictions will be - and it’s okay to name that in your plan.
Show your work!
Now that you have a great operating plan, make sure that you can back it up. In the appendix of your pitch deck, include a link to the spreadsheet you used to build your operating plan, or include a screenshot or table with more accurate numbers and figures. This could include a sheet for your hiring plan, a detailed product development and release plan, and your detailed financial projections.
In your appendix, you can be as granular and precise as you want to be - Use monthly numbers and don’t worry about rounding your figures. Plan three or five years into the future, if you want, but ensure that you highlight that your projections become less and less accurate the deeper you have to look into your crystal ball.
Chances are that your would-be investor won’t be looking at it until they are starting to do slightly deeper due diligence, but if a question comes up about your operating plan, it’s helpful to have your source of truth handy.