Friday, November 7, 2014

A Perspective On When A Business Plan Adds Value

notepad-business-plan As a startup mentor and investor, I am approached regularly by aspiring entrepreneurs who assert that business plans are a waste of time. They cite sources like the BusinessWeek story, “Real Entrepreneurs Don’t Write Business Plans” and this Forbes article. From my perspective, much of this advice is an urban legend and just plain wrong.

Based on my experience, a business plan always adds value to the entrepreneur – most people can’t build a complete plan in their head, and need the process of organizing it on paper to make it consistent and complete. The size of the document should be based on your style, but 10-20 pages or slides are usually more than adequate to outline even a complex business.

Beyond the value to the entrepreneur, let’s take a look at how and when a written plan might add value, or even be required, by other people who may be critical to the success of your startup efforts. Most of these scenarios involve attracting outside investors, strategic partners, or key team members:

  1. You are the team and you don’t need outside funding. Tiny bootstrapped teams usually don’t have a business plan, and probably don’t need one. They can iterate and evolve their business idea with a low burn rate and minimal dependencies. A formal plan will only add value after they finalize a model, build a team, and are ready to scale.

  2. You’ve built a successful startup before, and plan to use the same investors. If you have a proven track record, investors don’t have to see a written plan to believe you can do the job. In fact, they are probably in such a hurry to give you money that they don’t want you to waste time writing anything down and passing it along to new investors.

  3. You need funding, and plan to get it from friends and family. Hopefully you know your friends and family better than I do, so you decide when a business plan is required. If your rich uncle is an accountant, or has his own business, I recommend a good business plan. On the other hand, your mother probably won’t read one.

  4. You need money, and plan to do crowdfunding. Although the major crowd funding sites today, including Kickstarter and Indiegogo, don’t technically require a business plan, they do demand essentially the same information in a project format. Thus building a business plan ahead of time will improve your application and chances of success.

  5. You need an investor, and want a document to mass-mail to everyone. Creating a business plan for this purpose is a waste of time. In fact, the whole process is a waste of time. Most VCs and Angel investors don’t read unsolicited proposals, unless they have met you first, or have a glowing recommendation from another investor or acquaintance.

  6. You need an investor, and want to solicit professionals online. Major platforms are available online to find Angel groups or VCs, including Gust and AngelList. These platforms, and every investor who uses them to find entrepreneurs, expects to find a good business plan posted. You won’t even be considered without a business plan.

  7. You find an interested investor or bank, and need to close the deal. Most professional investors, even if they like your story, and were properly introduced by a friend, will ask for a business plan at the due diligence stage. They want to see if you have done your homework, have reasonable expectations, and are willing to commit.

You might fairly conclude from these points that a business plan is only “required” if you want to close funding from professional investors who don’t already know you or know your track record. Since the best VCs deal primarily with known and proven entrepreneurs, it’s easy for them to say that they don’t read business plans.

On the other hand, don’t forget Angel investors, who fund 60 times as many startups, to the tune of $20 billion last year, who start their search primarily from platforms like the ones mentioned above. A business plan may be a small investment to get a shot at that opportunity.

For the rest of you entrepreneurs, consider the value of a business plan when it is not required. Clemson University professor William B. Gartner looked at data a while back from the Panal Study of Entrepreneurial Dynamics, and found that writing a plan increased the chances by two and a half times that a person would actually go into business.

Of course, building a plan is not an alternative to getting out there and doing something. There is no substitute for knowing your customers first hand, and iterating on a minimum viable product to find the most marketable solution. Writing it down promotes both understanding and commitment.

Overall, I sense that not writing a business plan is more often an excuse rather than a time saver. Building a business is a long-term non-trivial task, like building a house. Would you give money to someone, without a plan, who had never built a house before? Hopefully you wouldn’t even build your own house without a plan. You should treat your new business with the same respect.

Marty Zwilling

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