Are business plans a waste of time?
I recently attended a national entrepreneurship conference along with several other recognized university instructors and entrepreneurs. I found it interesting that two simultaneous sessions offered conflicting views on business plans. One session featured a panel of successful entrepreneurs who questioned the relevance of business plans in the real world. The other session focused on teaching students to quickly and correctly develop business plans.
I was intrigued by the panel discussion, so that’s the session I attended. None of the entrepreneurs on the panel had ever written a business plan, at least to launch a business, but they were all very successful. The disclosure that they did not use written plans is not surprising, most entrepreneurs do not. One of the reasons given by the panel for giving up on a formal business plan is the natural tendency of entrepreneurs to stick with a business plan they wrote due to the investment of time and effort. The reality, they said, is that things change so much in the real world of business that the assumptions that underpin a business plan often have to be modified or even abandoned to allow the company the flexibility it needs to survive. Furthermore, the entrepreneurs insisted that a good plan will not make a bad idea work and a great idea will probably not be hampered by a poorly written plan or no plan at all. Another concept discussed in the session was that what the entrepreneur is really selling to the venture capitalist or angel investor is the entrepreneur. One of the panelists commented that “if investors believe in you, they will invest in your business.” The consensus of the panelists was that investors seek passion and vision in addition to the idea. They must be convinced that the entrepreneur is capable of persevering and making good decisions and adjustments so that the business continues to advance. Since college instructors attended and most entrepreneurship programs require written plans, all the entrepreneurs on the panel diplomatically agreed that requiring a business plan as part of a course or study program was not a waste of time. They agreed that the process itself could provide valuable information.
As a university entrepreneurship instructor, I try to convey as realistically as possible the realities that entrepreneurs face. After attending this conference, I realized that students may have a difficult time reconciling the two seemingly conflicting points of view presented in the workshops. Certainly my students know the statistics that suggest that most entrepreneurs enter a business without a written plan. Trying to convince them otherwise would be false. If the panel was right, why bother with a business plan? I think the answer can be found in the last nugget offered by the panel of entrepreneurs; it is the process that is most beneficial.
The planning process does not start with the business plan. In fact, it is a mistake to write a plan too early. A feasibility analysis should be performed prior to writing the plan so that the key assumptions underlying the plan are properly examined. Research conducted as part of a feasibility analysis can also lead the entrepreneur to better understand their business. For example, if a focus group is used to better understand the target market, new insights can be gained that can lead to the development of a more competitive business model. The results of the feasibility study and the articulation of a compelling and competitive business model are the most critical components of a business plan. Together with a cash flow analysis, these facts can be critical in acquiring the resources necessary to launch a new business.
Another point that I like to make to my students is that the importance of a business plan depends on the type of business. A retail store with a large requirement for capital, inventory, payroll, etc. it’s completely different from a startup in a technology-driven industry that is rapidly changing and evolving. A company similar to Facebook, for example, has much less need for a formal business plan than the owner of a new sporting goods store.
Also, the amount of borrowed capital required to start a business will affect the need for a formal plan. The venture capitalist will typically want to review at least certain sections of a formal plan as part of their due diligence.
I think the entrepreneurs had a valid point regarding the tendency of entrepreneurs to stick too closely to a formal plan. A critical moment occurs when the business is launched and the entrepreneur begins to receive real feedback from customers. Decisions made at this juncture can make the difference between business success and failure. Should the employer stick to the assumptions of the plan or should minor or major adjustments be made? The entrepreneur must remember that the business is not on autopilot just because a polished business plan has been implemented. Adjustments should be made as conditions require.
The panel was not wrong in questioning the need for a formal business plan, but the planning process is different from the plan. A business plan, whether necessary or not, will allow the entrepreneur to better articulate their vision, which can make writing a plan worthwhile.