Why Write a Business Plan? Look At This Data

I am spending a lot of time currently reading research on new firm formation — the process that occurs as  opportunity, entrepreneur, team, and outside partners interact to create a new venture.

Much of the research shows that successful firms (across various metrics) make use of business plans and business planning.

Tim Berry’s firm has surveyed over 3000 of its users and have found some impressive statistics. Clearly this is not a random sample of ‘entrepreneurs’ and Berry has a link to answer statistical design and methodology. But the bottom line is, even if this sample is biased, its biased towards strong, growing firms and that is a great group to learn from.

From the entry:

Simply put, those who finished their business plans were about twice as likely to successfully grow their business, get investment, or land a loan than those who didn’t. You can see the numbers on the chart.

For the record, we sent the results to the University of Oregon Department of Economics for validation. I posted more details about that study and the statistical validation yesterday on our Business in General blog.

Why Plan Your Business? Look At This Data.

Wall Street Journal on Grads Making Their Own Jobs

Entrepreneurship by necessity has always accounted for much startup activity. Toddi Gutner has a piece in the Dec 23rd Wall Street Journal highlighting recent grads launching firms and also some of the structures and assets that the campus presents to entrepreneurs. Kauffman, Babson, Y Combinator, business plan classes, etc. The article is worth reading, here is a snippet:

Andrew Levine knew he wouldn’t find a job in investment banking when he graduated with an M.B.A. from the University of Miami in 2008. Wall Street was in the midst of a financial collapse. So instead the 24-year-old focused his efforts on launching a start-up. “I figured that starting my own company was the best use of my time while I waited for the market to thaw,” says Mr. Levine.

Faced with an unemployment rate of 16% for 20- to 24-year-olds, a growing number of recent college and grad-school graduates are launching their own companies, according to anecdotal evidence from colleges, universities and entrepreneurship programs around the U.S.

For his part, Mr. Levine built upon a business plan for a niche social-networking company he had created for an entrepreneurship class the prior year.

VC Investors Don’t Care About BPlans

Writing a business plan is something virtually every entrepreneur and entrepreneurship student does. A new study out of U of Maryland, authored by my friend David Kirsch and co-authors Brent Goldfarb and Azi Gera). From the NYTimes article by Brent Bowers:

Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions “under conditions of high uncertainty,” venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business.

That means, the study said, that they pay little attention to the documentation from entrepreneurs about their academic credentials, work or start-up experience, previous success in raising equity capital, ability to form a top-notch management team or even how much money they want.

“In general, business plans don’t matter,” said Brent Goldfarb, an associate professor of management and entrepreneurship at the Robert H. Smith School of Business, who wrote the study with David A, Kirsch, also an associate professor at the school, and Azi Gera, a doctoral student. “Nobody is going to read them.”

That assertion flies in the face of the conventional wisdom that writing a business plan is one of the first and most essential tasks an entrepreneur should undertake, Mr. Goldfarb acknowledged. But, he says, the report’s conclusions jibe with the feedback he gets from venture capitalists.

Do You Really Need A Business Plan?

Great thoughts on business plans from the great Northwest. SeattlePI writer Susan Schreter responds to the question: “I’m at the point where I have to decide if I should hire employees or farm out certain work to independent consultants. Also, please don’t ask if I have a business plan because I’d rather spend my time making money than creating documents I don’t have time for.”

Here is a part of her Inside Entrepreneurship column:

Yogi Berra once said, “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.”

Unfortunately, during the past 15 years or so, business plans have morphed into a marketing tool to raise money. Entrepreneurs just don’t bother to prepare them until a potential grant provider, lender or investor requires the document as part of the selection process. It’s too bad, because useful startup operating plans or business plans are built around a clear understanding of the founder’s desired business destination. And this destination is not vaguely defined as “to make a lot of money” or “to be my own boss.”

Interview with Tim Berry

Found a nice interview with Tim Berry at his blog. Last week I recommended his article/book on planning as you go. Well, here is the audio version in the form of a podcast by SmallBizPod. (btw, he did this interview/podcast in London at a ‘rather nice’ Bloomsbury Hotel — about a block from where I lived when I attended the University of London’s School of Oriental & African Studies. Very cool urban campus environment)

Again, Tim is focused on the ‘living document’ with built in check ins and metrics. Also – always pay attention to cash flow. Great little analogy of a map vs navigating.

Its interesting to hear about Tim’s background/career development as a journalist turned MBA turned software entrepreneur/writer/blogger.

Tim Berry and the Evolution of Business Planning

I spent much of the holidays frantically trying to launch a business (incorporating, calling web contractors, graphic designers, networking, dealing with the funding issue, etc.) and also putting together a business plan — for internal use and also for communicating what I am doing (via a 2 page exec summary) to potential partners, vendors, etc. The plan currently exists as 9 word docs (everything from exec summary and mission to industry analysis and competitive landscape ) in varying degrees of development.

Today I stopped by Tim Berry’s blog for a little encouragement. I found it in a big way. Tim has a new post on the Plan-As-You Go Business Plan. Which, as I read the entry and learned more about it, is exactly what I am doing.

Tim is working on a book about this ‘new conception’ of the business plan and I am looking forward to it. Here are just a few highlights from his post.

1. It’s a process, not just a plan. Every PAYG plan has a review schedule built in, from the beginning. It sets the dates and participants in the future review meetings, taking 60-90 minutes once a month and 2-3 hours once per quarter. and PAYG planning is about process: not just the plan, but the regular review and management of the plan.

2. Form follows function. The PAYG plan is not necessarily the same kind of formal business plan document you did in business school or read about all over. It doesn’t necessarily follow a recipe. Every PAYG plan is unique. It might generate a formal document at some point, or over and over again actually at different points in company history, but until you need the formal plan document to show somebody it lives on your computer. You pull from the plan to make a pitch presentation or elevator speech or summary memo or full detailed business plan document, as required for business purpose. It’s the source of all of these, the key thinking including strategy and metrics and dates and deadlines, without having a specifically defined form.

The post is really worth the read and I am sure the book is going to be great. It also makes one wonder a bit about the value of business plan competitions which demand static plans created for judges rather than a living, evolving tool of entrepreneurship that is the ‘plan as you go business plan’?

WSJ Looks at BPLAN Contests

The WSJ  covers business plan contests — though their writer, Kelly Spors, didn’t call me. They highlight the growth of plan competitions outside of the university environment.

“Many of the newest contests aren’t hosted by colleges, but rather by product makers and Web sites courting small-business owners and by investment firms or nonprofits trying to spur economic activity in a particular region or industry. Even the college contests, where student teams at various schools compete against each other, have become something of a sport.”

Independent street blogger,  Wendy Bounds, asks if business plans are worth the effort.