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Everyone who owns a business needs a business plan, but that doesn·t mean they need to have the formal
document commonly associated with venture capital and other investors. Business plans can range from
highly formalized documents, to simple statements written on a cocktail napkin, to a set of ideas that exist
only in the entrepreneur·s mind. If a business plan doesn·t need to be written down by its nature, why should
an entrepreneur take the time to do so?
The primary reason why an entrepreneur should create a formal business plan is because studies have shown
that engaging in the act of business planning on this level can have serious benefits for the company. Scott
Shane and Frédéric Delmar discovered that companies ´will enhance the likelihood of their new venture·s
survival and facilitate product development and venture organizing efforts if they engage in business
planning.µ In a later study, they further discovered that those that complete business plans before even
beginning marketing activities improve the chances of the company surviving to maturity.
William Gartner and Liao Jianwen completed a series of three academic studies around the value of creating
formal business plans and found that completion of a business plan increases the likelihood of the company·s
continued existence and that ´when entrepreneurs engage in early planning efforts, they will be more likely to
accomplish a greater number of start-up activities in a given period of time than those entrepreneurs who do
not plan.µ
In short, creating a business plan improves your company·s likelihood of success. Logically this makes sense
as planning has tangible benefits to entrepreneurs. These include:
1. Forcing the entrepreneur to research the market and competitors, enhancing management·s
knowledge about best practices and competitive differentiation
2. Generating information used to drive the process of allocating resources and capital
3. Setting objectives for management and employees that drive corporate vision and serve as
benchmarks against which the entrepreneur can measure performance
4. Enabling management to identify key assumptions that they can then test
5. Helping the entrepreneur assess if idea is a complete business, or a product idea
6. Communicating management·s vision to employees and potential investors
The second reason to create a formal business plan, and by far the most prevalent nowadays, is to
communicate information about your business venture to potential investors. While creating an informal
business plan is frequently sufficient (provided it is done with care) for internal purposes, the business plan
that you present to potential investors is both a summary of your business and a sales document. As such,
handing a partner at a venture capital firm a cocktail napkin that the company·s founders have scribbled upon
is unlikely to qualify as ´putting the best foot forward.µ
Much debate goes on around whether having a formal business plan is, in fact, necessary to raise funding
from an investor. Business plan detractors argue that creating the plan is a distraction from operating your
business and investors ´don·t read business plans.µ There is some truth within each of these comments, but
hardly enough that you should decide not to create one. Business planning  a distraction from operating
your business. Time spent working on your plan is time you do not spend selling goods and services and
your goal as a business operator is to generate revenue. A good analogy, however, can be made to
constructing a building. Architects spend a great deal of time and effort creating schematics that help
determine the best materials to use and, in the end, determine how the building is constructed. If the
construction crew went in without any schematics, the building could easily cost twice as much due to
needing to tear down and rebuild things because factors like wiring or plumbing were not adequately
considered in advance. Creating a business plan can help you avoid those pitfalls for your business in the way
schematics help builders and engineers. However, there is a balancing act that needs to be done. It is far too
easy to get so involved in your plan that you spend all your time planning and never get around to executing.
Returning to the building analogy, if you spend all your time drawing the schematics and renderings, but
never get a construction crew, you will never complete the project. It is the entrepreneur·s responsibility to
manage his resources accordingly and balance planning and execution so that he spends adequate time
planning, but not so much that he never executes on his ideas.
The second criticism is that investors don·t read business plans. The kernel of truth here is that an investor
may never read a specific business plan. As an example of an investor, consider a venture capital firm
(´VCµ). The process of an investment by a VC (dramatically simplified) goes as follows:
1. Initial review of submissions ² between 85% and 90% of submissions will be turned down in this
2. Initial meetings ² Another 5% - 10% are screened out during this process
3. Due diligence
4. Term Sheet
5. Negotiations & Signing of an Agreement
6. Ongoing relationship with the company
A typical VC may be contacted by 2,000+ entrepreneurs in a year. The partners and associates at the VC
need to split their time between the initial review of these companies, due diligence on the companies that
make it past the initial meetings, negotiations with those selected companies, managing their portfolio of
companies/checking in on their investments, meeting with their own investors, and potentially raising funds
for the VC. With all these responsibilities consuming their time, they cannot afford to spend more than a few
minutes reviewing each of the companies during the initial submission stage, particularly since many of the
companies submitted may not meet their criteria based on industry, size of investment, etc. During that
initial stage, it is likely that the VC will read through part or all of your executive summary and possibly skim
selected sections of the business plan (if you submitted one at this stage). In short, if you are rejected
immediately it is unlikely that your business plan will have been read.
What if you make it past the initial review and are invited to present to the VC though? Here is where having
a business plan becomes important. At this stage, many VCs will read your plan in depth as preparation for
the meeting. In addition, having a business plan shows potential investors that you have thought about your
business in depth, identified the risks, and have a plan for how to address them. Those who argue in favor of
creating a presentation ´instead of a business planµ are not truly arguing against business planning. In effect,
the presentation is your business plan, but in a presentation format. Furthermore, creating the business plan
will have prepared the entrepreneur for the questions investors are likely to ask. It is, therefore, advisable to
have one, even if you happen to meet that hypothetical investor who doesn·t read them.
If you are an entrepreneur or business owner, a business plan is invaluable to the future of your company. If
you are seeking funding from a venture capital fund or other investor, the plan sits at the heart of the process,
many equity investors being unwilling to consider a company unless a business plan is available. Even if you
are not seeking investment, the plan serves as a guide that forces the entrepreneur to focus on and think
strategically about his business, increasing the company·s chances of success.