A common question among aspiring founders is whether to developa full-blown business plan and, if so, what to include in it. Accordingto most business schools and books on entrepreneurship, writing abusiness plan is one of the first essential tasks of launching a business.It’s a rite of passage, one that has spawned its own support industry:business plan competitions, websites offering sample business plans(enter the search term “business plan” for a quick tour), and servicesthat will write your business plan for you.
At the same time, we all know successful business owners whonever bothered with a written plan, who just leapt in, and some studiesthat show little or no correlation between the writing of a businessplan and startup success.1A number of experts insist that businessplanning is actually counterproductive to the startup process, becauseit siphons valuable time and attention away from more urgent tasks(such as selling), is full of assumptions and flat-out guesses about an unknowable future, and locks the business into a singular path whenflexibility and agility are paramount.
But the question of whether or not to plan represents a falsechoice. If you are thinking about your venture’s future (and who isn’t?),you are planning. Every founder anticipates future events, determinesgoals and objectives, weighs options, and decides how to proceed andwhat to do next—all basic planning activities. The real issue is one ofeffectiveness. So, ask yourself: What kind of planning/thinking approachwill best support the current needs of my business?
MATCH YOUR PLANNING TO YOUR PHASE
Too often, planning approaches for mature organizations are unnec-essarily applied to seed-stage businesses. The right approach for youwill vary depending on where you are in your new venture life cycle.For this purpose, let’s look at typical planning needs at three phasesin a typical startup journey.
GESTATION/PRODUCT DEVELOPMENT – Here, you are incubating yourstartup idea, developing your product or service, learning about your market, and maybe gathering some early customer feedback.Your goal is to build something that meets a market need, one thatcustomers will pay to have resolved. Your most important questionis: Do we have a concept that anyone (other than us) cares about? In thisphase, planning should focus on how to prove your concept, learnabout potential markets, set priorities, and coordinate next steps.
You can lay out a low-cost development path and identify key milestones,but some elements of a traditional business plan, such as extensiverevenue projections, make little sense. If you don’t yet have a com-pelling product or a workable business model, focus on developingthese, instead of guessing how much money you will make. One ofthe common mistakes of early entrepreneurs, especially those in lovewith their idea, is behaving as if they have launched a stable businesswhen, in fact, they are still in the cave of gestation.
CONSISTENT REVENUE – Once you have achieved some level of recur-ring sales, everything changes. Early revenue doesn’t always translate nto a profitable business, so your key question becomes: Can we ac-tually make money at this, and how? Your sights now shift to the goal ofbreaking even, the point at which your venture can fund itself. Hereis where the development of a clear, compelling math story is invalu-able.
The math story, to be outlined in the next section, answers ques-tions such as: What is our business model, our competitive advantage,and our strategy? What is our path to breakeven (including proforma profit and loss projections)? What are projected cash flows, andhow will we manage our burn rate? What control mechanisms do weneed in place to manage forward? How much capital will we need toreach profitability?
Whether or not you need a written business plan at this stage de-pends on your financing and communication needs. If you are seekinginvestors or lenders, you need a high-quality written plan, but be sureto learn what format your target investors require and what aspectsof the plan they are most interested in.
Even if you are not seekingfunding, you may benefit from the discipline and rigor required to de-velop a business plan and find that it helps you communicate withstakeholders of all kinds. On the other hand, if you are working withonly a handful of key team members, you can address the above ques-tions and regularly review your key financial metrics without pullingtogether a formal plan. A decent-sized whiteboard and simplified fi-nancial snapshots will do just fine.
BEYOND BREAKEVEN/GROWTH – Once a business is self-funding,everything changes again. If you want to continue to grow, the oper-ative questions are: Is this business scalable? How can we create significantvalue over time? Here, you will benefit from a disciplined planning ap-proach that is widely communicated and regularly updated. Onceyou have found a robust market, scaling your business is all about ex-ecuting. Identifying and coordinating resources, finding ways to growefficiently, maintaining a hawk-like focus on key growth drivers, andunderstanding and mitigating risk factors are all critical to scaling ayoung business. In the growth phase, a well-managed planningprocess can be the difference between a healthy, thriving venture andone that overreaches, stalls, or flames out.
THREE VENTURES, THREE APPROACHES
In thinking about your approach to planning, consider the maturityof your venture. How fully developed is your product or service? Doyou understand customer receptivity and demand? Do you knowwhat will be required to successfully bring your offering to market?The underlying issue here is the relative number of knowns vs. un-knowns: the more predictable your path forward, the more valuablea detailed, written business plan becomes. To illustrate, here are threequick examples:
DECISION ONE MORTGAGE – While he was incubating his startup ideaas a senior leader at First Union, J.C. Faulkner knew that his newmortgage venture would target a well-known core need (i.e., homeownership) with well-established products in a rapidly growing mar-ket that he deeply understood. He had built successful mortgage shopsand had been through many rounds of annual sales and cost projec-tions.
He knew the kind of people he would need and what he wouldpay them. He could accurately estimate an overall cost structure. Inshort, although he would encounter the unpredictable twists and turnsall entrepreneurs do, he faced more knowns than unknowns. For allthese reasons, he developed a thorough business plan with detailedfinancial projections over a three-year period to give himself a high-confidence roadmap for raising capital and growing the business.
MODALITY – At the time of his first round of funding, Mark Williamswas dealing with uncertainty by the bucketful. He was still in a prod-uct development mode, having tested a raw concept with medicalstudents and possessing what he hoped was a fairly mature prototype.He couldn’t yet produce, sell, or deliver anything of substance. Andhis hypothetical customers swirled about in a poorly understood,just-emerging market.
Even if he could identify the right users, hehad no reliable distribution channel for delivery of the product (re-member, this was pre-iPhone, pre-AppStore). And he still lacked theformal blessing of his most important partner, Apple Computer, ashe patiently built relationships within the company in hopes that itwould not crush him like a bug.
In the summer of 2006, Mark’s attorneys developed a privateplacement memorandum (PPM), a standard fund-raising documentoutlining for prospective investors what Modality was all about. It in-cluded high-level information about the product idea, the assumedmarket need, existing licensing agreements, points of risk, and so forth.Only a single page in the eighty-page document dealt with financialforecasts, using a very simple chart with assumed prices, sales, costs,margins and some projected earnings per title figures.
According tothese projections, the company would produce and release 400 titlesby the end of 2007, earning an annual average of $8,260 for each title.Total company profits were not included, but an investor could easilycalculate Modality’s rough projected earnings to exceed $3 millionfor 2007. Mark and his team knew that these projections were indeedrough. In fact they were guesses, based on little factual data and a raftof assumptions. As the PPM affirmed in understated fashion, “the for-ward-looking information provided in this Memorandum may proveinaccurate.”
Because of the high levels of uncertainty at the time, Mark’s plan-ning approach was to continually sharpen priorities, in order to stayfocused on a small set of mission-critical tasks. No formal businessplan here. Just all hands on deck, pinching pennies, 24-7, with eachmonth bringing a new make-or-break challenge. Everyone’s effort andattention was on the very next task that would take Modality towardthat landmark day when revenue would begin to flow.
THE IVEY – In Lynn Ivey’s case, she and her financial modelers appliedlater-stage planning approaches and financial assumptions to an un-proven, early-stage concept. Based on her first business plan, devel-oped for investors in the spring of 2006, The Ivey seemed like amature concept ready to go to market with a high degree of certainty.Lynn had a compelling and clear vision of her product, businessmodel, and client base. She was confident that she could quickly fillup the facility with members. Her information packet for investorscontained ten years of financial projections with annual revenues,cash flows, earnings, and rates of return.
The fact that her plan included the development of a high-valuereal estate asset in a preferred area of the city gave investors confidence,and it also drove her financial forecasting. She started with the total up-front cost of the building, added to it the overall cost structure requiredto operate a world-class service from it, and worked backward to createsales projections that would guarantee an acceptable path to profitabil-ity. Lynn’s attitude at the time was, “Whatever it takes, we can do it.”
But in reality, just like Mark Williams, Lynn was in the earlieststages of product development and gestation, facing many unknowns.In one sense, the most predictable aspect of her vision, the building,didn’t matter. Her real product would not be the physical facility, butrather the services that would flow out of it, and, on this front, she hadno factual evidence that her service concept was viable.
She was tryingsomething that had never been done before, and no amount of plan-ning or projecting could accurately predict in advance how the servicewould play out in the real world. Looking back now, Lynn wishes shehad invested more of her upfront money in more thoroughly investi-gating the market for an upscale adult daycare service, finding waysto test her concept before committing to millions of dollars of fixedcosts. Depending on how her early experimentation went, she mighthave delayed construction in order to more fully prove her concept.
She might also have been able to utilize her personal savings (she in-vested more than $400,000 into the company) in a low-cost pilot ap-proach that may have gained enough traction to remove the need foroutside investors. Or, at a minimum, this path would have helped herestablish more realistic sales projections, based on actual market re-sponsiveness instead of on a grand vision, and allowed her to plot amore steady, realistic path to profitability.