Business plans and planning for startups

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Business Planning

Are Business Plans Really Necessary?

It's funny how the very first thing that comes to mind when business plans are mentioned is the Dack Bullshit Generator. This is a very useful tool for making your plan read as if it was written by a team of Stanford MBA students.

There is no bigger sinkhole for entrepreneurial energy than the business plan. Every budding entrepreneur sets out to write the finance winning plan in 30 days and spends two to three times that long on it.

What's worse is that maybe 5% off all business plans are actually read by anyone. The rest are never even cracked open. People who have no clue about entrepreneurship will always stress the importance of having a well researched business plan before you start. Frankly, people who don't know what they are talking about really ought to just shut up. Entrepreneurship is about creating cashflow not about writing the perfect business plan.

Asking for your business plan is also an indirect way of getting rid of you. When someone you have tagged as a potential investor asks for a copy after only the briefest of conversations, it's almost a sure bet that they are not interested but lack the intestinal fortitude to just say so. On the other hand, asking for a copy of your plan after drilling you with questions can usually be interpreted as a positive sign.

But don't take it from us that business plans are not the essential first step in creating an enterprise. Read what America's leading academic on entrepreneurship says about business plans. In the October 2002 issue of Inc. Professor Amar Bhide was interviewed and shared these findings on business plans and their value in real life entrepreneurship.

Only 40% of the founders of companies on the 2002 Inc 500 had bothered to write formal business plans.
Of those, 65% admitted that their business had strayed significantly from the original plan.
Only 12% said that they had conducted formal market research before launching their enterprise.

The truth is that many of the most successful enterprises from Wal-Marts to Microsoft to Dell never had business plans drawn up.

Why is this? The answer lies in how an idea for the business comes up in the first place. In some of his earlier research Dr. Bhide discovered that 71% of new ventures are started by domain experts who had directly experienced a particular problem earlier and had come up with a solution for it. As Dr. Bhide puts it, "New ventures are usually started to solve a problem the founders have grappled with personally". This firsthand experience occurred while they were working for someone else or in an earlier enterprise.

In other words, the entrepreneur first experiences a pain directly and then comes up with an "aspirin" product or service to kill or substantially reduce it.

In circumstances such as this, it's usually not mandatory to write a business plan unless you need to raise capital to make the venture happen. Having directly experienced the pain and seen the opportunity it presents implies that the entrepreneur has sufficient industry insider knowledge and experience to be able to quickly calculate whether or not the opportunity is viable. Moreover, savvy entrepreneurs understand that to succeed these days it is of critical importance to be able to act quickly when an opportunity presents itself. In many cases, making a decision to research and write a formal business plan sets action back three to six months back. Meanwhile, others are looking at the same opportunity and perhaps even jumping in with an aspirin of their own while the more cautious soul is polishing his or her business plan.

What are Some Reasons Against Writing a Business Plan?

Dr. Bhide lists a number of reasons why many entrepreneurs give business plans a pass:

Oftentimes, there's very little data available that is of relevance to a company looking at introducing a new product. Such data is typically the cornerstome of a business plan. Think of the expert who fifty years ago smugly predicted that worldwide demand for computers would be under ten. The lack of data on market demand for computers back then would certainly have been interpreted as supportive of his assertion. Could Bill Gates and Paul Allen have found any germane market statistics in 1975 to support their decision to start Microsoft? It's highly unlikely.
The "window of opportunity" opens only for a fleeting moment before closing again. In today's hyper competitive world operating on a 24/7 basis, you have to be agile and fast to survive as an entrepreneur. Writing a business plan often leads to paralysis through over analysis which results in a competitors snatching away the opportunity.
With low capital startup situations there's minimal downside risk to finding out that you were wrong in your assessment of the opportunity. If things don't pan out as hoped for, you can either shift to a new opportunity or just pull the plug on the venture.

When Does it Make Sense to Write a Formal Business Plan?

There are two situations where a business plan is beneficial. One is where it's impossible to begin without a capital investment by outsiders. If your startup is going to be the next FedEx and needs fifty aircraft, 2000 employees, and facilities in twenty cities just to open its doors for business, you will need a business plan to raise the necessary capital. The other situation is where you are a complete rookie at entrepreneurship. If you are inexperienced in running a business and cautious by nature, it may make sense to take the time to thoroughly research the opportunity and write a business plan for your own personal benefit. (It goes without saying that the latter person should not write the plan with any expectation of raising outside capital with it. Investors do not back wet-behind-the-ears rookies.)

Why Does Everyone--Outside of Entrepreneurs Themselves--Put So Much Importance on Business Plans?

Dr. Bhide views the almost obsessive emphasis on writing business plans as a crutch.

When asked if he's on a crusade to move academics away from so much focus on business plan writing he responds with:

The crusade I'm on is this: I don't think that people deliberately set out to teach business-plan writing because they want to do harm to their students. It's really that they don't have an alternative set of educational materials that would fill up time and courses. My crusade is to try to figure out what the alternative should be.

At a very superficial level, it's the idea that adaptation rather than planning is critical. To some degree, it's a matter of socialization. I think you can sensitize people to the importance of adaptation. I think you can get people emotionally used to the idea that they will be wrong. Even successful people are wrong quite often. (Inc. October 2002)

Read the entire interview here.

The Different Types of Business Plans

Find out about the four types of business plans so that you write the right one.

Alternatives to the Business Plan

So what then if not a business plan? We recommend that you begin with a well thought out business model and an expanded executive summary of three to five pages. If these two items are not sufficient to win the cooperation of prospective strategic partners, customers, and investors, then nothing will be.

Still Want to Work on a Business Plan?

Here are some well formatted examples for your viewing pleasure.

Executive Summary

Business Plan #1

Business Plan #2

Business Plan #3

What About Books on Business Plan Writing?

They are all pretty well the same since every plan must answer the same basic set of questions. You can in most cases find all the tips you need online for free. If you are determined to make a purchase, look up books by Rich Gumpert. You can't go wrong with his advice.

Business Plan Software

Should you use it? Find out.

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