Wednesday, April 08, 2009

It's Official: Business Plans Are a Waste of Time

Lots of entrepreneurs ask me if they need a business plan. I always give the same answer: No.

I've raised and participated in dozens of angel and venture rounds, and the only time a business plan was ever involved was my very first start-up.

I'll bet the experienced investors who gave me their money saw my carefully crafted 50-page plan and thought, "Rookie!"

I'm glad I can now now cite a real study from the University of Maryland's Smith School of Business to support my intuition.

The group studied business plans of more than 700 dotcom companies from the late-1990s to early-2000s. They compared characteristics of each business plan – including the contents, team make-up and business model – and whether the plan received venture capital funding.

Their conclusion is that the content of the business plans does not predict which businesses get funded. “We kind of thought we’d find something,” he says. “We thought it would at least matter if you submitted a plan, or if the plan kind of looked right. The evidence is pretty strong that [VCs] don’t pay attention at all.

So what does matter? Social connections trump business plans by a long shot, says Goldfarb. Thus it is that people who already know VCs and angels have an easier time raising money.

Alas, many folks continue to waste their time writing business plans, or even worse, paying someone to write a plan for them. Save your time and money, folks, and focus instead on building relationships.

8 comments:

Brian Klug said...

David Kirsch was one of my business professors. I remember his business plan archive well - I even evaluated one of the thousands of business plans across a bunch of metrics, including the ultimate "was the business successful" question. Essentially, he crowd-sourced the analysis of these thousands of business plans - and we all tried to find out if the company was still alive.

The business plan I reviewed was this: a small time insurance company thought they would become a "hub" for buying and selling insurance on the Internet. As in ... the #1 place to do this. It just sounded like a lame pipe dream to me. And naturally, they company went out of business altogether.

Kirsch was a good guy.

jpadams said...

Chris -

Decent point...but what's the downside of spending a month creating a business plan?

...is there one?

Chris said...

JP,

There is a major downside to taking a month to write a business plan. That's a month you could have spent talking to customers, building your product, and otherwise advancing the business.

Business plans are busywork that help people feel productive while avoiding the risky behavior of actually doing something.

LP said...

The point of the business plan is not to get funded or to create a road map for the business -- everyone knows that whatever way it's written in the business plan, that's the one way things are *guaranteed* not to happen. The point of the business plan is to weed out would-be entrepreneurs who can't be bothered to do them. As you note, after you've done a successful startup, investors no longer need to 'weed you out' so the business plan isn't important. Requiring a business plan is one of the ways investors (and others taking a substantial risk on the company) create an objective reason to say no to a deal they're not sure about.

Rob said...

I don't think it is shocking that it comes down to who you know. That's basically the way EVERYTHING works.

But to dismiss the exercise of writing a business plan I think is a mistake.

It is a great way to formalize goals, see weaknesses in your idea or aspects of the business and serves as a simple way to troubleshoot areas that will lead to everything in your business plan never happening because reality showed up and tore your rosy projections apart.

At most if you know your market and exactly what you intend to do it shouldn't take you more than a week to bang out a plan.

I read a report that noted the most common trait the richest folks in America shared: they put their goals in writing.

And if you are an already successful entrepreneur, you probably have developed a system that mimics the benefits of writing a business plan if you don't bother to.

paul said...

Thank the LORD!!

And LP - that's brilliant and it always struck me as correct. Many times I was asked for a business plan... I was always thinking, what BP? It's a website... "code it, tell people, hope it goes viral" ... the whole idea of pulling numbers out of a hat and coming up with an elaborate marketing plan etc. seemed like such a waste... especially when, after all that, they still come back and tell you cliche' #305, "it's not in the idea, it's in the execution" ... no shit sherlock, give me some money, I'll execute. lol.

Anonymous said...

It's about due diligence and fiduciary duty. Fund a 20-page PowerPoint because X person knows Y person ... a formula for disaster.

Lawyers feast on lack of due diligence.

A written business plan is important to make sure items have been thought through - especially demand.

Bernie Madoff - a great example of relationships without the due diligence!

Maybe the financial community should became more open to ideas versus who you know --- change investment criteria from an insiders game as we watch Wall Street self-destruct all due to inside, trusting relationships --- cooperative greed.

Byron Woodson II said...

i agree more with Rob (business plans are meant to clarify ideas) than LP (weed out the weak).

MIT researcher Sandy Pentland found out that it's not necessarily who you know, but who you act like. He can predict the success of hiring decisions and pitch-success based on behavior (likeness) to the evaluator. videos:
http://www.youtube.com/watch?v=kdiHhqwqMYw
and
http://www.youtube.com/watch?v=T1iKKAA2FOw

So it's half who you know, half who you act like and half whether the business sounds good (that's the funny math of entrepreneurship for you).