For young entrepreneurs starting out on their first venture, one of the most common questions is: “Why should I write a business plan?”
Business plans are, after all, difficult and time-consuming to write, running to around 50 pages and taking at least a month to complete.
To the average entrepreneur, that probably sounds like a pretty heinous task.
Who wants to spend hours sitting in front of a word processor when you could be out making sales?
Likewise it is argued that start-ups are inherently tumultuous by design. By the time you are finished writing the plan, the business is likely to have pivoted once or twice, making the business plan out of date and fail to reflect where the business is really going.
These arguments are backed up by a well-worn bit of Silicon Valley folklore that has gained a huge amount of traction – the idea that many hugely successful firms began life as pie-in-the-sky ideas quickly jotted down around the coffee stains on the back of a napkin. If it’s good enough for Southwest Airlines, Compaq, HP, and Apple, proponents claim, it should be good enough for anyone.
And beyond all that, there is one other dirty little secret about what happens to business plans after they are written. What do you suppose investors do with the plans they get each week? After 10 years as an angel investor, I can tell you where I store them. It’s called the “circular file cabinet”. Ikea sells them under the name, Knodd Rubbish Bin.
Yes, the minute investors get your business plan, odds are they will rip out Appendix A, which is your 3-5 year pro forma, and bin the rest – the document that you have just spent 3 months working on. Right in the trash.
Without reading it.
So, to reiterate, business plans are hard and time consuming to write. They probably do not reflect your business by the time they are finished. Napkin planning seems to have been successful. And, the investor is not going to read the plan anyway!
Given all of that, should you write a business plan at all?
Well, for one Singaporean start-up, Investopresto, which provides a vertical social network and investment applications and tools supporting Asian Retail investors, the answer is a resounding, “Yes!”
“Well it all begins with intuition,” says CEO Ashwini Anand. “I don’t mean some sort of magical intuition that you are born with. I mean the type of intuition that only comes from becoming an expert through hard work.”
In his book Outliers, Malcolm Gladwell echoes this sentiment. Gladwell claims that the key to success in any field is a matter of practising for 10,000 hours.
“I think the same is true about becoming an expert in a market,” continues Anand, “Entrepreneurs need to live in the trenches, and at the business-inception phase, this means study, argue, explore, expand, discover, and, well, write it all down.”
This due diligence accomplishes two things.
First, a well-organised, thought-through, complete business plan proves to the investor, that the entrepreneur is serious enough about the business to really put in the hard work. It also proves, says Anand, “that the entrepreneur knows their stuff. Success will be based on hard work and a unique, thoughtful perspective, not blind luck. If I can write it down, in a way that even my mother can understand, then I have proven to myself that I know it!”
While it may be true that some entrepreneurs have built successful businesses from the back of a napkin, it is also true that people have won the lottery. But like lottery winners, napkin businesses are by far the exception to the rule. You don’t want to spend an investor’s money or your own time, energy and passion based on luck of the draw and guesswork.
Think of the business plan like your personal trainer at the gym.
Instead, you want to sit down and completely work through the issues and problems in advance of investment. Sadly, most entrepreneurs fail due to circumstances that could have been easily avoided by planning.
“When we were doing our plan,” Anand continues, “we surfaced several questions core to the business that we used focus groups with potential customers to resolve. If we had gone forward based on what we had imagined over coffee, without having talked to customers, we’d have gone in the completely wrong direction. Now, I feel that I personally know my customers’ feelings, desires, and expectations.”
But, there is a second, perhaps more important reason to go through the painful process of business planning. Specifically, Anand says, “once you’ve done that research, you will be able to be flexible and creative in the real world because you deeply understand how your business and market work. As a result, you’ll be much more able to pivot in a real-world context.”
Investors know that your business model is going to be a work in progress. All business models change because markets are alive and constantly evolving.
That is why investors want entrepreneurs who have gone through the difficult and time-consuming process of building an intuition about the market and their businesses by documenting a plan.
The only way to be good at quick pivots in business is to have a very sound intuition, and that only comes from a deep knowledge.
“So, think of the business plan like your personal trainer at the gym,” says Anand. “Even though we know we should, nobody wants to do those ’10 more sit-ups!’ So we all need someone, or some process, to force us to do them.
“So get back in front of that blank notebook and write 10 more pages!”