Business plans? Business models? Do you really need them?

Business plans? Business models? Do you really need them?

For a long time I have wanted to write a post about the irrelevance of
business plans. I was waiting for an appropriate time, and a high
profile example to cite in my post. Twitter just got VC funding with no business plan and no business model.

I confess that I have not used Twitter. I rarely use SMS or texting
either. These mediums strike me as one way bursts of irrelevant chatter
for the ADD (Attention Deficit Disorder) crowd.

Twitter_2 If you haven’t seen or used Twitter check out Donna Bogatin’s post which included an old screen shot of a Twitter message.

This message is a good example of why I don’t use it…it is
meaningless chatter. I just don’t have time for it, and don’t see value
in it. Hmmm…maybe that is because I have trouble expressing myself in
140 characters or less.

Now, back to business plans – In all my years in
startups and all my work with VCs I don’t ever recall seeing a written
business plan. The fact is that investors do not read them. Here is the
inside secretinvestors invest in people not business plans. Early stage investors know that great people can make a mediocre idea work, but mediocre people can’t make a great idea work.

Powerpoint rules – An earlier post "How to handle the first VC meeting"
explains how to get a VC meeting and what to present. Ten Powerpoint
slides is all you need. A short demo or screen shots takes care of the
rest. But, in the back of their minds the VCs or Angels are really evaluating YOU…how you react to questions and criticisms, how quickly you think on your feet, your energy level, passion, and vision.

Early stage investors understand that they just don’t know a lot of
things. Competitors may emerge, business models will change or become
apparent later on, a better application of the technology or idea may
emerge, and the political/legal/business environment might change. Shit happens. The key is how the entrepreneur responds.
In those early meetings the investors are evaluating how you respond to
questions, challenges, and new ideas. They may focus a lot on your past
as a guide to how you will react in the future. These things matter a
whole lot more than a business plan…that is surely overly optimistic
and filled with unfounded assumptions.

Paul Kedrosky has another take on why business plans are actually not good for you. Two reasons. First,
because VCs are professional nit-pickers. Give them something to find
fault with, and they’ll do it with abandon. I generally tell people to
come to pitch meetings with less information rather than more. Sure,
you’ll get pressed for more, but finesse it. Presenting a full and
detailed plan is, nine times out of ten, a path to a "No" — or at
least more time-consuming than having said less.

Profits are a
different issue. Being profitable too soon gives investors, rightly or
wrongly, an idea of what the margins are on the business, as opposed to
what they could be in some perfect world. As a result, it takes a
mighty force for them to not start wading in with discounted present
value worksheets, and the like, thus hammering your valuation and
generally making funding much more complicated (and equity consuming)
than if you were wildly unprofitable.

Big corporations like business plans.
The one place I have seen them used is inside big corporations. Big
companies require all kinds of plans and justifications for making an
investment in a new product or new piece of equipment. Big companies
have teams of MBA’s skilled at poking holes in financial projections
and shooting down projects. Big companies have a lot more at stake,
their business is more predictable, their revenues and costs can be
reasonably forecast. So, business plans make sense for them.

Business plans are used to examine cost and risk.
Powerpoints are used to create a vision of opportunity. This is why
entrepreneurs should stick to short Powerpoint presentations and avoid
detailed business plans.

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