a16z Partner: Don't let your business go off course, use an operational plan to lock in success.

You cannot control the market, but you can use an operational plan to make the company run more steadily and go further.

Written by: Emily Westerhold, a16z crypto partner

Compiled by: Luffy, Foresight News

"If you fail to plan, you are planning to fail." Benjamin Franklin did not direct this statement at startup founders, but it applies perfectly to them. Founders (especially those in the cryptocurrency space) face many uncontrollable factors: extreme market volatility, constantly changing regulatory policies, and high external expectations.

For this reason, it is particularly important to focus on what you can control, and this is where an operational plan comes into play. An operational plan may not sound glamorous, but it is one of the most controllable and useful tools in your hands, helping you turn your vision into momentum without exhausting funds or overwhelming the team.

Conceptually, an operational plan is quite simple. It encompasses everything the business is doing: What tasks are there? Who is responsible? What goals are to be achieved? What are the total costs? How are results measured? However, the answers to these questions can be intricate, making it crucial to organize them into a single plan.

Even if you have never created an operational plan for a business, you have certainly done something similar in your personal life. For example, if you want to run a marathon, you need a training plan to arrange the preparation in the months leading up to the race. How far do you run each time? When do you increase the distance, and by how much? Which routes do you choose? How do you rest and recover? What do you do if you get injured? In the business world, your "Marathon Race Day" could be a product launch, an initial public offering (IPO), or another significant goal. The principles are similar.

But do not confuse the operational plan with the strategic plan. The strategic plan outlines the macro blueprint of the enterprise; it is the vision you sell to investors. Meanwhile, the operational plan is the specific action plan that puts the vision into practice, transforming the strategic plan into executable details involving personnel, costs, and timelines. Both types of plans are essential for building a healthy and vibrant enterprise.

Next, let's delve into what the operational plan should include.

Develop Operational Plan

First, focus on the four core elements of operations: People (who is responsible?), Time (when will each task be completed?), Cost (what is the budget?), and Metrics (how will progress be assessed?).

The operational plan is an iterative process, so there is no need to get overly caught up in the first draft. There are many best practices to reference, various frameworks, and expensive consultants that can be hired. But the core task is to clearly articulate who is doing what within the company; you can write these down yourself and refine them later. For now, just ensure that the operational objectives for a period are clear and organized.

It is important that your plan involves trade-offs. A business cannot be all things to all people, so trade-offs are necessary. Moreover, these trade-offs should be difficult, prompting the leadership team to engage in thorough discussions about key and non-key directions. No matter how successful a business is, trade-offs will always be a timeless issue, and constraints can actually lead to wiser decision-making.

Three Common Mistakes

When developing an operational plan, there are three common mistakes to be aware of.

1. Do not be overly optimistic about timelines and expected outcomes. Information is constantly changing, so your plans need to be flexible and adaptable. Be cautious of various dependencies: for example, "We must launch Product A before we can launch Product B," "We need to hire two engineers to develop that new feature," "As long as we hire one marketer, revenue will grow by this much."

Incorporating such factors into the operational plan may be very appealing, but once milestones are missed, dependencies can lead to issues. If hiring those two engineers takes a long time, there might be a risk to the deadline for new feature development. Therefore, the operational plan can be optimistic but must also be pragmatic. Allow some leeway to adjust direction when circumstances change, while also remembering to adjust subsequent timelines accordingly.

2. Do not try to do too many things at once. Founders often have many ideas about the business, but time and resources are limited. Pursuing all ideas at the same time can exacerbate capital consumption and distract the team's focus.

On the contrary, it is important to strategically arrange the order of various activities. In other words, think about how different opportunities and capabilities can create conditions for other opportunities and capabilities. Perhaps launching a certain product can bring in new users, which in turn gives you the opportunity to leverage these users; or perhaps investing in a technology can open up new sources of income. Consider how to reasonably prioritize business activities and how to allocate time and resources accordingly.

Of course, reality is often more complex than plans. As a founder, you are most familiar with the array of opportunities related to the product. It is easy to want to seize multiple opportunities, partly because you can see the vast market behind each opportunity, and also because the performance of the core product may not meet expectations or progress slowly, so you want to carve out multiple paths to success for yourself. But the harsh reality is that small teams can usually only excel at one thing. The allure of distraction can often lead to the most important things not being executed properly.

To assess a company's focus, you can ask yourself two questions: What is the company's current top priority? What are employees spending most of their time on? If the answers are inconsistent, there may be a problem.

3. Businesses need measurable success indicators. No matter how excellent your operating plan is, unless you can monitor the operational status of the business, the entire plan may become mere talk. Why? Because if you don't know how to measure success, you won't be able to measure (or even realize) failure, which means you will struggle to cope with challenges and setbacks. Measurement indicators do not have to be complicated; even using red/yellow/green status indicators can work, but you must have measurement indicators.

Remember: what you incentivize drives people's behavior. Carefully consider whether your metrics can bring the best results for the business. For example, you might want to link people's incentives to the results they produce, rather than just looking at how many hours they worked.

Key Points Related to Budget

A budget is a key component of any operational plan, and the operational plan must answer the question, "How much will all this cost?" Therefore, founders should be familiar with some budgeting tips.

Most of the expenses for most businesses are spent on employees. This is not always the case, but it is a useful rule of thumb, especially since founders sometimes underestimate the total costs associated with adding new staff. It's important to consider not just salaries, benefits, and payroll taxes, but also hardware, software, licenses, travel expenses, and all other costs associated with employees. Many expenses are directly related to the number of employees, so this should be used as a basis for modeling when creating a budget.

One related point is not to forget to plan equity just like planning cash. Equity management itself could be the subject of a separate article, but when formulating hiring plans, you should also budget for the relevant equity intended to be granted. The same principle applies if your project issues tokens to employees. In summary, having a comprehensive and clear compensation philosophy is crucial. Mistakes made early on often get magnified over time.

Distinguish between fixed and variable costs to understand the flexibility of the budget. You need to know which parts of the budget can be adjusted and which cannot. Suppose you have to cut costs by 30% next week, do you know where to start? Or suppose the company is growing and you want to increase investment, do you know in which areas it is reasonable to increase investment? This can be challenging for startups as there are fewer variables. However, the more thoroughly you understand these budget adjustment factors, the more adept you will be at making decisions.

Additional Tip: Try to negotiate with vendors and service providers to avoid signing multi-year contracts in order to maintain flexibility.

Scenario planning is your friend. Any budget you create may have deviations, just varying in size. This is true even for mature enterprises, as there are too many factors that budgets cannot cover. Therefore, do not cling to a certain ideal scenario for your company's future; instead, use scenario planning to face various possible futures calmly, and allocate corresponding probabilities and confidence intervals for each scenario. What factors might catch you off guard? What changes could disrupt the company's current model? For example, if faced with regulatory uncertainty, what different regulatory outcomes might the enterprise present? Treat the budget as a learning and planning tool for discussing and sorting various opportunities and uncertainties.

Cash reserves should be able to sustain operations for at least 6 months. Founders often find themselves caught off guard by cash burn issues. Suppose your company has a two-year cash reserve but no operational plan to guide it. It may be by the end of the year that you realize you have hired 5 extra people, and the product development is 6 months behind schedule. Suddenly, your funds are only enough to sustain operations for 6 months. Unless you can effectively monitor cash burn, your energy will be spent on fundraising or cost-cutting. Even if you successfully secure new funding, closing the round may take longer than you anticipated and will incur legal fees. Not to mention, the closer you get to running out of funds, the less negotiating power you have.

The key to avoiding cash flow problems lies in budget control. As a founder, do not overlook this responsibility. While you can outsource the actual work to other team members, you should still communicate monthly to compare the expected cash consumption for the month with the actual cash consumption. Is there a significant difference between the actual cash consumption and the expected cash consumption? If so, is there anything that needs improvement or adjustment? Did you misjudge the costs, or is this just a one-time issue?

For founders, a useful tool is the "zero-based budgeting" method. Currently, many companies base their budget for the next year on the current budget, adjusting it by 10% up or down. While this method is simpler than some others, it does not encourage deep thinking about the company's current needs. Zero-based budgeting requires you to start from scratch and carefully consider the company's actual expenditures for the next year. The benefit is that you must find a valid reason for each expense rather than simply rolling over last year's budget. This helps you allocate the budget precisely to where the company truly needs it.

Regarding capital management, especially for founders in the cryptocurrency space: it is very important to establish an investment policy that provides guiding principles for capital management. While your risk tolerance typically depends on the state of your capital reserves, always remember that the top priority is to preserve capital.

What type of operating model is your business in?

There is no absolutely correct or best framework for creating an operational plan. Whatever you choose, as long as it helps you address the core issues of the plan: who is doing what, when it will be completed, how much it will cost, and how to measure it.

However, before choosing a framework, you should first determine which operating model you are in, as the operating model dictates your priorities. This can be determined through a series of questions:

1. Does your business still need financing?

The answer is likely "needed" because most early-stage companies that accept venture capital will seek funding again, but there are some exceptions. If your business is already profitable, that's great. You still need an operating plan, but funding may not be a primary constraint. If you are not yet profitable, keep looking at the questions below.

2. Can your capital reserves last for more than 12 months?

The core idea is that if the capital reserves can last for more than 12 months, then this year's plan may not include financing. Perhaps your priorities are to develop products or build a team. However, if the capital reserves are less than 12 months, the operational plan should include financing, cost-cutting, seeking strategic partners and investment opportunities, or all of the above. You may also need to carefully examine expenses and look for ways to improve.

3. What goals do you need to achieve if you require financing?

You need to clearly define which milestones need to be achieved in order to persuade investors to participate in the next round of financing. The appropriate milestones depend on the company's situation and the financing round you wish to pursue, so it's best to discuss this with your investors. For example, you may think that launching a product will attract more funding, but investors may want to see the product's fit with the market first.

Next, consider what resources are needed to achieve these milestones. Look at what positions need to be filled, what other steps need to be taken, and how long you think it will take. List these costs in a spreadsheet; does the cash in your bank account cover these needs? If not, see what variables can be adjusted to achieve balance. Would adjusting the order of activities help? What about changing the current priorities of the business?

After identifying the resources, consider how long your capital reserves can sustain by recruiting or investing in these resources. Then ask yourself: given the company's current cash situation, are these capital reserves sufficient? If they are sufficient, then you have a solid foundation for developing an operational plan. If they are not sufficient, you need to reassess recruitment, investment, or key areas and iterate adjustments to the plan.

Finally, establish some metrics to monitor the operational plan to understand if the plan is effective. It is important that the monitoring has a fixed cycle to ensure it is conducted regularly.

Operational Goals Template

The following worksheet can help you outline your operational goals. One approach is to first set annual targets and then work backwards to determine the tasks that need to be completed each quarter, by each department, and even by each individual. The key is to write down your ideas, as trying to remember the entire operational plan in your head is likely to result in overlooking some details.

Here is a simple measurement system example for tracking progress towards goals. With the red/yellow/green indicators, you can briefly report on goals that are progressing well and those that are concerning at the weekly leadership team meeting. In this example, you might say that there are no issues with the product, a minor issue with marketing that is not a cause for concern, but a serious problem in engineering that needs team discussion for resolution. Clearly, this system is not complicated, and that is the key: to find a way that can both monitor operational plans and hold people accountable.

Developing an operational plan for a business is crucial, but it shouldn't be overly complicated. Focus on substance rather than form, and ensure you can answer some simple questions, such as who is doing what, when it will be completed, how much it will cost, and how to measure it. Once you achieve this, you will have a basis for measuring your own performance and can always keep track of whether the business's progress aligns with the plan.