A Business Plan is Required for Entrepreneurial Success
To succeed, planning alone is insufficient. One must improvise as well.
—Isaac Asimov, Foundation
Planning is an unnatural process; it is much more fun to do something. The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression.
—Sir John Harvey-Jones
Another long-held vestige of our modern-day business vernacular has been the stubborn notion that a business plan must be constructed to ensure commercial success. In order to get your idea from the hieroglyphics scribbled on a napkin to a thriving enterprise, conventional wisdom dictates that you have to suffer through the formalities of writing a business plan.
For decades, budding entrepreneurs and inventors have been told to scribe their visions, dreams, market know-how, and business acumen into an impressive, spiral-bound treatise. Folklore has enshrined this tome as an indispensable document that every self-respecting banker, venture capitalist, angel investor, wealthy aunt, or generous uncle would insist upon prior to parting with their own or someone else’s hard-earned money. Arm yourself with an impressive business plan and the money will follow—or so we have been told. Etched in the advice gospels of contemporary capitalism is the all too familiar and misleading maxim that a Business plan is required for entrepreneurial success.
A nascent firm’s mission, strategy, business model, value proposition, management team bios, competitive positioning, intellectual property portfolio, market assumptions, sales forecast, operating plan, and financing requirements are all included in the business plan. These requisite components may also be useful for recruiting talent, securing partnerships, and planning for resource allocation.
However, numerous entrepreneurial triumphs have been accomplished without the creation of a formal business plan. Success stories sans early business plans include Bill Gates, Michael Dell, and the Google duo of Sergey Brin and Larry Page.1 Brin and Page worked together on their search algorithms and PageRank system at Stanford for 3 years before writing a business plan. In 2000, Brin recounts events from 2 years prior in an interview with MIT Technology Review, saying:
When we decided to start a company – and we actually committed to it by purchasing disks ourselves, with our own money – we spent about $15,000 on a terabyte [a million megabytes] of disks. We spread that across three credit cards. Once we did that, we wrote up a business plan and, remarkably, we have stayed close to it over the last couple years.2
Early and rapid success with users assured Google of access to venture capital (VC) as the company added capacity. Other entrepreneurs not starting out with a formal plan were Anita Roderick of the Body Shop retail chain and Debbie Fields with her delicious Mrs. Fields’ Cookies. The early days and pre-initial public offering (IPO) successes of Frank Carney’s Pizza Hut were also accomplished without a consummate plan.
I often ask small business operators and the successfully self-employed if they wrote a business plan. The answer is very often no. My local plumber with 30 years in business, 3 trucks, and 12 employees? No business plan. My home renovation contractor, so busy he can’t return my phone calls, now 15 years into his enterprise? Has not got around to writing the plan yet. My electrician? Nope? How about my local neighborhood mom and pop pizza parlor, variety store, one-man computer repair service, or Certified Public Accountant (CPA)? Not one business plan among them. Bear in mind that these are not necessity entrepreneurs (those having no other choice to make ends meet). However, they are all smart, opportunistic entrepreneurs that adapted to a market demand for their services. In spite of not having a business plan, customers have found value in these enterprises.
This chapter reviews some of the many books and research studies in the business planning domain as well as insights from my own personal experience. A documentary film on venture capital is also mined for additional perspectives from the investment community. Findings consistently reveal that business plans are used primarily (and very often singularly) as fundraising implements. Lost on many in the entrepreneurial endeavors is the value of all the work done within the business plan writing process. Unfortunately, the knowledge gained from composing the document may be discounted or even ignored during periods of inactive fundraising.
Wannabe entrepreneurs, investors, and academics alike have duped themselves into seeing the business plan document as an end in itself. However, I contend that the process and sum of all the gritty parts of a business plan are worth more than the finished product—the impressive, full-color, gold-leafed embossed business plan reproduced on demand at the local office superstore.
The Entrepreneurial-Academic-Industrial Complex
In the wake of countless testimonials extolling the necessity of business plans, a new breed of institution has emerged into what I call the entrepreneurial-academic-industrial complex. This ambitious entity has replicated into hundreds of parochial network clusters focused on creating commercial innovation, job growth, community economic development, and at the very least some juicy public relations for local sponsors. Members of these syndicates include entrepreneurs, economic regional development centers, political opportunists (both the vote getting kind and the simply wonkish), universities and their incubators, investors, media organizations, service providers, business law folk, and consultants aplenty.
The labels used to describe these entrepreneur nurturing life forms include, but are not limited to, the following: enterprise forum, public-private partnership, entrepreneurial learning initiative, university regional economic development authority, initiative for growth, business accelerator center, entrepreneurship council, Quadruple Tri-Valley Hub for Start-up Success (OK, that one I made up), small business development network, new business development hub, and so on. I could continue, but I think you get the idea.
The aforementioned organizations are also keen sponsors of business plan contests. These events have multiplied due largely to their populist appeal, political support, entertainment and networking value, and case-based reality orientation. These gladiatorial contests are sometimes referred to as a New Venture Showcase, Venture Summit, Business Plan Competition, Shark Tank (the local, non-televised kind), Next Idea Competition, FastPitch (featuring rapid fire 3-minute elevator pitches), University Venture Challenge, International Business Model Competition, the Big Sell, and Innovation Challenge, just to name a few. These forums rarely award much needed money to the beseeching start-ups. Instead, they grant the winners some assistance via in-kind donations in the form of marketing services, lab space, conference rooms, management and legal advice, copy machine access, shared receptionist, and so on. These sponsorships generally further the cause of the donators more than the donatees via public relations and promotional bumps generated by the event. However, while these soirees usually overpromise and underdeliver, they offer exceptional networking opportunities and serve to celebrate aspirations in entrepreneurship.
While often lagging behind popular sentiments in the business community, academics have fully embraced the study of if, when, why, and by whom business plans offer value and utility. Scholars in the academic capitalism and entrepreneurial research crowds grew concerned with the advent of studies that questioned whether business plans were worth all the fuss. Concerned, because the business plan is central to the teaching of entrepreneurship at colleges and universities throughout the United States and much of the world. Imagine how uneventful the annual business plan competition would be if business plans lost their cachet.
Cutting close to the bone, the affront to the business plan’s legitimacy forced many well-respected scholars to conduct their own investigations. To their credit, academic researchers are largely true to their mission that includes the disinterested pursuit of truth in explaining environmental phenomena. And lo and behold much of the research completed in the last 15 years or so has indeed shown that the existence of comprehensive business plans has not correlated very well with successful outcomes of start-up ventures.
What the Research Tells Us
While I cannot cover the entire canon of research literature in this field, I will provide a representative sampling of what researchers have discovered recently regarding business plan efficacy. First up, in the brashly titled Burn Your Business Plan, David Gumpert puts forth a provocative yarn about the lack of value associated with a business plan. Gumpert not only provided an informative review of the research literature to date, he also surveyed 42 venture capitalists regarding their perceptions and use of business plans in making funding decisions.
Although Gumpert criticized the hype surrounding the business planning industry, as well as the poorly understood effectiveness of the business plan as a significant success indicator, he did not credit the process of business planning as well as I and others contend. Gumpert’s best contribution is his insistence that entrepreneurs get into the field as soon as possible to test and prove the principles of their new business model, product, or service. He correctly stressed that a business plan without tangible feedback from real customers is not worth writing or reading.3
Gumpert refers to the business plan industry as a “corrupted process” hawked by academics and consultants preaching self-serving and phantom virtues of the business plan. He faults the business plan as a static document attempting to foretell the future yet not grounded in reality. While I concur with Gumpert’s assertion of the business plan as a dated blueprint, I view this in a positive light. Many business professionals view their formal plans too rigidly and resist adapting to environmental realities when things don’t go according to plan—which is nearly always! Consequently, I am encouraged knowing that entrepreneurs don’t continually revert back to their sacred yet flawed business plan. They should adapt and improvise as conditions warrant. Although Gumpert would rather throw the business plan into the ash heap, he did praise the benefits of a hard-hitting presentation, strong set of financials, and a credible management team (especially in sales).4
Lastly, Gumpert railed against the consulting side of the business plan industry, claiming an entrepreneur could put that scarce money to better use by working more with customers. He also contends that the 50 to 100 hours an entrepreneur spends on the business plan could be better spent elsewhere on the opportunity.5 This is indeed a stretch considering 50 to 100 hours is not much to ask from someone looking to borrow lots of money from investors. Suppose an entrepreneur asked you for $500,000 in seed capital and then tells you she didn’t make the time (i.e., 1 week) to write a business plan. You’re likely going to have doubts about this individual’s level of commitment. If an entrepreneur can’t spare 50 hours, an investor is unlikely to spare $50. Even if I’m only reading the executive summary and the finance section, I would like to see that the homework was done and documented. Recall your fifth grade math teacher demanding that you show your work. Nevertheless, Gumpert’s research reveals a common distaste for the long-form business plan on the part of many investors.
Research published in the Strategic Management Journal studied 722 funding requests (mostly Internet-related ventures) submitted to one VC firm during the height of the dot.com bubble and it’s bursting (1999 to 2002). The results showed the inclusion of a business plan to be a weak predictor of successful funding. This study also found business plans to be more ceremonial than communicative, and suggested that critical information about the enterprise and the market opportunity may be “learned through alternative channels.” Data from the study hinted that relationships and unobserved characteristics of those involved often influence funding decisions. Just 5.4 percent of total funding requests (with or without a business plan submission) received the green light for first round funding in this sample. Needless to say, this team of researchers concluded the business plan to be of negligible value.6
Research done outside the United States has also given the entrepreneurial community some grim signals regarding the utility of business plans. A study in Spain using a sample of over 2,000 service-oriented start-ups found no support for business plan quality as a predictor of firm survival at 3 years and 6 years out.7 Additionally, a Swedish study concluded that business plans are largely symbolic artifacts used to legitimize the entrepreneurial activities of firm founders. They also found that business plans were rarely updated or referred to after being written.8
In a study by noted entrepreneurship researchers led by Julian Lange of Babson College, 116 new firms were surveyed to determine if the existence of a business plan in the prelaunch phase impacted the subsequent success rate of the businesses. Lange and his team claimed that “There is no compelling reason to write a detailed business plan before opening a new business.”9 On the surface, that statement is both damning and courageous. After all, these academics and others like them have made careers out of teaching students and entrepreneurs to write formal business plans. However, this is a telling example of how semantics have gotten in the way of providing useful recommendations for practitioners. Using the business plan per se as a predictor variable for business success is often a fatal flaw in terms of the pragmatism and validity of the research.
On a positive note, in the same paper Lange and his associates countered with additional advice for entrepreneurs, including start your business with some initial projections and financials; get some practical market knowledge and traction with customers; and then write the business plan after demonstrating early progress in the field. Done this way, researchers concluded that the entrepreneur will have a stronger, evidence-based document to better position the venture for successful acquisition of capital and long-term success. Furthermore, the entrepreneurs queried in this study felt that the business plan yielded important benefits particularly in the areas of strategic planning, business model articulation, financial planning, operations planning, and the examination of critical assumptions.10
Some interesting work from Irish researchers demonstrated the benefits of the exploration method in venture creation versus the traditional business planning model. Briefly, exploration is much less prescriptive, embraces environmental uncertainty, is discovery-oriented, and veers toward the writing of business plan components as the need arises (i.e., when required by potential investors).11
A study in the Journal of Small Business and Entrepreneurship looked at 152 VC firms from around the world and found 98 percent of venture capitalists surveyed thought business plans were either important or very important. Only 31 percent of those venture capitalists invested in a firm without a business plan. Just 5 percent of respondents deemed business plans as “relics.”12 These findings lend credence to business plans as tools to bolster the chances for funding. In a separate study, Frederic Delmar and Scott Shane also found positive evidence for business planning, citing that plans lowered the odds of failure in the first 30 months, facilitated decision making due to the development of business assumptions ahead of time, and helped with goal orientation and estimates for resource requirements.13
A study published in 2015 in The Journal of Business Venturing investigated the impact of images and color as influencers of screening decisions in a business plan contest. Researchers found partial but positive support for the inclusion of images, as well as evidence that the color red may negatively impact the chances of a business plan being screened favorably. It’s hard to draw too many conclusions from this quasi-experimental study, but the researchers highlighted the role of visual heuristics on the screening process. It makes sense that a busy reviewer, with only minutes to review each proposal, may rely heavily on “mental shortcuts” or “visual cues” to expedite the process.14 To what extent are investors judging business plans by their covers? Frightfully, it appears that scented, auditory, and holographic executive summaries may be closer than we think.
One Madrid-based venture capitalist sees the eye candy bias as a serious problem. Luis Martin Cabiedes, an early stage investor, does not read business plans or watch PowerPoint pitches. He prefers interviewing founders one-on-one without the distractions to limit chances of bias.15 Nevertheless, introductions to investors must be facilitated somehow, and referral networks carry much more clout than unsolicited mailings of glossy business plans.
Jeffrey Timmons and Stephen Spinelli, authors of my favorite text for teaching entrepreneurship (New Venture Creation: Entrepreneurship in the 21st Century), offer some solace to the pro-business plan camp by claiming that creation of a business plan helps with goal development and guides internal decision making.16 Indeed, often ignored by many in the antibusiness plan faction is the value of the writing process as a booster to critical thinking. John C. Bean, a foremost writing educator, has repeatedly stressed that writing can make us better thinkers. The writing-to-learn movement embodies a process that helps us better understand the phenomena we are studying. In discussing the link between writing and critical thinking in his book Engaging Ideas, Bean explains:
Quite simply, writing is both a process of doing critical thinking and a product communicating the results of critical thinking. . . . writing instruction goes sour whenever writing is perceived as a “communication skill” rather than as a process and product of critical thought.17
Taking Bean’s lessons into account from a business plan perspective, we need to move beyond looking at the plan strictly as a communication medium aimed at impressing investors and winning contests. It is more than just a tool for legitimizing prelaunch entrepreneurial behaviors. The writing of the business plan is a chance for entrepreneurs to better understand their opportunities (and pitfalls) by thinking through scenarios, what-ifs, technological alternatives, forecasts, potential hazards, and market trends.
It should be noted that the business plan is just one variable in our efforts to understand and explain the entrepreneurship phenomenon. Entrepreneurship is an imperfect, dynamic force, often uneven and difficult to categorize. This elusive concept is even more unpredictable when studying extreme outlier cases. The Facebooks, Apples, and Googles represent the lightning strikes so many try to emulate—yet with obviously little success.
Fruitful entrepreneurship does not just make company founders successful in financial and reputational terms. A litany of societal benefits is fostered downstream from new venture achievements. These dividends include jobs for direct employees of the enterprise, revenue for local businesses serving these employees, tax revenue, contracts for suppliers, and possibly society in general due to advances made by the firm. Thus, the entrepreneurial-academic-industrial complex has tried to inculcate an environment that increases the volume of start-ups and the rate of their success. Entrepreneurship education efforts have often centered on creating better entrepreneurs. If we can identify the magic entrepreneurial traits, then maybe we can teach these skills to willing practitioners. However, this oversimplified notion of training a new type of creative class has proven to be much easier said than done.
Peter Thiel, cofounder of PayPal and an early investor in Facebook, succinctly states in his recent book Zero to One, “The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative.”18
Thiel is a believer in bold leaps of innovation and new ventures searching for new markets. He also sees value in planning, even waxing that “a bad plan is better than no plan.”19 He marvels at the audacious goals set and met by the likes of Steve Jobs, NASA’s Apollo program, creators of the Manhattan Project, and builders of the Empire State Building and Panama Canal. Surely these great achievements did not happen without planning, budgeting, risk taking, and rigorous attention to details.
One last piece of evidence to ponder in weighing the value of a business plan for a new venture is the excellent documentary film Something Ventured, which chronicled the beginnings of Silicon Valley and the VC industry. In the film, released in 2011, Tom Perkins of the prestigious VC firm Kleiner Perkins confesses:
I don’t know how to write a business plan, I can only tell you how we read them, and we start at the back and if the numbers are big we look at the front to see what kind of business it is.20
This admission by Perkins is indicative of the truism that size often matters with regards to potential markets and its influence on positive investor sentiment.
Something Ventured also recounts how Mike Makkula, the often forgotten third founder and initial investor of Apple Computer, convinced himself to invest while he was writing the business plan for Apple! That’s as good a testament as you may ever hear for the virtues of writing a business plan, or more accurately a testament for the business plan writing process. Additionally, the film tells of how Gordon Moore and Bob Noyce left Fairchild Semiconductor to form Intel, writing a one-page double-spaced business plan to help secure $2.5 million in funding. Sounds like a damn good executive summary! Lastly, Something Ventured also speaks to several other factors that often contribute to a start-up company’s success: bootstrapping, relationship networks, perseverance, boldness, and good old-fashioned serendipity.
Nothing of Consequence goes According to Plan
Suffice it to say that the research on business plans is mixed. There is not a definitive, prototypical entrepreneurial process that guarantees success if you follow it. But lost on many is the value of preparing a business plan independent of the final document. Business planning for new ventures should be a combination of planning along with practical experience on the bench, in simulations, and most importantly, work in the field with real customers. This experience informs the planning process along the way and should make for a more compelling case for financing.
If your venture’s vitality is not obvious to others, and you don’t already have relationships with bona fide investors, a business plan (at least in draft form) is likely critical for fund raising. Notably, the process undertaken while writing the business plan enables critical thinking and forethought about the opportunity. The research literature paints a mixed picture for the finished document, but the business planning process comes through as a worthy prelaunch exercise that qualifies the entrepreneur to go further (certainly beyond the scribbled-on napkin).
There are caveats, however. Nobel Prize-winning psychologist Daniel Kahneman and his colleague Amos Tversky warned us about the planning fallacy. This delusion involves plans and forecasts that are “unrealistically close to best-case scenarios” and “could be improved by consulting the statistics of similar cases.” Kahneman blames much of this on our pervasive optimistic bias.21 I heed these warnings when reviewing new venture pitches at events and in the classroom. I use three rules of thumb that are negatively biased to counteract the presenter’s unbridled optimism, including: the forecast is too optimistic by at least twofold; the launch date should be pushed back 6 months; and the presenters should be asking for twice the capital they think they need to reach stated milestones.
Investors like to hedge their bets. Any sales or market acceptance you can garner early on will enhance your case for funding down the road when scale-up needs arise. Having that practical, customer-centric knowledge and experience reflected in your plan should greatly increase your chances for success.
The business plan is seldom read cover to cover by investors, but it does serve as your proxy when you’re not there. It informs investors on details concerning intellectual property, financial projections, and management team backgrounds. Although shows like Shark Tank are fun and interesting, they are not realistic from an investor trigger-pulling perspective. In reality, investors want to mull over all the information as a critical step in the due diligence process. Incidentally, it’s worth noting that the Shark Tank investors are, paradoxically, relatively risk averse. They usually decline to invest when they find out that the presenting entrepreneurs have little or no sales traction. The sharks generally provide capital for expansion—not for riskier concept testing or market acceptance. They know from experience that events do not often unfold according to plan.
Another byproduct of the planning process should be rock solid presentations of varying lengths, including 30 seconds, 3 minutes, and 15 minutes. The first two are often called elevator and subway pitches, respectively. Entrepreneurs should be prepared to pitch the new venture almost anywhere. There is no substitute for a well-rehearsed, in-person, passionate solicitation of an entrepreneur’s opportunity. The various permutations of the pitch are more important than the bound form of the business plan. Pitches should be done enthusiastically, but realistically. If you are not enthusiastic about your venture, how do you expect investors to feel?
I’ll close this chapter old school-style with former D-Day commander and President of the United States, Dwight D. Eisenhower, who said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.”
Contra Maxims for Business Planning
A business plan is not absolutely necessary for entrepreneurial success. Combine business plan writing with tangible field or bench work. A business plan is not just for communicating value, it helps uncover value. The work that goes into writing the business plan is more valuable than the final document. Lastly, make sure you have one heck of a convincing pitch!
Notes
1. Julian Lange, Aleksandar Mollov, Michael Pearlmutter, Sunil Singh and William Bygrave, “Pre-Start-up Formal Business Plans and Post-Start-up Performance: A Study of 116 New Ventures,” Venture Capital 9, no. 4 (2007): 237–256.
2. MIT Technology Review, “Search Us, Says Google,” 1 Nov 2000, https://www.technologyreview.com/s/400833/search-us-says-google/ (accessed Sep 29, 2016).
3. David Gumpert, Burn Your Business Plan: What Investors Really Want from Entrepreneurs (Needham, MA: Lauson Publishing Company, 2002).
4. Ibid.
5. Ibid.
6. David Kirsch, Brent Goldfarb and Azi Gera, “Form or Substance: The Role of Business Plans in Venture Capital Decision Making,” Strategic Management Journal 30, (2009): 487–515.
7. Rafael Fernandez-Guerrero, Lorenzo Revuelto-Taboada and Virginia Simon-Moya, “The Business Plan as a Project: An Evaluation of its Predictive Capability for Business Success,” The Service Industries Journal 32, no. 15 (2012): 2399–2420.
8. Tomas Karlsson and Benson Honig, “Judging a Business by its Cover: An Institutional Perspective on New Ventures and the Business Plan,” Journal of Business Venturing 24, no. 1 (2009): 27–45.
9. Lange et al., “Pre-Start-up Formal Business Plans”
10. Ibid.
11. Simon Bridge and Cecil Hegarty, “An Alternative to Business Plan Advice for Start-ups?” Industry and Higher Education 26, no. 6 (2012): 443–452.
12. Maali Ashamalla, John Orife and Ivan Abel, “Business Plans: Are they Relevant to Venture Capitalists?” Journal of Small Business and Entrepreneurship 21, no. 4 (2008): 381–392.
13. Frederic Delmar and Scott Shane, “Does Business Planning Facilitate the Development of New Ventures?” Strategic Management Journal 24, no. 12 (2003): 1165–1185.
14. C.S. Chan and Haemin Park, “How Images and Color in Business Plans Influence Venture Investment Screening Decisions,” Journal of Business Venturing 30, no. 5 (2015): 732–748.
15. Chana Schoenberger, “Avoid this Color in Your Business Plan,” The Wall Street Journal 24, (Aug 2015): R4.
16. Jeffrey Timmons and Stephen Spinelli, New Venture Creation: Entrepreneurship for the 21st Century, 7th ed. (New York, NY: McGraw-Hill, 2007).
17. John Bean, Engaging Ideas: The Professor’s Guide to Integrating Writing, Critical Thinking, and Active Lessons in the Classroom (San Francisco, CA: Jossey-Bass, 2001), 3.
18. Peter Thiel, Zero to One: Notes on Start-ups, or How to Build the Future (New York, NY: Crown Business, 2014), 2.
19. Ibid., 21
20. Dir. Daniel Geller & Dayna Goldfine, Something Ventured (Miralan Productions, DVD, 2011).
21. Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), 250, 255.