"Seeing that Twitter closed
a funding round, and spotting the associated incredulity about Evan’s
company not having a business plan, reminded me of something: Whatever
your feelings about Twitter, business plans are overrated, and profits
perhaps even more so.
"Why? Two reasons. First, because VCs are
professional nit-pickers. Give them something to find fault with, and
they’ll do it with abandon. I generally tell people to come to pitch
meetings with less information rather than more. Sure, you’ll get
pressed for more, but finesse it. Presenting a full and detailed plan
is, nine times out of ten, a path to a "No" — or at least more
time-consuming than having said less.
"Profits are a different
issue. Being profitable too soon gives investors, rightly or wrongly,
an idea of what the margins are on the business, as opposed to what
they could be in some perfect world. As a result, it takes a mighty
force for them to not start wading in with discounted present value
worksheets, and the like, thus hammering your valuation and generally
making funding much more complicated (and equity consuming) than if you
were wildly unprofitable."
- The fuzzy thinking about not having a business plan.
- Maybe once in a while a venture capitalist will take a deal without having read, maybe without having seen, a business plan; but if so, it involved a star system founder who the VC already knew, a great track record, a business already up and running, and users and traffic or sales to validate the idea. And even in that case, does not working with a detailed formal thick, coil-bound business plan document mean the funding deals were made without a business plan? No, not likely. A plan isn’t a formal document, at least not necessarily; it’s a series of organized thoughts and projections, it’s accountability, and commitment.
- Do you really believe Twitter didn’t have a plan? I like Robert Scoble’s post on the subject, he says that is just "bulls**t." He adds: "…if you REALLY think you can get funded without having a business plan you’re probably smoking something illegal."
- And while I’m on the subject (of fuzzy thinking, not of smoking something illegal) the idea that entrepreneurs have just a pitch presentation, instead of a plan, is also wrong. The plan, whether it’s a formal document or not, is built into the presentation. You should never do one without the other.
- And — rant continues — it’s wrong for opinion leaders to throw around this loose talk about not planning. We’re supposed to be giving entrepreneurs good advice, and "don’t plan" is bad advice however you cushion it. Planning is good. Set your goals, set the steps to achieve the goals, plan your resources, allocate according to priorities, and track results. Always. The fact that somebody somewhere was successful without a plan doesn’t mean "don’t plan" is ever good advice. Somebody somewhere may have gotten straight A’s in school without working, and somebody somewhere may have won a marathon without training, but does that really make it a good idea? Come to think of it, the guy who ran the first marathon did it without a plan, and he died.
- Disclosure: I’m a business planner, I’ve written books and software for business planning. No question about bias: I am biased (and proud of it).
- VCs are investors, which makes them partners. You should choose investors as carefully as you choose a spouse. You’re going to live with them for years, and either win with them or lose with them. So why should you try to blind them because they’re going to nitpick? What about accountability, and perhaps even commitment? I had VC investors in my company for a few years, and they were allies, collaborators, and valuable help. I was grateful for comments on our plans. People pay for plan reviews, and these are your partners. Am I getting too emotional on this point? How bad an idea is that?
- "Being profitable too soon gives investors an idea of what the margins are …" What?! Read that paragraph again. He isn’t serious, right? That’s just a bad joke, isn’t it? One of the dumbest ideas I’ve ever heard of is seeking dumb investors.