The Truth About Business Plans – Do You Really Need One?
September 29, 2011
I’m biased. I admit it. Having written thousands of business plans for entrepreneurs over the past decade, I think every entrepreneur should have a business plan.
But does every entrepreneur need a business plan?
The answer is “no.” Let me explain.
To begin, there are two core reasons why most entrepreneurs decide to create a business plan: 1) to raise funding, and 2) to identify and document their game plan for achieving success.
1. Business Plans for Raising Funds
When raising funding, whether or not you need a business plan depends upon the source of funding you are seeking.
For example, if you are seeking a bank or SBA loan, you need to present a business plan. Period. The bank needs to check that requirement off their list, so if you don’t have it, you won’t get the loan.
Now, that’s not to say you need a colossal 50-page business plan. But, at the very least, you’ll need a 5-7 page plan and complete financials proving you’ll be able to repay the loan.
Let’s move to funding from individual or angel investors. Virtually all angel investor groups require you to complete an online application that resembles a business plan. For example, you’ll need to answer questions such as what the size of your market is, what the wants and needs of your customers are, and the key members of your management team.
For solo angel investors (angels not belonging to an angel group, which represent the vast majority of angel investors), you generally do need a formal business plan. Sure, some angels will invest based on their trust in you alone. But a formal business plan will give angels more confidence in you and your venture, and increase their chances of investing.
So how about venture capitalists? We’ve all heard the stories of an entrepreneur writing an idea on a napkin and having a venture capitalist write a multi-million dollar check to fund it.
Venture capitalists rarely fund ventures in such a nonchalant manner, and when they do, it’s only in one case. And that case is when the entrepreneur presenting to them is a serial entrepreneur that has already, in a prior investment, made the venture capital (VC) firm millions upon millions of dollars.
What you must realize here is that VC firms do not invest their own money. They raise money from pension funds, corporations and others, and are charged with earning a high ROI on these dollars. As such, VCs have rigorous investment criteria to which they adhere.
Now, as I’ve told you, VCs won’t fund your idea on a napkin. But do they need a formal business plan? The answer here is sometimes yes and sometimes no.
Some VCs require a full business plan. Some don’t. At the very least, you’ll need a 3-5 page executive summary to present to VCs. This will get them interested and ideally get you a meeting. In that meeting, you’ll need to present a compelling 30 minute slide presentation that gets them excited about investing in you.
Importantly, while you may not need a full 25 page business plan, the process of creating that plan is the same process required to create the executive summary and slide presentation. It’s the same information, just presented in a more condensed form.
Mark Twain said it best when he said, “if I had more time, I would have written a shorter letter.” The point is that it’s much easier to write the formal 25 page business plan and then whittle it down to the executive summary and slide presentation to make sure you’ve hit all the key points.
Raising Funding is Competitive
It is important to note that raising money is very challenging. For every investor (angel, investor or bank), there are hundreds if not thousands of entrepreneurs seeking their money. So, raising funding is very competitive and the odds are highly stacked against you.
As such, you need all the ammunition you can get. And the business plan is one piece of that ammunition. In this regard, you should view your business plan as a marketing document. You use it to convince a lender or investor to write you a check. It is not a stodgy 50 page document, but rather should be more like a brochure that gets the reader to turn page after page. They should be excited to get to the end, as each page should make them more and more certain that your company is a solid investment opportunity.
Finally, the earlier the stage of your business, the more important your business plan is. At the earliest stages, your business plan is key because it is one of the few factors an investor has to judge you on. They can consider your business plan, your team, and maybe a product or service prototype if you have one.
At later stages, the business plan becomes less critical, as the investor can speak to your customers, analyze your financial history, assess your team members, compare your product to competitive offerings, etc.
2. Business Plans to Document Your Game Plan For Achieving Success
Numerous studies have found positive correlations between the success of businesses and the presence of a formal business plan. And every successful corporation I know of requires annual business planning for all key business units.
Here’s the key: the process of creating a business plan forces you to think about the key elements of your business. It forces you to look at who your competitors are; how your market landscape is changing; how your customer needs are evolving; how your products and services stack up; who your team is and what new team members are needed; etc.
If you don’t assess your business through such a business planning process, and use it to create a game plan and strategies for success, your competitors will quickly surpass you.
Likewise, it’s important to document your game plan as a formal, written business plan. Such a plan removes ambiguity. Everyone in your organization can view the plan. Everyone is clear on what the organization is striving for, and what they need to do. And the plan allows your company to stay on course, and have a yardstick against which to measure its progress.
In summary, whether you are seeking funding or seeking to grow your company, your business plan is a key tool that can give you significant competitive advantage. In many cases, it’s not required. But neither is answering the phone properly, treating your employees well, and a ton of other functions that aren’t required, but are critical if you want to build a highly successful company.
Dave Lavinsky is the President of Growthink. Since 1999, Growthink has provided its business plan development services to over 2,000 entrepreneurs. Growthink also allows entrepreneurs to quickly and easily complete their business plans on their own via its business plan template.