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Do Start-Ups Need A Business Plan?

Yes! The WSJ also has some other thoughts -subscription required. I look at lots of business plans in my other life as a VC. My main message keep them simple and focus on illuminating the idea. Only include data you really understand. Some highlights:

  • Matt Coffin, founder and chief executive of LowerMyBills.com, a Web site sold to Experian Corp. in 2005 for $330 million, says he used a 10-page PowerPoint presentation that he spent four to six months gathering research for instead of a formal business plan when pitching his idea to investors in 1999. He succeeded in raising $4 million in venture capital by convincing them that the market for people needing a one-stop place on the Internet to refinance was ballooning.
  • Tim Petersen, managing director of Arboretum Ventures, a health-care venture-capital firm in Ann Arbor, Mich. says he generally prefers getting five-to 10-page summaries of business ideas or PowerPoint presentations over lengthy business plans.
  • Benson Honig, a professor at Wilfrid Laurier University in Ontario, Canada, says his research of 396 nascent entrepreneurs in Sweden from the late 1990s also found no correlation between business planning and profitability. Instead, his study found the biggest predictor of success to be knowing customers in advance. Mr. Honig says he teaches “contingency planning” to his students — or thinking about a business as constantly progressing, changing and making decisions based on the market climate — instead of traditional business planning.

The WSJ also includes links to some relevant research:

Plans and Performance

Study: “Pre-startup formal business plans and post-startup performance: A study of 116 new ventures” by Julian E. Lange, Aleksandar Mollov, Michael Pearlmutter, Sunil Singh, and William D. Bygrave (all Babson), June 2005.

Summary: The study compares the success of 116 ventures started by Babson College alumni between 1985 and 2003, using performance measures such as revenues, employee numbers and net income. Researchers found no statistical difference in performance between those businesses launched with formal business plans — roughly half of the 116 — and those started without them, and concludes that “there is no compelling reason to write a detailed business plan before opening a new business” unless the entrepreneurs needs to raise substantial amounts of start-up capital. Instead, the researchers say start-up entrepreneurs should generally just make some financial projections, especially cash flow, and open the business.

You’ll need a plan to get funded but it’s like the old saying about memos “I didn’t have time to write a short memo, so here is a long one”. Make the time.

One Response

  1. By Greg Balanko-Dickson on January 10th, 2007 at 7:51 am

    Great points, I agree there are times when financial and cash projections will suffice. (Disclosure: I have authored a book on business planning)

    As a VC I can see the importance for having access to succinct information when trying to assess an investment opportunity. Often shorter is better whether a Power Point or a well written summary.

    In researching my book and in reviewing U.S. and Canadian studies of business failures, I found that bankrupt and successful firms had similar business plans and financial plans.

    The major difference between success and failure was that 81 percent of successful firms periodically took stock of where they stood with respect to their goals, and they followed up by making adjustments to their practices and expectations. The sad news is that less than 33 percent of bankrupt firms with financial forecasts in their business plans actually compared their results with their forecasts, and only 40 percent of those took any remedial action when their forecasts differed from their goals. (Source: Failing Concerns: Business Bankruptcy in Canada, Characteristics of Business Owners 1992 by U.S. Department of Commerce)

    Plus, if an entrepreneur chooses to go the bank route, most bankers will ask for a business plan.

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