Isn’t this about as dumb as saying a screenplay doesn’t matter because the audience won’t read it:
Small businesses seeking financing from venture-capital firms need not worry about writing up a solid business plan, since it doesn’t sway funding decisions anyway, concludes a new study by researchers at the University of Maryland Robert H. Smith School of Business.
That, I’m afraid, is the lead of Business Plans Don’t Matter to Venture Capitalists, in the Wall Street Journal‘s Independent Street blog, yesterday. And I like that blog. Raymund Flandez should know better.
Think about it: what the researchers mean to say, I would hope for their sake, is that the document itself — the formatting, the presentation, the painstaking worry about where to break the page, and all of that — isn’t as important as some people think.
What they say there, as quoted by Flandez, is as if they don’t even know what a business plan is. He makes it seem like they think it’s a piece of paper, or a collection of pieces of paper. Certainly, by the time they’re on the faculty of a major business school, well, that’s got to be journalistic exaggeration, right? Here’s what a business plan really is (and this is me, not them, from my The Plan-As-You-Go Business Plan book):
So the plan is a collection of concepts in the middle, [the strategy] surrounded by specifics that have to be done. Around the core you put a collection of metrics to be measured and tracked (lots of them are sales, expenses, and the like, but not all), task assignments and responsibilities for different people, dates and deadlines, budgets, and so on. That’s your plan.
Seriously, do you think for even a minute that venture capitalists don’t care about companies having strategy, and metrics, and tracking, and tasks and responsibilities, and forecasts, and budgets? Are you kidding me? They may or may not read the business plan, but the entrepreneurs they fund can’t possibly do a decent presentation without knowing their plan. What happens when they get to the first question about how much they need, and why, and what they’re going to spend it on?
I’ve consulted to venture capitalists in due diligence, for years, my company had venture capital investment in it and bought it back, and lately I’m also an angel investor. And I can tell you this: they may not read the plans, but that’s because the plan is for you, the startup wanna-be, to know what you’re trying to do, and how much money you need, and why, and what you’re going to spend it on. You may only show the VCs the presentation, but if you don’t have a plan behind it, with your numbers straight, then they’ll know it. Forgive me for quoting myself again, but:
From that core plan, you spin off various outputs. You take the highest highlights of the plan and 60 seconds or so to explain it in an elevator speech. That’s one output. Or you write it all out carefully, and add supporting information about the market and the industry and the backgrounds of the management team, and it’s a plan document. Or you create a 20-minute 10-slide summary with PowerPoint or Keynote slides, and that’s a pitch presentation for potential investors. Or you create a cover letter or cover e-mail, about a page or so, along with a 5- to 10-page written summary, and that’s a summary memo. Or you do none of these, you simply keep that plan as a collection of bullet points, of picture financial projections, and a list of things to be done by whom and when and for how much money, and share it with your team. In that last case you don’t ever edit or polish it, or sweat the page headers and page footers or font size. You just use it to manage your company.
Notice that none of these outputs stands as something you do instead of the plan. And none of these outputs is really the plan. The plan exists at the core, and you create the outputs as needed.
Doesn’t that make a lot more sense? And shouldn’t the professional researchers ask the right questions? The Independent Street continues:
“Our results are most supportive of the premise that planning documents play, at best, a minor ceremonial role and do not inform venture capitalists,” wrote researchers in next month’s issue of Strategic Management Journal. “Therefore, we conclude that planning documents do not play an important role in VC opportunity screening.”
Doesn’t the screenplay analogy apply here exactly? As if the fact that the investors don’t read the plans means the entrepreneurs don’t need them. The plan isn’t for the investors, anyhow, its for the people running the company. It’s not a sales brochure, it’s a business plan. And I hope this is just a quick reading of the real research.
Authors of the study are quoted as saying “A business plan may be useful in helping entrepreneurs organize their thoughts and details.” What’s the phase for that? “No duh?” I hope they play that out better in the full report.
When they get into the details, it sounds like this research was done in the wrong way, at the wrong time:
Researchers sampled 718 funding requests from April 1999 to February 2002, at the height of the dot-com bubble and its immediate aftermath.
I think by now everybody knows that the dot-com boom was not the brightest moment of the venture capital industry. I don’t think many of them look back with pride at how well they picked investments between April 1999 and February of 2002. I’m pretty sure the phrase “back to fundamentals” has come up a lot since.
So I’m tired of this silly myth that having a business plan doesn’t matter if the investors don’t read it. The entrepreneurs need it and want it, whether the investors read the details or not. They expect the entrepreneurs to know what they need to do. I hope the actual research is better than the write-up it got in Independent Street.
8 thoughts on “As if Business Plans Don’t Matter to Venture Capitalists! Jeez!”
I agree completely. I took the report to mean “anyone doing a business plan just to get financing – should not waste their time” . The reason being is because they are doing one for all the wrong reasons. A business plan is for the management team. Since two thirds of new businesses fail within seven years, it is very risky to go without a solid and realistic business plan.
Hey Tim great blog post, I totally agree business plan is essential for investment of any sort.
I recently blogged about a template for a business plan for raising funding, would love to have your thoughts: http://blog.kwiqq.com/2009/04/14/business-plan-template-to-grow-a-business/
Raj: thanks for the comment. Re your template, sorry, but I like Business Plan Pro a lot better because it has a productized and documented financial model built in, so anybody who can do the assumptions will have the financial projections mathematically and financially correct. Word is easy, but the tables are important, and Excel templates are way too easy to break. But I admit, I’m biased.
Thank you for responding to the article about the University of Maryland study. I agree with you 100%. If the aspiring entrepreneur hasn’t gone through the rigor of building a complete business plan (even if he doesn’t write it himself) he’ll likely stumble when he faces potential investors. You’ve inspired me to address this on my own blog.
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