Factors related to venture feasibility analysis and business plan preparation.

FACTORS RELATED TO VENTURE FEASIBILITY ANALYSIS AND BUSINESS PLAN PREPARATION

In recent years, governments, educational institutions and private corporations have become increasingly involved in the process of educating entrepreneurs (McMullan 1988). There is some evidence in the literature

to indicate that entrepreneurial education programs have a positive influence on aspiring entrepreneurs (Hornaday and Vesper 1982, Clark et al. 1984, Watkins and Morris 1981, McMullan 1988, Wyckham and Wedley 1989). Important components, common to many of these programs, and as yet not examined in the literature, are feasibility studies and business plan preparation. This study analyzes demographics, ownership/employment, and venture factors as they relate to feasibility analyses and the preparation of business plans.

Educators designing recruitment, selection, and curriculum components of entrepreneurship courses may benefit from a better understanding of the factors related to successful venture feasibility analysis and business plan preparation.

New Enterprise Program (NEP) graduates and their ventures are the focus of this research. The NEP, offered by Continuing Studies, the Faculty of Business Administration, and the School of Engineering Science at Simon Fraser University, is a merket-responsive program aimed at current and aspiring entrepreneurs, research and development professionals, and corporate managers of new product development. Between the spring of 1985 and the spring of 1988, a total of 97 participants completed the NEP.

Given that it is the objective of the New Enterprise Program to assist aspiring entrepreneurs to determine the feasibility of their proposed ventures and to help them prepare plans to launch and manage their businesses, three research questions were addressed:

1. Are participants able to evaluate the feasibility of their ventures?

2. Do they prepare business plans?

3. Are there demographic, ownership/employment, and venture factors which distinguish those who determine venture feasibility and those who do not, and those who do and do not prepare a business plan?

EVALUATING ENTREPRENEURSHIP EDUCATION

There are many ways to evaluate entrepreneurship education programs. Table 1 outlines some objectives of these programs which may be used to examine their output.

In addition to these objectives, demand for spaces in entrepreneurship courses, the value of entrepreneurial consulting by students, and after-graduation course assessment may be used as foci for evaluating the perceived impact of education for entrepreneurs.

Although only a limited number of measures are addressed, research results demonstrate that entrepreneurship programs can yield positive returns. For example, data suggest that entrepreneurship courses may influence career choice toward self-employment (Clark et al. 1984, Hornaday and Vesper 1982). In a study of graduates from one business school, Knight (1987) found that a significant proportion of the people who became entrepreneurs felt that their studies had prepared them for a career in entrepreneurship. And, graduates of entrepreneurship programs seem to be more likely to start their own businesses (Clark et al. 1984, Conner 1985, Hornaday and Vesper 1982, Watkins and Morris 1981), although Dimick (1986) did not find this relationship. Furthermore, courses in entrepreneurship are one of the factors related to increased venture spin-offs from universities (McMullan and Vesper 1987).

Moreover, entrepreneurship education may be cost effective. A learning program for aspiring entrepreneurs working with established entrepreneurs resulted in positive returns (Long and Ohtani 1988). Similarly, increased taxes more than covered the cost of long-term counselling at Small Business Development Centres (Gatewood et al. 1987). The New Enterprise Program is analyzed in light of such evidence.

THE NEW ENTERPRISE PROGRAM

The New Enterprise Program, begun in 1985, is an evening, community-oriented course aimed at people with innovative new venture concepts. The objective of the program is to develop participant's knowledge and skills in feasibility analysis and business plan preparation. Participant's proposed ventures are used as the focus for analysis and planning. The NEP has won two Awards of Excellence from the Canadian Association for University Continuing Education.

Designed to meet the needs and schedules of entrepreneurs, the NEP begins with a three-day intensive seminar focusing on: the characteristics of entrepreneurs, the start-up decision, defining the mission and purpose of a new venture, the business planning process, the entrepreneurial team, evaluating and controlling the business, government services and requirements, obtaining financing, business strategy, how to analyze an industry, entrepreneurial alternatives, and steps in writing a business plan. Beginning one and one-half weeks after the initial seminar are six weekly five-hour afternoon-evening sessions. These sessions address aspects of the feasibility analysis and business planning process in greater detail and in a manner which provides direction in the preparation of a business plan. Topics covered in the six sessions include market opportunity analysis, marketing strategy, financial planning and evaluation, operations planning, the management team, and putting it all together.

The instructors in the program are university faculty members from business administration and engineering and consultants from the business community. Instructors provide weekly feedback on assignments designed to assist in feasibility analysis and business plan preparation. In addition, each participant is assigned a mentoran individual from the business community--who works with the participant on a one-to-one basis. Mentors also provide participants with opportunities to network with the business community. Additional networking occurs among participants and instructors during the evening meal hour which is built into the course.

At the completion of the program, a panel of financial practitioners evaluates completed business plans. The evaluators refer to the following criteria: appeal as an investment opportunity, overall business concept, level of professionalism, quality of financial forecasting, apparent weaknesses, the entrepreneurial team, and the general potential of the business. To encourage the completion of business plans, awards of excellence are presented to those whose plans receive the highest evaluation.

RESEARCH METHODOLOGY

The Population

The population from which the sample was drawn contained all 97 graduates of the New Enterprise Program. The average age of the participants, at the time of entry, was 38 years. Females tended to be slightly younger than males, although the difference is not statistically significant. Participants' ages ranged from 23 to 67 years. Although provincial government sources suggest that at least half the new businesses started in British Columbia are launched by women, only 23 percent of program participants were women. (See table 2.)

People with a wide range of academic backgrounds have been attracted to the NEP. Most participants were well educated. All were high school graduates; 81 percent had post-secondary education; 53 percent had at least one university degree. Almost 60 percent of the university graduates were from the sciences.

Eighteen percent of the NEP participants were first-generation Canadians and 20 percent were second generation. Forty-two percent were the first child in their family. These figures support findings of other studies that a disproportionately large number of entrepreneurs are immigrants and many are the first-born child in their family (Knight 1983).

Data Collection

All New Enterprise Program graduates were sent a questionnaire by mail. Participants were then telephoned and their responses to the questionnaire recorded in writing. Eighty-six sets of data were obtained (89 percent of the population). Analyses were carried out on data from the total sample and from those who had been out of the program for at least six months.

Data were collected on the characteristics of the program participants, the nature of their venture, the stage of development, and whether or not they completed a business plan. The next section analyzes the characteristics of the participants and their ventures. Subsequent sections analyze whether or not their projects were feasible and whether they prepared a business plan. The results can be generalized to entrepreneurial education programs which have similar characteristics.

CHARACTERISTICS OF THE SAMPLE MEMBERS AND THEIR VENTURES

Sixty-five percent of the respondents were sole owners or partners in small businesses prior to entering the NEP. Fifteen percent were employees of small firms, 17 percent worked for large companies, and 3 percent were neither owners nor employees.

At the start of the NEP the largest number of the participants' ventures were at the pre-start-up stage of development. About two in ten were at the prototype stage and almost one-third were at the post-start-up stage. (See table 3.)

Table 4 presents data on the types of entrepreneurial projects the NEP participants were evaluating. Almost half the participants were examining a completely new venture. Just over one-third were studying a refinement for a current venture, and the remainder were looking at a new product or service for an existing market or a new market for a currently sold product or service.

One-third of the NEP participants were examining a venture for themselves with the intention of starting a new company. Some of this group already owned another company. Fifty percent of the participants were examining a project for an existing company of which they were the sole owner or a partner; 17 percent were examining a venture for their employer. Given that 28 sample members were employed by small and large businesses (see table 3) and only 15 of them were examining a venture for their employer (see table 4), it seems likely that the others had the intention of going out on their own. This supports findings that many entrepreneurs are corporate refugees (Knight 1983).

Most respondents were not going into their ventures without experience. Seventy-five percent of those who took part in the NEP had at least some experience in an industry related to their project. One-third had more than ten years of experience. The average was seven years and the median five years of industry-related experience.

Many of the participants' ventures were computer-related; 24 percent were computer hardware enterprises and 12 percent computer software projects. Other ventures were in the fields of entertainment, manufacturing, consulting, import/export, agriculture/forestry, clothing, and construction. Fifty-two percent of the ventures were services and 48 percent products.

A large number of participants were examining international ventures. Twenty-one percent indicated that the world was their market, and another 20 percent said North America. Thirty-five percent identified their market as Canada, Western Canada, the Pacific Northwest, or British Columbia, and 26 percent were orienting their marketing efforts to the Greater Vancouver area. Ventures aimed at larger markets were more often product-oriented while services tended to be aimed at more local markets.

FEASIBILITY DETERMINATION

The New Enterprise Program seems to have been successful in helping participants determine the feasibility of their new business concepts. Eighty-nine percent of the 86 participants said they had been able to decide whether or not their projects were feasible. Of the 63 participants who concluded that their venture was feasible, 79 percent said the program assisted them in determining the feasibility. Most of the remainder said they knew before entering the program that their project was feasible. Of the 14 who concluded that their venture was unfeasible, all said that the program had helped them to determine the non-viability of their project (see table 5).

Table 5 also shows that there is a statistically significant association between project feasibility and business plan preparation. Those who determined that their project was feasible were more likely to go on and complete a business plan.

FACTORS ASSOCIATED WITH VENTURE FEASIBILITY

To gain a better understanding of the variables associated with feasible vs. unfeasible ventures, a discriminant analysis was performed on the feasible and unfeasible columns of table 5. Wilks' stepwise method with a maximum of five steps was used. Table 6 outlines the discriminating variables while table 7 gives the classification results.

The discriminant equation indicates that participants are more likely to classify their projects as unfeasible if they:

1. were at the pre-start up stage, and

2. were dealing with a service rather

than a product.

Feasible projects were associated with participants:

1. whose ventures were for

themselves rather than for their

employer;

2. who had more managerial

experience; and

3. who were employed by a large

firm at the time of entry into the

program.

BUSINESS PLAN PREPARATION

A primary objective of the NEP is to have participants develop a business plan. It seems that the program has been successful in this regard. Seventy-six percent of the survey respondents had completed a plan.

Apparently, the participants' business plans were not just paper exercises. They were actually used. Of the 65 participants who completed a business plan, 46 used it as an internal planning document. Thirty-two used it as a marketing plan, 27 to get financing, and 12 to attract a partner. Many used it for more than one purpose. Only 11 did not use it at all. (The total does not add to 65 because of multiple use.)

FACTORS ASSOCIATED WITH BUSINESS PLAN PREPARATION

Because the formal activity of business planning runs counter to the instincts of many entrepreneurially oriented people, and because it is believed to be critical to the successful launching of a new venture, the NEP puts a great deal of emphasis on this program component. As pointed out above, three-quarters of those sampled indicated that they had completed their planning document.

To determine what distinguishes those who prepared a plan and those who did not, a discriminant analysis was performed. Wilks' step-wise method with a maximum of six steps was used. The discriminate equation is presented in table 8. The discriminate equation indicates that:

1. Participants who were examining

a venture for an employer were

less likely to have completed a

business plan.

2. However, those working for a

small business, but not necessarily

examining a venture for their

employer, were more likely to have

written a planning document.

3. Other factors associated with business plan preparation are:

a. Those examining ventures

oriented to smaller, more local,

markets were more likely to

finish a business plan.

b. Entrepreneurs evaluating

products rather than services were

more likely to complete a plan.

c. Participants who were the sole

owners of their businesses were

more likely to do a business

plan.

d. Older people were less likely to

complete a plan.

DISCUSSION

Measuring the output of an entrepreneurship education program such as the New Enterprise Program is a difficult and multifaceted task. One would like to be able to say that the participants' analytical skills were sharpened and that they were subsequently able to do a superior job in evaluating the feasibility of their ventures. Similarly, one would hope that those who participated would develop planning skills, actually create a business plan, and go on to use this plan as the model for their new business. One would anticipate that this process would result in an increase in appropriate launch decisions, i.e., that participants would be confident in, and actually make better decisions to go ahead, or not to go ahead, with proposed enterprises.

Attributing a cause-effect relationship between an education program for entrepreneurs and some set of subsequent events is a tenuous undertaking. At best, one can identify a correlation. It may well be that the subsequent events would have occurred without the interposition of the program.

However, given the caveat that no claim of cause-effect can be made, it is instructive to examine some of the post-program results.

VENTURE EVALUATION AND BUSINESS PLANNING

Entrepreneurs require unbridled enthusiasm to carry through the arduous task of evaluating a proposed enterprise. Their keenness for their venture can sometimes get in the way of an objective evaluation of its feasibility. The NEP provides participants with an orientation to information gathering, tools to analyze data, and decision rules to use in determining whether a venture makes economic sense. It also provides inputs from mentors, program colleagues, and instructors which help to dampen unreasonable optimism. The survey data indicate that the program has been successful in assisting participants to conduct new venture feasibility analyses.

Eight in ten NEP participants said that the program helped them to determine the feasibility of their ventures. This was true both for those who concluded that their project was feasible and for those who decided that their proposed venture was unfeasible.

Almost 20 percent of those who had been out of the program for six months or more had determined that their venture was not feasible. The NEP appears to have made a contribution to the abandonment of a number of, perhaps, ill-fated projects. It is important to truncate ventures with little chance of success. From this perspective, the program can be judged to be effective.

Business planning, for the entrepreneur, is an extension of the feasibility analysis process. The information base is the same, but the use of the information is different. Three-quarters of the responding participants completed a step-by-step plan for the launch and management of their enterprise. It seems likely that many of these venturists would have had neither the knowledge nor the inclination to prepare a detailed design of their proposed businesses before entering the New Enterprise Program. Demonstrated financial feasibility and a well-prepared business plan put the entrepreneur in a position to understand and address the risks involved in launching a new enterprise.

It appears that the NEP participants went beyond simply creating plans to actually using them in the development and operation of their companies. Although most used their plans to point the way for internal and external strategies, some used them to generate financing and attract partners. NEP participants seem atypical of entrepreneurs in the use of business plans in the development and operation of new ventures.

It seems likely that the New Enterprise Program played a role in influencing participants to conduct explicit feasibility studies, to prepare formal business plans, and to utilize those plans in the launch and management of their new ventures.

PARTICIPANT TARGET MARKETS

Given that a program such as the NEP seems to be of value in assisting entrepreneurs, who should be encouraged to participate? The easy answer would be any and all individuals who are interested in starting a business. However, such programs usually do not pay their way on an operating basis, so it is important to select participants in a way that maximizes benefits.

Currently, the NEP tends to attract middle-aged male university graduates with quite a few years of business experience. Is this the appropriate target market?

If the objective of the program is to identify feasible entrepreneurial projects, then perhaps the current participant population is appropriate. Those most likely to conclude that their venture was viable had had more managerial experience, were developing an enterprise for themselves, and were employed by large firms. However, if it is also a goal to have candidates complete a business plan, those presently attracted to the program may not be ideal. Older candidates, and those examining a venture for their employer, were less likely to complete a business plan. Most likely to complete a plan were those who were employed by a small business, those examining local market ventures, those evaluating product-based projects, and those who were sole owners.

Combining what we know about the demands of the NEP program, the characteristics of current participants and the results of this analysis, suggests that weight should be given to candidates who have some post-secondary education and some managerial experience. Further, prospective participants might best be looking at a product-oriented project for themselves (rather than for an employer) and one that is beyond the start-up stage of development.

CONCLUSIONS AND RECOMMENDATIONS

The participants in this university-based entrepreneurship education course indicated that the program assisted them to determine the financial feasibility of their proposed new ventures. In large proportion, they prepared and utilized the business plans the program is designed to assist them with. Hence, it can be concluded that this entrepreneurial education program achieved its objective.

Differences between those who determine feasibility and those who do not, and those who write business plans and those who do not, suggest a set of criteria which may be used to select program participants who are likely to carry out these functions.

The results of this study suggest some future research directions. An ongoing tracking study of sets of graduates would provide valuable information. For example, what patterns were followed by graduates who did not "complete the process," i.e., did not determine feasibility, did not complete a business plan? Did graduates who completed the feasibility/planning process stick with their enterprise or move on to other ventures? Of particular interest would be data on the behavior of graduates in subsequent entrepreneurial projects: did they follow a formal feasibility analysis, business planning process; did they use the university as a resource; did they utilize a networking system in analyzing and launching other ventures? Are analysts/planners more or less successful as entrepreneurs than non-analysts/non-planners? (We don't want to turn out good planners and poor entrepreneurs!) Tracking other sets of graduates from the program or sets of graduates from other programs would allow comparisons which may be helpful in program design. Monitoring the needs and concerns of program graduates may be of value in organizing post-launch support systems. All of these data may be of assistance in attracting resources to entrepreneurial education programs.

The program evaluated in this paper was specifically designed for entrepreneurs at a point fairly far along in the entrepreneurial process. Research is also needed to determine the effects of programs designed to provide information and inculcate values about entrepreneurship in those who are curious but know nothing about the field. What types of people are encouraged or discouraged by this type of program? What is the likelihood of a person who attends such a program moving to the next stage of entrepreneurial endeavour? Programs for high school students and early post-secondary students would be prime candidates for this type of research.

Greater returns to entrepreneurial education can be achieved if program design is based on thoughtful research. [Tables 1 to 8 Omitted]

Dr. Wyckham is professor, Faculty of Business Administration, Simon Fraser University, Burnaby, British Columbia, Canada.

Dr. Wedley is professor, Faculty of Business Adminstration, Simon Fraser University.