“The importance of a comprehensive, thoughtful business plan cannot be over-emphasized” – but lately, questions have arisen about the necessity of the business plan for startups. As tools such as spreadsheets and plan writing software have grown in importance, people can see that business plans have become overstuffed with complex financials that are often backed up by little more than guesswork – so in the end, do they even bring value?
Some people believe that creating a business plan imposes unnecessary restrictions on the entrepreneur, replacing creativity and experimentation with rigidity. Having a business plan implies that the entrepreneur can adequately prepare for the major components of their business – and this is simply not the case for startups. In the early stages of a business, entrepreneurs have to make significant leaps in every area of the business: the product, pricing, marketing and distribution will all have to be tweaked. The necessity of rapid-fire adaptation at the startup stage creates a situation where business plans are almost always outdated from the very minute they’re committed to paper.
William Bygrave, a professor emeritus at Babson College and longtime entrepreneurship researcher took a look as graduates-turned-entrepreneurs and found that entrepreneurs who began with formal plans had no greater success than those who started without them. It is not about the plan but rather the planning – all entrepreneurs have to think about how opportunity recognition fits with marketing, building the right team, making financial projections and so on – so it is not a full waste of time. A business plan gives an opportunity to outline all of these key elements and forces an entrepreneur to commit. There is no need for a 100-pages plan – today it can be no longer than 20-40 pages. Start small with a business plan – summarize the current strategy, metrics, milestones, tasks and basic responsibilities. Typically, most have an executive summary, a marketing plan, a management team description and financials (income, cash-flow and balance sheet projections).
Skeptics and fans of business plans agree on one point: securing funding almost always requires a formal business plan. Companies funded by friends and family usually don’t need a plan, but if you go to venture capitalists, banks, lenders and most angel investors, you will need a business plan. And it is not the actual document that matters – it is the action behind the spreadsheets: investors want to see that an entrepreneur has actually examined the market for a product or service, identified potential customers, assembled a capable team, devised a business model – did the homework.
Reality is that you need a basic plan for how you’ll run the business. The problem with the business plan isn’t the plan itself, it is about spending too much time developing it. Implicitly, it’s about executing a plan.