A BUSINESS PLAN, WHAT FOR?
“An A-team with a B-plan is always better than an A-plan with a B-team.”
(George Doriot)
Business Plans have been around for more than a century, initially for bankers and managers of large businesses. Startup business plans became a necessity about fifty years ago. They have proliferated ever since. On the web one can browse through thousands of sites in all languages providing either information about business plans or business plan templates. Why in the first-place spending time on a plan when so many things need to be done in priority?
1. Business Plans are for investors. It is commonplace to hear founders at startups feeling the haste to write their venture business plan. All startup founders do have a plan, even if it is rarely formalized in a document. They talk about it within their group, on one-on one conversation with people whose feedback they respect. As much as I am in favor of the Walt Disney method (“Do it rather than talk about it”), no one jumps on the execution of a business idea without a minimum of thoughts and planning, feedbacks and adjustments. The business plan is this very process, formalized and extended to all aspects of the venture with a horizon of visibility.
Indeed most (all?) investors wishing to know more about an investment opportunity will ask for the business plan. Do they read it? No. They browse through a few sections, depending upon their focus, never missing the ones on team members’ bios and go-to-market strategy. Sending a plan before any demonstration of interest from an investor serves no purpose. You must have passed the first, short, test that showed your pitch, delivered in a format of your choice, triggered the investor's appetite to learn more.
Should a Plan check all required boxes? It better does. Yet, for an early-stage venture, no smart investor will trust that founders, if they are not repeat founders, would have the right answers on all items, from product/market fit to financial projections. The question often arises as to providing confidential information or not, as most investors will not sign NDAs. To be safe, avoid writing confidential information as much as possible. Good investors are not interested in confidential information on technology and products. They want to know how your product/service works, what excruciating pains it cures and how it is delivered. If you are lucky and you finally receive a term sheet from an investor and you decide to accept it, then the investor will call upon a few experts in their network to evaluate the technology. With these experts, NDAs are easily signed.
I remember as a co-founder of an early collaborative ERP solution for small and medium size companies, taking a call from a young associate from a renowned firm called me, at a time when we were pitching investors for our A round of financing. Within ten minutes I realized his questions were becoming more focused on the product. It dawned on me that his interest was not in our venture. He was checking whether another business he was likely considering investing in, on the same exact emerging space, had a product trying to solve a similar problem than ours. As I had obviously not shared any confidential information on a phone call, I did not worry too much. I shortened the call and never heard of him since.
2. Business Plans are for business partners: when a startup is engaging to partner with an established company or even a large group, as it happens more often now, it is good practice from the established company to ask for the upstart business plan, to understand where its management is envisaging its future. Generally, founders share part of the business plan but not all. It comforts the mature party that management is not just flaunting some brilliant technology without having thought through its implementation, adoption etc.
3. Business Plans are for the Team. Much more importantly business Plans are for the team within the venture. It is a great communication tool. The team is involved in co-writing the plan. The rich interaction that results from strategic meetings between the founder(s) and the early executives who yields progress by leaps and bounds. In addition, when hiring a top gun, say the head of Marketing, having a relevant business plan helps in the luring process.
4. Business Plans are for the founders who write it. Writing a business plan provides a good platform to ask thousands of questions. What a founder accepted initially as obvious suddenly encounters obstacles. The deeper the founder drills down, the more he/she realizes there is more thinking to do to perfect the plan in order to build a successful business. Understandably, the plan is said to be a living document. It is a long process, yet it is time well spent. More knowledge and data bring changes and improvements, a new iteration increasing the likelihood of a successful execution.
Therefore, it is fundamental that startup founders and leaders write the plan, and do not hire a third party for the job. Such helpers may use the right jargon, write with elegance and check all boxes, yet they end up with a product that lacks soul, sparking no attraction from any investor. In substance, a business plan for an early-stage company should reflect the strengths of the founders at that very stage and the understanding from the founders of all that needs to be done with in-house or outside expertise.
Lastly, what about financial projections? Too often financial projections are quickly built to show an appealing level of revenue and net income at the end of a period under review. During the Internet bubble twenty years ago, rumors circulated that investors were not funding businesses unless they would show a path to reaching $100 million revenue within 5 years. Hence all business plans then showed the magic number generated at the right time. Obviously, only a very small fraction of VC-funded businesses achieved such a goal.
Financial projections, when carefully built, are the most concise way to describe the potential evolution of a business; what matter are the reasonableness of assumptions and the architecture of the projections, allowing investors to simulate at leisure and check their own “what if scenarios”. Reasonableness implies that the probability of achieving year 1 of your projections is very high, year 2 is above 50% and year 3 is more a goal than an easy-to-accomplish milestone. In some spaces, the ever shorter lifecycle of products, and of technology, make five-year detailed projections a real shot in the dark beyond year 3. If your venture is in a long-cycle industry, such as electric vehicles, working with long horizons, longer than 5 years, makes sense however.