“You need a business plan” is the mantra of MBA types.
As they say, businesses don’t plan to fail, they fail to plan! Who could argue with such a clever turn of phrase?
Let’s do some quotes:
- “Without a business plan, how will you know whether you can make a profit?” (source)
- “A complete business plan should include five-year financial projections. These projections will assist investors with making decisions about your business and help you to know how much funding you will need to get things rolling.” (source)
- “Many businesses fail due to poor planning. It is important for every business owner to understand the entire depth, flexibility, strength and weakness of their business plan.” (source)
- “Adjust your business plan as needed, but be sure to not stray too far off of your original idea.” (source)
Surely those Harvard MBA grads are correct! After all they don’t give out those MBAs for nothing — you have to at least start a business yourself! Oh wait, you don’t have to do that? Oh.
Trouble is, this advice is inconsistent with how real (small) businesses operate, as you can often see for yourself in the same articles that promote the use of the business plan.
For example, Kenrya Naasel writing for Latina.com starts by saying “A business plan is the most important document you’ll ever create.” (And you thought your website’s home page was important? Ha.) But later she quotes a successful entrepreneur who admits “We operated with no real plan for years” and “Things don’t generally go as planned.”
That’s one thing everyone can agree with: Things don’t go as planned. Yeah, so how are you supposed to write a three-year projection with a straight face?
The telling part comes in the comment section where Sean adds:
Now that I think back on it, I’ve done plenty of marketing that led sites to success… but it was all from trial and error. Had I known BEFORE what I know now, I could have had a plan and reached my goals much earlier.”
Here inlies the fallacy. You never “know before what you know now.” If success is “all from trial and error,” how exactly do you write a plan?
Marketing is trial and error! Features, messaging, the path to customers, your competitive edge, your pricing model — all this gets figured out as you go. You can’t know what’s going to work ahead of time, so why is Sean concluding that he should have written a business plan?
Business plans are just guesses, and they’re almost always wrong.
The very idea of “planning” is ridiculous:
- If you had written a business plan in 2007, what would your assumptions have been? Investors love “Web 2.0,” MySpace is how to reach young people, the economy is growing without limit, and products with demonstrable ROIs will get healthy slices of corporate budgets.Of course every assumption in your plan was reversed in 2008. The world economy exploded. Getting money from budgets is like squeezing water from rock. MySpace is dead, long live Facebook. The term “Web 2.0″ is passé. Twitter went mainstream and might be more important for “word of mouth” than blogging.Good thing you spent all that time planning.
- At the beginning you don’t know anything about what your business will look like. Your product will evolve to fit the market. You’ll test marketing messages on AdWords and make unexpected discoveries about what works. Good and bad luck shape your company. You have no answers, no predictive power. Nor should you artificially pin yourself down! Even a “plan” buried in a drawer makes you less likely to consider the radical new idea that changes everything and makes you successful.
- Have you tried actually writing a plan? Go ahead, try it! Be sure to include your mission statement, your vision, your five-year profit-and-loss statement, decide who will be your key personnel, define your pricing strategy, explain the risks, position yourself against competitors.Now be honest, where did this data come from? I’m guessing you reached right up your ass and pulled it out. For the five-year plan you were so deep you tickled your spleen. You know this is crap; why are you doing this when you could, oh I don’t know, just talk to potential customers?
But enough from me. What do VCs have to say about this? What if you’re trying to raise money, don’t you need a business plan? What do other entrepreneurs say?
- From Venture Hacks, a great blog written by entrepreneurs-turned-VCs: “Don’t send a business plan to investors. Nobody reads them and nobody executes them. … Document your detailed plans on a napkin.”
- From David Cowham, Bessemer Venture Partners: “Nothing slows down a VC as much as a comprehensive business plan.”
- From Mike Moritz, Sequoia Capital in a Guy Kawasaki fireside chat, “Five-year plans aren’t worth the ink cartridge they’re printed with.”
- I could fill three pages with links to 37signals railing against business plans (did you like that pun y’all?). From When was the last time you looked at your business plan: “[All three businesses] are still alive but have also completely rethought their original plans. They’ve changed focus, services, salaries, partnership arrangements, etc. … If these companies’ one year projections were so far off, imagine how worthless those year three (or five) projections turned out to be.” Or, from The only plan is to learn as you go: “Stop presuming you can be right in a world of massive uncertainty. The only plan you should make is to plan on improvising.”
- A study found that “quality of business plans had zero impact on the amount of VC funding being raised.”
- From VentureBlog, VC David Hornik derides an article on Wired and TechCrunch about how to raise money: “VCs tend not to read business plans because a) they are too long and b) your business will likely have changed by the time anyone gets around to reading your business plan.”
- From Business Insider, Kevin Ryan, founder of six companies, says “I don’t do a detailed plan. If a VC focuses a lot on the details on the financial model, I won’t work with them.”
- From Steve Blank, “In the real world, most business plans don’t survive the first few months of customer contact. And even if they did — customers don’t ask to see your business plan.” And then from an article called Startups are Inherently Chaos: “As a founder you need to prepare yourself to think creatively and independently, because more often than not, conditions on the ground will change so rapidly that the original well-thought-out business plan becomes irrelevant.”
Do I really need to go on, or are you sufficiently bludgeoned into not writing that business plan?
In fact, stop reading this article and do something useful like A/B test a landing page.
What do you think? Is there value in writing a plan?
This post originally was published Dec. 14, 2009, on Jason Cohen’s blog, “a smart bear.” Check there to see comments and more tips from his readers!
Jason Cohen founded Smart Bear Software, maker of Code Collaborator, a tool for peer code review and recent winner of the Jolt Award. He took Smart Bear from start to multiple millions in revenue and 50 percent profit margin without debt or VC, then sold it for cash. He also is a founding member of ITWatchdogs, another bootstrapped startup which became profitable and was sold. He’s also a mentor at Capital Factory (like TechStars or Y-Combinator in Austin). And, he’s the author of Best Kept Secrets of Peer Code Review, the most popular book (35,000 copies) on modern, lightweight methods for doing peer code review effectively without everyone hating life. He blogs at “a smart bear.” Email him: jason (at) asmartbear (dot) com