Are Business Plans a Waste of Time in today’s Lean Startup World?

Are Business Plans a Waste of Time in today’s Lean Startup World?

For entrepreneurs, business planning usually evokes, either a feeling of tremendous anxiety or building of colossal faith about the “IDEA”. Countless books, articles, seminars and workshops have been dedicated to understand this strange animal. In fact a growing number of business-plan contests are springing up across the globe to encourage new ideas and entrepreneurs. Indeed, judging by all the hysteria surrounding business plans, one would think that the only things standing between a would-be entrepreneur and spectacular success are decorative graphs, a bunch of complicated spreadsheets, and long-term financial projections. Nothing could be further from the truth. In reality business plans are the least relevant especially as a predictor of a new venture’s success. In fact, the more elaborately crafted the document, the more likely the venture is to tank, for lack of a better word.

So what’s wrong with most business plans?

Simply put, most business plans waste too much ink on numbers and devote too little to the information that really matters to the intelligent investors. As every seasoned investor knows, financial projections for a new company – especially the detailed ones– are an act of vivid imagination. An entrepreneurial venture faces far too many unknowns to predict revenues or profits. Moreover, very few can correctly anticipate how much capital and time will be required to accomplish the set objectives. In fact by being wildly optimistic and padding their projections, new entrepreneurs end-up creating a vortex of inaccuracy that is rarely of use to anyone. Don’t misunderstand me: business plans should include some numbers. But those numbers should appear mainly in the form of a business model that shows the entrepreneurial team has thought through the key drivers of the venture’s success or failure.

In today’s lean start-up world, instead of engaging in months of planning and researching, start-ups should build on a series of untested hypothesis, followed by getting feedback from customers and making it an iterative and incremental process of product development. In fact I would like to go to extent of saying that start-ups that ultimately succeed move rapidly from one failure to another, all the while adapting and building on their initial ideas.

While traditional business planning and the lean start-up approach are at logger heads about issues related to lack of foresight and rigidity of business plans, I think a middle ground can be achieved if both commit to start out in a small yet effective way. The new kind of business plan can talk about the people, current strategy, metrics, milestones, tasks on hand. One doesn’t need to print or edit or polish it, but just use it as is. Like the start-up itself the business plan also needs to evolve organically and needs to be revisited and reviewed from time to time.

The following framework can be kept in mind as a guiding light while building a business plan:

The Team

Involves men and women starting and running the venture. It also includes outside parties that provide key services or resources, such as lawyers, accountants, and suppliers. Almost all investors are interested in knowing about the entrepreneurial team first above everything else. Not because the people who are a part of the new venture are most important, but because without the right team, none of the other parts really matter. A business plan should candidly describe each team member’s knowledge of the new venture’s product; its process flow; and the market itself, from competitors to customers. It also helps to indicate whether the team members have worked together before.

The people part of a business plan should receive special attention because, simply stated, that’s where most intelligent investors focus on. A typical professional venture-capital firm receives thousands of business plans per year. These plans are filled with tantalizing ideas for new products and services that will change the world and reap billions in the process – or so they claim. But the fact is, most venture capitalists believe that ideas are a dime a dozen, but execution skills count. Business plan writers should keep this advice in mind as they craft their proposal.

The Opportunity

Entrepreneurs and investors alike, look for sizeable or rapidly growing markets mainly because it is often easier to obtain a share of a growing market than to fight with established competitors for a share of a mature market. Hence, a start-up venture should begin by focusing on two aspects; One, whether the new venture is going to be a part of an industry that is large and/or growing and is structurally attractive, second, to make sure the business plan rigorously describes how this is the case. This can be done by; building a convincing case that a substantial market exists (let a sample size of customers use the product prototype), establishing market interest by providing evidence that customers are intrigued by your claims about the benefits of the new product (collect and document your claims by using analyzed data to support your assertions).

The next step in the business plan should be describing in detail how the company will build and launch its product into the marketplace. Often the answers to this question reveals a fatal flaw in the business. For example there could be entrepreneurs with a “great” product but it’s simply too costly to find customers who can and will buy what they are selling. Economically viable access to customers is the key to any business, yet many entrepreneurs take the approach: “build it first, and they will come”. That strategy doesn’t necessarily work in real life. Investors also always look for market opportunities where the costs to produce the product are low, but consumers will still pay a lot for it. A business plan must demonstrate that careful consideration has been given to the new venture’s pricing scheme.

To summarize, the opportunity section of a business plan must address issues related to market potential, product plan, pricing scheme, expansion of product range, customer base or geographic scope. A business plan that describes an indomitable lead is by definition written by naïve people. All opportunities have promise; all have vulnerabilities. A good business plan doesn’t disregard the latter. Rather, it proves that the entrepreneurial team knows the good, the bad, and the ugly that the venture will face in its future.

The Environment

The environment – regulatory, interest rate & inflation, demographic trends, competition, often has a tremendous impact on every aspect of the entrepreneurial process, from identification of opportunity to final product outcome. Every business plan should contain some information related to its environment i.e. how it helps or hinders their specific proposal. More importantly, they should demonstrate that they know the venture’s environment will inevitably change and describe how those changes might affect the business. Further, the business plan should spell out what management can (and will) do in the event the environment grows unfavorable at the same time the ways (if any) in which management can affect the environment in a positive way through its lobbying efforts.

The Trade-Off

Good business plan is a snapshot of an event in the future. But the best business plans go beyond that; they show the team, the opportunity, and the environment from multiple angles. All three parameters and their interrelationship are likely to change over time while the venture evolves from being start-up to an ongoing enterprise and special attention needs to be given to these dynamic aspects of the entrepreneurial process.

Even though the future is difficult to predict, giving potential investors a sense of the kind and the class of risk and reward they are assuming with the new venture is imperative. A business plan should talk candidly about the end of the process i.e. how will the investor eventually get money out of the business, assuming it is successful, even if only marginally so? Most investors, at least the professional ones prefer companies with a wide range of exit options. Venture Capital firms usually want to cash out in three to seven years, while professional investors look for large capital appreciation. In fact, investors feel a lot better about risk if the venture’s endgame is discussed up front. A business plan should therefore be the place where that map is drawn.

Today, in the golden age of entrepreneurship there is little doubt that crafting a business plan so that it thoroughly and candidly addresses the ingredients of success–team, opportunity, environment, and the trade-off–is vitally important. A business plan built of the right information and analysis can be called a cardinal guide to a new venture. Having said that it is essential that just as businesses are subjected to measurement and redevelopment, the plan is subjected to constant review and revision. The key words to remember for a smart business plan are “Plan, Review and Revise”.

About The Author – Divya Sampath

PhotoEntrepreneurship is the last refuge of a trouble making individual. I consider myself a neophyte at entrepreneurship, someone who has had her tryst with the financial world and now is learning the ropes of business & management all in this lifetime.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

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