Why Business Plans are a Waste of Time for Startups
Oftentimes when I meet with entrepreneurs, I am presented with long business plans replete with market analysis, pro formas, competitive analysis, product specs, etc., etc. They would make my business school professors proud. While these documents can make entrepreneurs feel great about their ideas (has anyone ever seen a business plan with an inverted hockey stick?), crafting these documents is usually a waste of time.
Startups are Different
While business plans can be valuable for traditional service-types of businesses and/or corporate or bureaucratic types, they don’t make much sense for startups, which are fundamentally different animals.
Because startups are temporary organizations in search of a business model, they are fundamentally replete with uncertainty. Many startups aren’t even sure who their real market ought to be, let alone know enough to do a full market analysis. Business plans, conversely, give the illusion of certainty.
Planning is Important, but has to be done differently
While crafting business plans is often a waste of time for startups, planning is not. It is important to think through who the target customers might be, which features might be most important, which channels merit investment, and so forth.
Startups, however, treat these facets of their ‘business’ as assumptions until it’s clear that they’ve found product/market fit. It’s at that point – when their assumptions have been validated – that startups should start thinking more formally.
How Startups Should Plan
When planning, startups are better off with post-it notes and a business model canvas than they are with long Word documents. This tool is a great way to visualize the nine areas where startups make assumptions, if they are to succeed.
To start, a founding team should brainstorm their assumptions along each of the nine dimensions, starting with Value Proposition and Customer Segment, and ending with Cost Structure. I find it helpful to adhere sticky notes to a large canvas, so that the whole team can see an overview of their hypotheses at one time.
Then, the team should devise experiments to validate their assumptions. Think your product is better for small business than large companies? Find the ideal startup customer and interview them. Think your proposition is efficiency over price? Devise an experiment to validate your real value.
Then, each week, the founding team should discuss the results of their experiments and see how their model has changed. So, if the team talked to 10 small business prospective customers and 10 large business prospective customers and found that small business didn’t understand their product, that post-it note should be removed. Small business is not the customer. If, after talking to these prospective customers, it turns out that the efficiency savings are what’s sexy, then that’s the leading value proposition. The next round of validation should emphasize that value proposition.
Startups should then repeat this process iteratively, until the entire canvas has been reduced to the post-it notes that you know you can build a business around.
What about people that expect a business plan?
Launching a startup – and validating a business model – are not expensive undertakings. Little to no outside money should be required for the first few rounds of discovery.
However, at some point, you may need to raise money. And, in many cases, loan officers, grants, and (some) investors might ask for a business plan (As an aside, I don’t know many investors who have ever asked for a business plan. Usually, other metrics matter more). At that point, though, you should have a validated business model and need funding, not to build an interesting product, but to satisfy latent demand you know exists.
Before that point, though, a business plan is not worth the time investment.
