Archive for January, 2010

How Business Plans Destroy Startups

January 31st, 2010

Business plans - at their best - are an invaluable tool to help a small startup or growing company plot its path to the next stage of growth.

Unfortunately, most business plans are a complete waste of time and energy - turning would be founders and startup builders into word-smithers and BS artists.

At their worst, it is not uncommon for the business planning process to waste months of effort - or even put the startup (and sometimes the entrepreneur) out of business.

So how did business plans become such an enormous waste of time (and startups)?

The original intent of a business plan - to force the entrepreneur to think through all of the issues for getting the startup launched, and to cover all bases - is actually quite sound. The problem is that most entrepreneurs who write business plans are doing it to play the “startup lottery” - writing the plan in the hopes that after the 6 month to 1 year grueling process of begging angels and VC’s for money, they will be amongst the 1% of startups who get funded. This process creates a few major problems:

1) Business Planning turns into “Let’s Pretend”

By definition, any startup faces a sequence of short term and medium term hurdles that are critical to determining if the business model is viable, and then getting the startup off the ground. Generally these “short hurdles” involve testing a market, gauging interest, and determining if there is a profitable business model. If you are using your own money, then these challenges are real - and all of your planning and execution effort is naturally focused on confronting them.

If you are chasing other people’s money, the real and immediate challenges suddenly seem less urgent - and your business plan focuses on how you are going to take over the world after easily sailing over the “short hurdles” (the same short hurdles that ironically spell the death of the majority of “lucky” startups that do raise money). And so your business plan turns into a steaming pile of “Let’s Pretend” - and investors can smell it from a mile away.

2) Time spent schlepping for money is time not spent building the business

Most entrepreneurs who are chasing money are burning their own cash reserves while doing it, and also not focusing on the business. As time goes on, and the business plan is revised, and the financial model is lipsticked for the 18th time, there is little focus on actually getting the business off the ground - and the startup suffers enormously. Maybe it turned out there was a market, and customers would have loved the product; but you’ll never know because you spent time you could have spent launching your startup in the game of chasing money.

Imagine if the Allied forces ready to storm the beach on D-Day put the mission on pause for a few months so they could instead draft the perfect plan for rebuilding Europe after the war. Just like this, millions of entrepreneurs every year wuss out on their own D-Day, deciding it’s better to spend time writing about their business idea than making it happen.

3) Investors can smell a BS plan from a mile away

Having read a lot of business plans over the years, I’ve found the vast majority can be summarized in 3 steps: 1) the startup will lose (amount being raised) in the first year, but discover that everyone loves the product, 2) the startup will somehow break-even in the second year, and 3) the startup will then become amazingly profitable and everyone will get rich.

Though this plan smells the same every time I’ve read it, it is sadly what I’ve come to expect from entrepreneurs who’ve skipped out on their “D-Day” in favor of the money chase. And for all the bad plans I’ve smelled, angel groups and VC groups have smelled many more. On the rare occassion that a plan doesn’t smell like this, it’s usually written by an entrepreneur running a startup that is already taking down milestones and genuinely has a reason to raise money.

4) The “captain gets glued to the ship” the longer the process drags on

Perhaps the only thing worse than the impact the “money chase” has on the startup is the impact it has on the entrepreneur. What was once a rational person who had a potentially good idea is now a stubbornly determined blind optimist who has “bet everything on this idea and has to make it work.” Had they tried building the startup and actually testing the idea 3, 6, or 9 months ago - they may have realized very inexpensively that it wasn’t viable - and thus moved on with their life (and come up with another idea that did work).

But now it’s too late. They’ve got too much riding on the idea, the business plan, and the belief that some investor some day is going to give it a chance and give them the money they need to pursue glory (and now vindication).

The Launch Plan - a Better Way to Start

If your plan is in the 1% that is going to get funded, then just write your plan - don’t waste your time on pressing issues or on building the business :-)

For the rest of us, the key is to use the scientific method (remember from junior high) and break out the most pressing issues you need to solve in order to prove there is a business model. For each of these questions, what is the simplest / smallest thing you can do to prove there is or isn’t a viable product, market, etc? What is the smallest test market you can learn from? What is the minimum set of features you can offer to gauge interest? How much will it cost to acquire attention, interest, and purchases from each customer? Will the purchase cover that cost?

Your Launch Plan should turn all of these questions into an actionable plan for launching the initial product, getting feedback from the market, and determining if there is a viable business model as quickly and as inexpensively as possible. If the answer is no, congratulations, you’ve filtered out an idea on the cheap and can move on to the next idea. If the answer is yes - and there is a viable business - then you can start writing your business plan in earnest knowing it will be based on proven facts and not make believe.

Author: Jeff D'Urso Categories: Startups, Web Startups Tags: