Let’s cut through the B.S. here and take a realistic look at the proverbial Business Plan. It is responsible for more business failures than any other document, dooming many enterprises before they even get started!
Why? It’s complicated, but with a little resolve we can cut to the chase. Here are some of the myths surrounding business plans:
- “You can’t get conventional financing without a business plan.”
Bankers do require business plans that they can take to their loan committee. Bankers, by and large, are not risk takers. They can’t live with a loss rate that exceeds one or two percent of the loans they make. Just like HR Departments use your resume to eliminate you (rather than hire you), banks use your business plan to find reasons to reject your application. The fact is that if you need financing for your startup, the money will usually only be lent to you on a personal basis using your home or other asset as collateral. Credit cards and personal lines of credit are the way most entrepreneurs finance a new venture.
- “Venture Capitalists need a business plan to fund you.”
While Venture Capitalists can live with more like 20% failures and mediocre performance from 70% of their projects, they have to make their profits from the 10% that “hit it big.” That’s one reason they take such a large piece of the pie. Ask any seasoned V.C. how much stock they put in a business plan and they’re likely to tell you in all candor that they really don’t read a lot more than the Executive Summary. They rely more on things like I.P. (Intellectual Property you own), credentials and proven track record of the Management Team. Purchase orders from established businesses or the government, as well Letters of Intent or Memoranda of Understanding can carry some weight, depending on the market or circumstances.
- “The business plan guides the marketing plan.”
Sophisticated Managers and Venture Capitalists know that the plan is good until the first marketing salvo is launched and then it becomes a case of adapt and improvise. The business plan undergoes daily and even hourly revisions. The original plan is nothing more than an historical document, often bearing little or no resemblance to reality. Putting too much time and energy into forecasting at the beginning serves more to delay the startup than to aid it. Better to have a minimal-length plan that can be modified as you go than a cumbersome and rigid plan before you even test the market.
So, what good is the business plan anyway?
The real value is in the building of it in the first place.
The mere act of writing the plan builds “management muscle” and demonstrates the skill of the team to forecast events. Sophisticated readers (think: potential investors) mentally check the box for “ability to draft a document and present data.” Then they move on to the contingency plans section… the “what ifs!”
Too many would-be entrepreneurs believe the myth that they need a business plan to get financing. Accordingly, they spend countless hours, financial resources and emotional energy putting one together. Had they devoted this effort to getting even a handful of paying customers they would be farther ahead in understanding and presenting the value of their business.
From our viewpoint, even a one-page plan is adequate for a real game-changing business concept. For most entrepreneurs, a ten-page plan is sufficient. Make that work for you until you have some actual sales under your belt or really have to go to the bank.
The bottom line: A business plan is a work in process that undergoes constant revision. Use it as a tool; don’t let it become an obstacle. If you are a “planning freak,” spend your time and energy on the marketing plan. That’s where the real action is!