Is a Business Plan Necessary?

Before you dedicate your life to crafting a business plan the length of a book, read these two paragraphs from the 1/9/07 edition of the Wall Street Journal in an article called "Enterprise: Do Start-ups Really Need Formal Business Plans"

A study recently released by Babson College analyzed 116 businesses started by alumni who graduated between 1985 and 2003. Comparing success measures such as annual revenue, employee numbers and net income, the study found no statistical difference in success between those businesses started with formal written plans and those without them...

“What we really don’t want to do is literally spend a year or more essentially writing a business plan without knowing we have actual customers,” says William Bygrave, an entrepreneurship professor at Babson College in Wellesley, Mass., who says he generally advocates “just do it.” Entrepreneurs must be nimble, and will be more apt to stick with a flawed concept they spent months drafting, he adds.

I think that Prof. Bygrave’s study is so right. Here is the entire study if you’d like to read it. This is the plan’s abstract:

This study examined whether writing a business plan before launching a new venture affects the subsequent performance of the venture. The data set comprised new ventures started by Babson College alums who graduated between 1985 and 2003. The analysis revealed that there was no difference between the performance of new businesses launched with or without written business plans. The findings suggest that unless a would-be entrepreneur needs to raise substantial startup capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan before opening a new business.

The phrase “unless a would-be entrepreneur needs to raise substantial startup capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan” merits discussion. Most venture capitalists require a business plan as part of due diligence. This doesn’t mean they spend more than ten minutes reading the plan, and it certainly doesn’t mean that they believe it. :-) A great plan won’t make a lousy idea successful, and a lousy plan won’t necessarily stop a great idea.

Most of the plans that we see at Garage are too long and too detailed—to the point of reducing credibility. Here is my prior blog posting about business plans that you might find helpful. The gist of it is:

• Perfect your pitch, then write your plan.

• Use the business-plan exercise as a way to get your team on the same page.

• Keep it short: ten to twenty pages.

• Spend no more than two weeks writing it.

• Don’t get obsessed with with details in your financial forecast because it should be one page long.

However, don’t draw the wrong conclusion from this study: “Analysis, planning, vision, and communication are unnecessary.” This isn’t true. What is true is that a business plan should not take on a life of its own. It is a tool—one of many that may help you get funded (or, more accurately, hinder you from getting funded if you don’t have one) and may help you get your team working as a team. But it is not an end in itself.

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Comments

[Dedicated hosting]

Well, business planning is definitely is the best choice prior to start. It just gives a way to move from one path to another.

[Thomas]

So, I've seen hundreds of business plans. I've seen them for venture start-ups and internally funded businesses at big tech companies. A few observations:
1. Trying to generalize whether or not business plans are necessary is a bit presumptuous. The need greatly depends on the experience/skill of the founder and the demand for capital to fund the enterprise (and a bunch of other things). To say that they are or are not helpful based upon a survey done by a bunch of MBAs is like using Gartner to make investment decisions.
2. Smart entrepreneurs already have a business plan in their head before they ever sit down with PowerPoint or Word. The entrepreneurs that are most 'fundable' in VC world are those who come from a very large company already in the space, have spotted a disruptive opportunity that their current employer won't pursue and have relationships with their first 3 beta customers already committed to the product. These guys don't need no stinking business plans.
3. Bplans are great for finding the 'weak spots'. Most entrepreneurs are great at a couple of dimensions, but not all fo the dimensions really required to create a great business. Reading their plan will highlight what they don't know. "No competition? Hmm...looks like you need to do some work there." "GTM Plan = Big Companies? Let's figure out some focus for you." "TAM = x% of GDP? Riiiiiight." The funny thing is that weak entrepreneurs HATE to show their weaknesses when good VCs can spot them a mile away. The VC wants someone smart enough to say, "I got a great product designed and I've figured out my target customer, but I have no idea how to begin a viral marketing strategy and I'd like to find someone who knows what that's about to really turn the crank on my deal."
4. As an entrepreneur, my bplan was great for identifying the 3 critical variables that I needed to focus my time on. I knew if I couldn't make significant progress or find a solution for all three variables, I didn't have a business. Most VCs are looking for the entrepreneur that not only knows his standard bplan stuff, but then is able to focus his strategy by saying "With all of this analysis, I've figured out that I will have a great business if I can do x, y & z." Strategy is about what you don't do.

[Chris "TheProsperityGuy.com"]

Richard Branson uses a one-page business plan to sketch out if he'll do a business. He makes it in one day and it helps him minimize the downside and understand how the business works.

[Maki]

I think business plans are best written in a group. I used to work in a company that used Instant Messaging as the primarily means of communication. We wrote several business plans for our clients by hammering out the details in the chatroom.

[Crawdaddy]

I actually worked with Prof. Bygrave at Babson during the one year I was there. Amazing entrepreneurship scholar. This study reminds me of that classic quotation from Herb Kelleher that goes something like this: "Yeah, we have a business plan at Southwest Airlines. It's called doing things."

[Yuri]

Thanks, Guy.

It certainly helps to know it is a good idea to save my time for something else.

Overall, though, do you think writing a business plan is absolutely necessary for a single person project instead of keeping everything in one's head?

[Aaron Newman]

I'm currently working on my 3rd startup (the previous 2 being successful) and I never even considered writing a business plan. I may be too far to the other extreme, but I've always managed fine without one. Of course that doesn't mean I didnt have a "business plan" - I always knew exactly what we were doing - in my head.

I dont think the business plan is such a bad thing. I think the issue is that if you are spending too much time formalizing a business plan and other tasks not adding value to the customer, you might not be attacking the startup business the right way.

Just my 2 cents.

[John]

In my opinion, a business plan is not necessary for running a business. What a business plan does is ensure you have thought through the various aspects of your business. If you can do that in your head, and do not need to present your company to outside investors (just need to present to your internal team to get them hyped up about moving the idea of the business forward), then you are are good to go.

However, a business plan is necessary when you have to take your business to institutional money and other outside investors. They like to have a document to ensure they were not making a bad decision when deciding to help your business out with their money.

Remember, a business plan can be less than 10 pages long. It is like teaching the golf swing: good teachers understand the complexity of the golf swing so well that they can explain it in simple words to their students.

Guy, nice topic for discussion.

[Patsi Krakoff, Psy. D.]

We (The Blog Squad) like to tell entrepreneurs to be clear about 2 things before starting:

1. Who are the members of your targeted audience, your future customers/clients?
2. What is the purpose of your biz (how will you make money?)

This can be used before starting a blog, a program, an e-book, many things.

[Rick Van Ness]

"Perfect your pitch, then write your plan." Yes! That's constructive advice because it is soooo important that an entrepreneur answer key fundamental questions and focus on the critical areas. This requires discipline to listen, to think honestly, and to fend off fluff and hyperbole. While I agree with your points about "formal business plans", I do think that basic planning is essential.

[Jack]

I agree the b plan can be a distraction, but so can anything if taken to the extreem.

I have intergrated tracking into my plan so a new promotion, process or what every can be tracked and changed faster if the stats don't show what i'm looking for.

[carl rahn griffith]

as ever, sound and pragmatic real-world advice - thank you.

my own business plan has evolved into some 40+ pages and i am inclined to agree - next time i'd go for a lot more visual emphasis and some compelling sound-bites.

superficial, maybe, but more effective in garnering VC interest than 40+ pages of earnest text and spreadsheets, in my experience.

ergo, maybe a business plan would be better done in powerpoint as opposed to word - would totally change one's approach.

think i'll give it a go ... ;-)

[Mario]

It seems to confirm that a restaurant is a restaurant while a web application is not.

Maybe a different type of paper applies?

[Neil McDonnell]

Some great guy wrote a terrific bit about start-ups, "be impatient for profits and patient for growth." Working on my third business, I've got to say the idea of profits sits far forward in my mind than does a business plan.

I don't think the idea of Guy's post is not to write a business plan, just don't get in the business of writing a business plan. Some entrepreneurs (me with my second company) get stuck on the idea of writing a perfect business plan. I ,now, highly advise against that. In fact, I advise against what a friend calls "constructive procrastination" in the beginning of a new business.

Most of us entreprenuers aren't starting up the next Cogent Communication that requires hundreds of millions just to get started. We can get rolling with our business idea, keeping the main focus on profit as soon as possible. Growth and a business plan can follow once we discover if the fish are biting your bait.

Glad to see you back Guy!

Neil McDonnell
http://sften.blogspot.com

[Andrew Ive]

Having founded three companies, I found the discipline of creating a Business Plan for the first business absolutely necessary. This discipline is probably vital for the 'virgin' entrepreneur and ensures they at least think about key elements such as customers, product, competitors, funding and so on.

With the second company, the Business plan was shorter, more specific and avoided hyperbole.

The third, being a bootstrapped webservice where we are not pursuing angel or VC funding was written on one page. So far, we are delivering against our own expectations. This could be because we have tapped into a gap in the market but a succinct one page plan has not hurt and has maintained critical focus!

Andrew
http://www.AdvisorGarage.com

[John K.]

To me this is a sticky subject (I'm somewhat living it right now with one business - and it's working without a plan - at the same time we are self-funding with our own cash and time with no real idea of where it'll break-even ;).

Guy, you have told me not to start killing the dolphins until you know the dogs are going to eat the food and I agree...to a point.

Most business plans are full of fluff, BS and baseless projections. Further, if strictly adhered to they would likely contribute to the demise of just about any business (they are usually not nimble as a business needs to be) - because it's not until you are working the business that you really know what it's going to turn out to be, how it helps and who wants what.

What about just covering the basics in a plan? Perceived market needs/solutions, demographics, psychographics, competition, and what will it cost/create in income should it be wildly successful, moderately successful and a complete failure?

[me]

I think one should give some thought to whether your business idea could be profitable, but not obsess over the exact amount. Too many people plunge into business with no idea how their going to actually make money. If youtube didn't get bought out, how were they going to survive? You can't bet on a billion dollar miracle.

[Brian May]

I would agree that you need some type of plan, even if it is on the back of a napkin, but spending weeks and months is not necessary as much of it is hypothetical and will change once you actually start operating the business. Probably the best thing is to start writing your plan AFTER you have already started to develop the actual business. Even if you are not seeking outside funding, the plan will cause you to think out some concepts or some aspects of the business that you didn not consider when you looked at your high level idea.

The best advice is to keep the financial short because that is what changes the most. You may even want to write that in pencil :)

[Michael Evans]

Who is Musgrave? That word isn't in the MS Word doc that you link to.

Sorry to pick nits.

[Jeremy Beasley]

I find this post somewhat ironic given that I'm in a business plan development class in b-school. I agree with your point wholeheartedly but I suppose it's very difficult to find the balance between overplanning v. underplanning. I assume that this article is mainly intended for those who are on the overplanning end of the spectrum.

Overall, great advice. I'll keep this in mind as the semester progresses.