If you’re an entrepreneur, you’ve probably come across a few articles proclaiming the Death of the Business Plan. And perhaps you breathed a huge sigh of relief and thought to yourself: “Hooray! Now I can launch my venture without doing a lot of tedious planning!” R.I.P.
Whoa. Not so fast.
These “Death of the Business Plan” articles certainly mean well, but it’s also far too easy for average entrepreneurs to arrive at the wrong (and very dangerous) conclusion after reading them. The conclusions in these articles apply to some people in some situations; however, they are not universal truths.
Let’s look at the common fallacies some authors give to support their conclusion that business plans are a waste of time:
Fallacy #1. Investors No Longer Read Business Plans
This is a pretty pervasive argument, and if you’ve heard it enough times, you might even think it’s a universal truth. But it’s a dangerous notion for at least two reasons:
- Your target audience probably isn’t one of these people. It’s true that some prominent folks in the angel and venture capital communities don’t like to read traditional business plans. However, venture capitalists represent only a very tiny fraction of the funding community. Out of millions of companies seeking capital during any given year, venture capital is appropriate for only a few thousand of you. Unless you run a proven, growing company in a “hot” sector like cleantech, biotech, or software, you’re probably wasting your time even thinking about venture capitalists and their preferences. More likely, you’re seeking capital from lenders, friends, family, or angel investors. In most of those cases, a business plan is still very much appropriate. Furthermore, even if your target audience IS a VC who doesn’t personally read business plans, you can be sure that the VC’s associates and attorneys will need to review your plans in detail during the due diligence process.
- Even if your target audience doesn’t want to receive a “traditional” business plan, you still need to address the Ten Questions Every Business Plan Must Answer. Every entrepreneur needs a “conceptual” business plan – that is, your plan for how you will start and grow your business with limited resources. The medium you use to express your conceptual plan will depend on your target audience and situation: in some cases, a “traditional” narrative business plan is appropriate; other times, you’ll want to use an elevator pitch, a pitch deck, an executive summary, a financial forecast (which is just a business plan expressed in numbers), a multimedia presentation, a business model canvas, a bunch of diagrams on a whiteboard, a product demo along with verbal commentary, a private placement memorandum, a loan application, a grant proposal, or perhaps something else. These are all equally valid ways to express your conceptual business plan, and you need to match the medium to the situation. But no matter what medium you end up using, make no mistake: you need to put in the same effort to fully develop the underlying conceptual business plan.
Fallacy #2. Things Change Too Fast
It’s true that things can change quickly, especially in the tech world. Does that make it a good idea not to do any planning? Of course not. A business plan – no matter which medium you express it in – is a living, breathing thing that will incorporate the best information you have at the moment, and it will evolve and adapt as the known world changes around it. Think of the business plan as a road map for a long trip. You’re going to encounter detours along the way, and you might discover points of interest that you hadn’t planned on at the beginning of the voyage. Maybe your planned destination will experience a plague of locusts and you’ll decide to do a pivot (in common startup parlance) and head elsewhere on your vacation. But it’s still a good idea to start the journey with a pretty good idea of where you want to end up. Just be ready and willing to make adjustments on the fly as you receive new information.
Furthermore, disruption isn’t quite as common as some people think. Companies like Google and Facebook are exceptions, not the rule. Most markets don’t get reshaped overnight. Most change is gradual; a good plan gives you a framework for evolving and adapting.
Fallacy #3. It’s Impossible to Predict the Future
You can’t argue with that (if you could, you’d be a trillionaire by now). So what’s the point of trying to predict how the future will turn out? At a fundamental level, a business is a collection of cause-and-effect relationships. R&D leads to innovations. Hiring the right software engineer results in faster, more stable code. Generating good web content produces inbound leads. Sure, the exact nature of the cause-and-effect relationships can be uncertain, and a lot of serendipity can be involved.
The forecasting process requires a lot of hard thinking about the nature of these cause-and-effect relationships and the resources you’ll need. You’ll discover that the fate of your future depends more critically on some assumptions than others.
This thought process will help you prioritize your testing so you can identify and fix the flaws in your plan more quickly. You don’t need your predictions to be spot-on in order to get value out of the process.
Fallacy #4. It’s Futile to Plan in Isolation
Many authors argue that the act of retreating secretly into a bunker to write a brilliant business plan for how your incredible idea is going to be the next Facebook is an exercise in futility. They argue that you should talk to people about your ideas, design a minimum viable product and get it in the hands of potential customers so you can test product-market fit, blog about it to the world, and so forth. And they’re absolutely right. I agree completely that planning and shaping your business and product should not be done in isolation. You absolutely need to interact with the market so you don’t waste years of your life toiling away on something that nobody will buy.
Planning is an interactive, iterative process. In the language of science, your current plan is your null hypothesis – your best guess as to how things will develop. Your market tests represent the experiments that will determine whether or not your hypothesis needs revision.
Fallacy #5. You Don’t Need (or Already Have) Investors
Most people think of business plans as tools for raising money, and if you plan to bootstrap your company, or if you already have money from investors, you no longer need a business plan. Seriously? A business plan – regardless of how it’s documented – represents the collection of strategies and tactics you intend to implement in order to build a successful venture. Without it, you’re flying blind. I sincerely believe that one of the main reasons most businesses fail is because they either followed a flawed plan or didn’t have a plan to begin with.
Finally, it’s important to recognize that most of the value of a business plan comes from the planning process – thinking through and validating your business model, your market dynamics, your competitive positioning, your distribution strategy, and so on. A careful planning process can help identify fatal flaws early before you’ve ventured too far down the wrong path. You also need a plan so that you’ll understand what resources you’ll need at what times – just as a blueprint tells builders when and how much concrete, lumber, copper pipe, and paint will be required. A good business plan – regardless of the medium it is expressed in – gets you and your entire team rowing in the same direction, in the right sequence.
Business Planning Remains Essential
Whether you run a startup at the idea stage or an established firm planning the coming years, business planning is an essential activity. Once in a while, you’ll hear about a celebrity entrepreneur who manages to raise money without a business plan. You can be sure of two things in this situation. First, the entrepreneur is a rock star with a track record of building successful ventures. Second, the entrepreneur has a very clear business plan in her mind, even if it hasn’t been committed to paper in the form of a “traditional” business plan.
I have a tremendous amount of respect for the individual authors who have written that the business plan is dead. However, it’s too easy for novice entrepreneurs – heck, even experienced entrepreneurs – to misinterpret what they have written. None of these authors, as far as I know, are telling you to go out and wing it, without any planning at all.
So plan carefully, express your plan in a medium that is suitable for your needs, and be prepared to change course often. Long live the business plan.