Reality check: Are business plans necessary?

Mark Henricks — Wed, 27 Feb 2008 11:47:49 -0800

Private jet, palatial hilltop mansion and a solid business plan -- three items on the to-do list of any aspiring entrepreneur. While many small business advisors recommend against the first two, everyone knows that entrepreneurs need a formal plan before starting any new venture, right?

Wrong. Some experts and experienced entrepreneurs question the longstanding, near-sacred wisdom calling for startup business plans.

In fact, one of entrepreneurship's best-kept secrets is many startups begin without formal business plans. Research supports this: A majority of entrepreneurs in one survey of fast-growing firms said they began their ventures without written plans. Research cited in a recent Wall Street Journal article indicates that plans are far less important than is commonly assumed.

Some entrepreneurs even view such plans to be hindrances. Consider tech startups operating in new, untested markets -- detailed financial projections are purely speculative and, therefore, of little value to investors or entrepreneurs. Many tech entrepreneurs have been saying this for years, claiming that no more than a deck of slides is both adequate and preferred for pitches to VCs. "It all about the PowerPoint and the decimal point," says Munjal Shah, founder and CEO of visual search startup Riya. "Have a good overall strategy and a deep understanding of the detailed numbers," elaborates Shah, who has raised $19.5 million in venture capital and private equity for his company.

Still, other sources believe that business plans are a cornerstone of startup success. A new Small Business Administration study follows startups from the early conceptualization stages, and concludes that formal planners were far more successful.

Research aside, business plans have the potential to cut both ways. If you spend too much time developing a plan, or believe too strongly in the speculative projections that they contain, plans can end up causing grief. On the other hand, plans can help by forcing you to think through solutions to potential problems.

The one data point that innovative startups need most is the reaction of real prospective customers to their business. Unfortunately, this type of feedback is often lacking. If you're about to start writing a plan, divert some of the time and energy you'd otherwise devote to the plan and instead spend it getting your offering before a prospect. Put a prototype, mockup, or blue-sky pitch in front of somebody with a need and a budget, and listen to what they have to say about it.

And, while the palatial hilltop mansion may be a far-off dream, try this as a practical to-do list for your startup: Secondhand furniture -- check. Office in the spare bedroom -- check. Order from a customer so excited about what you are proposing that they can't wait for the launch -- check, cash, money order, bank wire ...

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Reality check: Are business plans necessary?