Are business plans really evil?
Filed in archive Bootstrapper Tips on March 14, 2007
Here is what globe trotting entrepreneur Pelle Braendgaard wrote on the subject in this June 2005 post:
Most people go out and buy or download business plan templates. There are millions of them out there. They all claim to be tried and tested. The only problem is that they are very time consuming and will never reflect a dynamic growing business.
Here are a few added thoughts:
1. Business plans just aren't realistic. As bootstrap entrepreneur and guru Greg Gianforte observes:
Bootstrappers don't write lengthy business plans, chase deep-pocketed investors,
or indulge in overly academic market research exercises. Instead, they focus all of
their considerable energy, brainpower, determination and skills on creating a
business that can actually succeed in the real world.
2. Earning projections are another way of saying wild guess. Here are some of my real life experiences with projecting income.
3. Customers will define your market, not a couple hundred pages you typed up before you even met a customer. Guy Kawasaki explains the problem:
You might try to position your product in a certain way, but ultimately customers, not you, position your product. You take your best shot and then you see how customers react--if, frankly, they react at all. But, at the end of the day, you're hardly in total control of positioning.
You can imagine what happens to the entrepreneur who pins his hopes to a marketing model based on selling lemonade only to discover customers are more interested in collecting the decorative glasses it is served in.
4. You can leave that business plan for later. When entrepreneur Shelli Styles
launched her line of fair trade beaded bra straps marketed to aide her husband's South American relatives she and her small volunteer sales force were much too busy getting their product into stores and testing customer response to worry about creating a business plan. She figures she'll just hire someone to type one up if she ever needs outside financing.
So, if not a business plan as a guide in creating that next venture, then what? Well, in The Art of The Start, Guy Kawasaki suggests a good business plan should be no more than a detailed version of a 20 minute sales pitch.
Braendgaard suggests a more free flow document which can be added to by contributors perhaps as part of an online collaboration.
And perhaps the most intriguing view is the one suggested by Feedburner CEO Dick Costolo of blog as business plan outlined here.
But I've come to believe an even better method of guiding entrepreneurs and their team through the early days of start-up may exist to replace the long winded and often much too inflexible business plan.
More on this in the next post.
or indulge in overly academic market research exercises. Instead, they focus all of
their considerable energy, brainpower, determination and skills on creating a
business that can actually succeed in the real world.
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Response from:
Will Kamishlian
(03/15/07 6:48pm)
Response from:
Will Kamishlian
(03/16/07 12:36am)
FYI: something went horribly awry with the paragraph stops in my post above.
Response from:
Shawn Hessinger
(03/18/07 7:22pm)
Will,
First, thanks for the comment and don’t sweat the paragraph structure. I’ve always believed that substance is more important than form anyway. Second, I’m not sure an allied army division is a good comparison to a small business start-up. It seems to me that one of the problems with the traditional business plan structure as it exists today is that it is set up with much larger groups in mind precisely because so many of the so-called small businesses the U.S. Small Business Administration is trying to help are bigger with more employees than most start-up entrepreneurs could ever dream of having in the beginning. In fact, the administration’s own Table of Small Business Size Standards allows numbers of employees up to 500 for most commercial printing operations and a revenue level of up to an amazing (from my perspective, at least) $23 million from electronic shopping companies, presumably like an on line merchant, to name only two examples. I picked these two examples, because, obviously both can be operated at much lower employee and revenue levels at the start. But the allowable employee and revenue levels for what the Small Business Administration considers to be a small business are even higher in other industries. The point here is that companies of this size are not start-ups and have been in business for some time so projecting their earnings over the next three years is simply a matter of reviewing historical revenue, the same thing you do when you apply for financing for a car or home based on your current salary. To apply the same kind of planning approach to a start-up entrepreneur with no employees who might be starting a business out of his apartment is ludicrous and, for the beginning entrepreneur, unrealistic. This is not to say that a business (any business) should be started without any plan whatsoever, even if it’s a list of services you expect to offer scribbled on a cocktail napkin. But making lengthy projections about a business or industry you have not even entered yet with an untried product in hand is foolish and self defeating. You make an excellent point about revising plans as more information presents itself. The key for the bootstrapper, or any start-up entrepreneur for that matter, is to develop an open ended plan that is easily amendable as situations arise and new opportunities are uncovered. A traditional plan with break even points and complex cost and earning projections will be too difficult to amend in the scurry of start-up and complicate the making of important decisions and changes of direction when necessary.
First, thanks for the comment and don’t sweat the paragraph structure. I’ve always believed that substance is more important than form anyway. Second, I’m not sure an allied army division is a good comparison to a small business start-up. It seems to me that one of the problems with the traditional business plan structure as it exists today is that it is set up with much larger groups in mind precisely because so many of the so-called small businesses the U.S. Small Business Administration is trying to help are bigger with more employees than most start-up entrepreneurs could ever dream of having in the beginning. In fact, the administration’s own Table of Small Business Size Standards allows numbers of employees up to 500 for most commercial printing operations and a revenue level of up to an amazing (from my perspective, at least) $23 million from electronic shopping companies, presumably like an on line merchant, to name only two examples. I picked these two examples, because, obviously both can be operated at much lower employee and revenue levels at the start. But the allowable employee and revenue levels for what the Small Business Administration considers to be a small business are even higher in other industries. The point here is that companies of this size are not start-ups and have been in business for some time so projecting their earnings over the next three years is simply a matter of reviewing historical revenue, the same thing you do when you apply for financing for a car or home based on your current salary. To apply the same kind of planning approach to a start-up entrepreneur with no employees who might be starting a business out of his apartment is ludicrous and, for the beginning entrepreneur, unrealistic. This is not to say that a business (any business) should be started without any plan whatsoever, even if it’s a list of services you expect to offer scribbled on a cocktail napkin. But making lengthy projections about a business or industry you have not even entered yet with an untried product in hand is foolish and self defeating. You make an excellent point about revising plans as more information presents itself. The key for the bootstrapper, or any start-up entrepreneur for that matter, is to develop an open ended plan that is easily amendable as situations arise and new opportunities are uncovered. A traditional plan with break even points and complex cost and earning projections will be too difficult to amend in the scurry of start-up and complicate the making of important decisions and changes of direction when necessary.
Response from:
Business Plans
(04/10/07 11:54am)
you do have some good examples/experience but I would still recommend spending some time on a short business plan (10 pages) to make sure you don't neglect competitors analysis and really have the time to think about your strenght and weakness on your market.
Response from:
Online Check Systems
(05/04/07 9:33pm)
Excellent article, but I would add something about attending to details. Before preparing a business plan, firstly you really need to get a good idea of a business, and figure out, after that, a business plan for a business that really works, must be a easy question.
Response from:
nexium
(06/20/07 11:15am)
I’m also curious, where abouts in San Fran are you going to setup shop at? When I lived there it was super expensive downtown. But there is always the outskirts and places like San Mateo, Oakland, The Mission and Mountain View.
Response from:
Canadian Drug
(06/25/07 8:49am)
Business plans aren't evil, just that they could make you lose money sometimes rather than just thinking the problem out.
Response from:
Steve
(06/30/07 2:15pm)
Why should business plans be evil? It's just a strategy. Nothing else. It's common scence for anyone who wants to earn some clean money. fosamax')" rel="nofollow">http://www.pharmacy-online.ca/drugs/fosamax.jsp">fosamax
Response from:
norvasc
(07/23/07 11:58am)
What Bangalore is to engineering, "outside consultants" is to marketing. Much as most engineers hate to hear this, the two professions have lots in common including this fallacy of outsourcing. Nine marketers can't produce a baby in one month any more than nine engineers can.
Response from:
Cash Advance
(10/18/07 7:48am)
OK, you are right, business plans are not the ultimate thing to do before starting a business but we have to accept they are important if we want to reach success. I good plan can get you out of a lot of trouble but you can't just adopt any plan you see on the internet, you need to make it specific for your own business.
Response from:
Sean Murphy
(11/25/07 10:27pm)
I have to agree with Will Kamishlian's comment that there is value in the planning process. In particular a one page plan that documents key assumptions is very useful for getting your team aligned (or at least your own thoughts down on paper): who your customer is, what your product is, what are the key needs you fill, how have customers done without the product to date, how you will reach prospects, and how you will price your offering (relative to the value you offer). If you don't have a simple plan written down you memory can definitely play tricks on you. Another way to consider a startup is as an experiment. At the beginning it's important to document your hypothesis (guesses and assumptions) and outline how you are going to test (prove or disprove them). Many of your original hypotheses may be proven incorrect, and in light of new information you may need to adjust your plan. This is an argument for keeping it simple and revising it frequently, not an argument that plans are evil. Finally the words "business plan" can be used for both "fund raising plan" and "operating plan." If you are bootstrapping you may not have achieved results that justify outside investment, but without an operating plan it's hard to make progress and keep you team on the same page.
Response from:
Robert Wagner
(10/31/09 10:03am)
Wow someone is giving advice not to have a plan for a new business? If you are starting a business or already have one and want it to be better I would suggest you set down with a piece of paper and write a plan. If you start a business without a simple plan then you are not a legitimate business. If you do not have the time to put something on paper do everyone a favor and do not start a business. This is the kind of thinking that got us in the economic condition that we face today.
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Philosophy
Business planning, like most planning, is an exercise, rather than a final product. Planning forces thinking and questions. Questions answered up front eliminate a measure of uncertainty later on. Reduction of uncertainty provides greater flexibility later on. Furthermore, good planning often uncovers hidden opportunities.
The question is not, "are business plans useful (evil)" Rather, the question is, "For what purposes are business plans useful, and what types of business plans are relevant for different types of entrepreneurs?" Different types of startups require different types of planning.
A bootstrapping entrepreneur requires different types of planning as would be the case for a capital intense startup. A bootstrapping entrepreneur may not spend a great deal of time estimating market sizes and shares; however, I feel that one relies purely on luck to succeed without understanding how cash will be generated. Start up effort expended often goes to naught in startups that do no reasonable estimation of potential cash flow. There is irony in the fact that many entrepreneurs who loathe business planning actually make rosy estimates that would put some "academic" research to shame.
In December of 1944, General George S. Patton wheeled Third Army on a dime -- despite the fact that they were engaged -- and moved north about 60 miles to engage the Germans at Bastogne. Few realize that the key component to his flexibility was the fact that his staff officers planned, planned and planned all the time. Planning became second nature, and new plans could be completed in short order with important details were accounted for. Staff and line officers were relieved of details and thus could focus on the changing battle scene.