For years I have been fighting a lonely battle against written business plans.  Recently some of my colleagues at the Smith School of Business published a study that suggested that VCs don’t really care about business plans.  An article about the report is here and a link to a podcast from the researchers is here .  In fact, the study, at least as reported by the NY Times, suggests that business plans are useless!  Now, that’s a tact that I had never taken but one that I think requires a bit of clarification and guidance for entrepreneurs. 

Conventional wisdom has been that in order to raise capital an entrepreneur needs to have a number of documents and things ready to deliver to potential investors:

1.        A 30 second “elevator pitch” that can be provided on short or no notice.

2.        A short executive summary.

3.        An introductory ten slide, short deck, for a 30 minute presentation.

4.        A longer presentation that provides greater detail. 

5.        A full written business plan.

You can find that advice recited in many places – text books, blogs, news articles and just about anywhere an entrepreneur can go for advice on company formation.  In fact, there is an entire industry that exists around the preparation of business plans.   For example, a Google search pulls up 58 million results under the term “business plan” with links to scores of experts available to help entrepreneurs deliver beautiful and complete written business plans.  58 million …. That’s 24 million than a search on venture capital returned.  And, what was the second sponsored link from the venture capital search?  Hire an expert to write your business plan.

My complaint about the conventional wisdom is that it has always substituted process for substance.  There are a few reasons for this.  The largest one being that where process exists, experts can be hired and make money.  That has always bothered me enormously.  I have seen entrepreneurs waste countless dollars on so-called experts, when in many cases the “experts” weren’t experts at all.  What I have continually found is that an entrepreneur with a strong business concept and compelling execution plan will find other stakeholders.  And, a poor opportunity will languish regardless of the quality of experts helping it.

That being said, there are some things about conventional wisdom that I do agree with.  You do need to have items 1 through 4 above.  And, you do need to have an appreciation for the “process” of obtaining capital.  By process I mean not the written documents you deliver, but the methods you use to find investors and interact with them.  There is definitely a “right way” to speak with investors and a preferred way to find them.  Entrepreneurs who appear to understand the unspoken rules of venture capital are much more likely to receive it.  Demonstrating a familiarity for the investment process will help an entrepreneur communicate experience and coachability – both of which are essential prerequisites for creating the right relationships with investors.

But, a written business plan?  Waste of time.  Professional Investors don’t really read them.  We decide whether we are interested in a business opportunity by meeting with the entrepreneur and perhaps reviewing an executive summary.  With respect to non-professional investors, it could be argued that they would benefit from seeing a beautifully written plan.  But, again, I think it’s a waste of time and could in fact be dangerous.  When selling securities to an unsophisticated investor any written materials you provide should be crafted to manage your securities liability.  This is more of a legal point, but the written document you should hand them is a private placement memorandum, not a business plan. A PPM describes the business, but also provides the entrepreneur with proper legal protection if the proposed investment does not work out well. 

Note that I am not saying that a business plan is useless.  It is not. What I am saying is that taking the time to prepare a beautiful 50 page business plan is a waste of time and money, and it is an even bigger waste if the business plan is not the result of your own hard work.  Every entrepreneur needs to have a business plan – that is, his plan for creating his business and executing it.  But, it’s the process of preparing the business plan, of tailoring it and optimizing it, that matters.  Good entrepreneurs are constantly doing their business plan and referring to it, they just don’t take the time to make it pretty or read well.

Every entrepreneur’s business plan should always have the following aspects to it:

·         How are you going to reach customers?  How will you market? How will you sell?

·         Who are your competitors today and tomorrow?

·         What aspects of your business will allow you to beat your competition?

·         What resources – human, physical and financial – do you need to execute your business over the next year and the years after that?

·         What can you do to make your business distinctive and protect it?

·         Why are you in business?  Is this a short rush to sell, or a long term business with slower growth?

·         What are the big risks to your business?

·         If you want to be purchased, what steps are you taking to get in the way of potential acquirers?

·         What metrics are you using to measure your success against your business plan?

If you stop to think about it, a business plan is merely the entrepreneur’s best guess at any moment as to how to market to and find customers, and the plan for finding the resources to execute.  It’s both a simple and complex process to formulate a business plan, and one that a good entrepreneur spends a large part of everyday working on.  They tend not to think of it that way of course – they don’t think that they are doing a business plan – they think that they are merely running a business.

Having said that there is no need for an entrepreneur to have a written business plan, it is important for the entrepreneur to know that any investor is going to expect him to demonstrate that he is doing the type of business planning that I have described above.  Therefore, before meeting with investors an entrepreneur should make sure that any presentation addresses the questions above and that the entrepreneur has supporting materials available to help investors assess the entrepreneur’s business plan.  Here are some practical examples:

·         You should always have a cash budget that shows how you would apply the cash from the business (and the investor’s capital) to grow the company over at least the duration of the utilization of any requested funding.

·         A detailed sales pipeline and prospect list, including reasonable weighting and probability to close.

·         Materials on the competitive environment that shapes your own analysis – consultant and advisor reports, media stories, third party data – anything that shows that you understand the market you are in.

·         Other information that you have that validates your world view.  Customer references, scientific papers and other third party validation, for example.

·         Have in place all of the material legal documents and relationships necessary to execute your plan. If an employee is key, for example, make sure they are locked in before asking for capital.

·         Projections of the overall business, which can be different from a cash budget, are probably the document that VCs will ask you for the most often.  Projections are widely acknowledged by VCs as being science fiction (that is, we know that they are unlikely to be the outcome of the business), but they are still very important.  How they are prepared – how much thought goes into the assumptions and the inputs – will demonstrate more than any other single thing how clearly the entrepreneur understands his business and prospects.  And, in an aside, if you have one area where you should have an “expert” it is in the preparation of the projections. If you don’t have a granular understanding of the drivers of your businesses plan, make sure that you surround yourself with people who can help you create a careful and rational financial model.

The bottom line to all this is that the right presentation matters – a presentation of the actual information that investors want, presented in a way that shows the entrepreneur is in charge and in command of his business plan is much more likely to be successful.  Professional investors don’t worry about written business plans because they tell us very little about how the entrepreneur thinks and how he works.  The quicker you can demonstrate your competence and follow through to investors – the faster you can demonstrate that you understand the difference between the business plan, and a plan to execute the business, the sooner you will find capital.

Of course, in the current funding environment, I’d rather that you go through the planning process and realize you can bootstrap your business to profitability. But, that’s for another blog.