April 15, 2021Blog

Why Your Startup Needs a Business Plan

It’s been the better part of a decade since I last weighed in on the notion that, as much as the high risk/reward entrepreneurship and investing world has evolved, most entrepreneurs thinking about launching a new business shouldn’t hit the money trail without a good business plan in tow. 

Those who find the notion of preparing a Business Plan a waste of time, talent, and other resources may make some fair points.  Perhaps the most cogent is that startup business plans, like military plans, seldom survive first contact with reality.  It is the rare post-exit startup that can point back to its first business plan with pride and say “wow: we really nailed it.” More often, it’s “wow: what were we smoking?”

As convincing as the “startup plans never survive” logic is on its own terms, it’s a strawman. Of course, startup business plans almost never play out according to the script. Predicting the future is not what startup business plans are really about. Vocabulary-wise, it may seem like that’s what they should be about, but in fact they are mostly about other stuff – and it’s the other stuff that finally justifies the time and effort it takes to create a good startup business plan.

So, what is the “other stuff?”

First, putting together a business plan requires an entrepreneur to step back from their (presumably good) idea and probe whether it is a good business idea.  It’s an important distinction that was driven home to me way back in the 1980s. I was part of a team tidying up a big-time startup crater (over $200 million of venture capital, which at the time, was the biggest dry hole credited to the VC business). Reading a description of the technology – it was in fact really cool (for the time) – I noted a comment in the margin: “great mousetrap: no mice.” 

A good startup plan will give the reader some sense of who the mice are and how to catch them in a way that makes for a compelling business opportunity. And, as important, it will demonstrate that the entrepreneur can in fact think about their idea beyond the customer value proposition to the business value proposition. How will the idea translate into a business model that makes good money?

A good business plan will also give some sense that an entrepreneur knows the difference between a good business opportunity and a good investment opportunity. Doing that requires an understanding of how to generate solid risk/adjusted returns on investment (in terms of how much risk capital is needed, in what increments, to generate solid returns on invested capital at each stage) and how those returns can be delivered to the investors (i.e. what is the exit/liquidity strategy).

Again, the point of the exercise is not so much to predict the future but to establish that there is at least one plausible future that works for investors and that the entrepreneur understands and is committed to making a future that works for investors. Making the world a better place, and even making happy customers, is all well and good, but frankly not what risk capital investors are all about.

So, yes, times have changed. But as the lyrics of a long-ago song remind us, “the fundamental things (still) apply:” it’s all about making good returns for the people who supply the capital. A good business plan, more than anything else, reassures prospective investors that an entrepreneur knows that. 

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