Do You Really Need A Business Plan For A Startup?

Last week one of my friends who is planning to start his own business came to me to find out if I could help him with writing a business plan. He needs the plan to show it to banks or angel investors in order to get some financial support. From an investors’ perspective, it seems logical to ask an entrepreneur for a plan illustrating some figures. They not only want to see a PowerPoint presentation full of ideas but also to be able to measure the costs and future returns. But is it really worth it to make a business plan for an entrepreneur?

Yes, but…

Some people say “Yes”.

“If you can’t explain it simply, you don’t understand it well enough.” – Albert Einstein’s quote helps to realize why a business plan is necessary for a startup. It helps to figure out and explain your product to others; it is your plan for how you’re going to sell it. This model on paper helps you structure your ideas in a bit more logical, clustered form. According to Jon Westenberg, founder of Creatomic, a business plan has to show:

What your product is, and what it does;
Your strategy for bringing that product to market;
Details about your revenue model;
Goals and milestones;
The method you’ll use to know if you’ve failed;
Your customer personas and target market;
Your financial needs.

Thus, the key point here is that the plan must be clear and simple not only to the entrepreneur but also to an investor. Otherwise, the product is too complicated.

Also, we can’t overlook the discussions about creating a business plan when we talk about lean startups. Some entrepreneurs, including Tim Berry, suggest making a specific type of business plan – the “lean business plan”. This is a type of a plan which should be used, revised and changed. It should evolve with the development of your startup, it’s continuously cycle-based on three similar repeating phases: plan, review and revise.

According to the research by Francis J. Greene and Christian Hopp in 2017, who studied more than 1000 U.S.-based entrepreneurs, making business plan gives startups more chances for success. “Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical non-planning entrepreneurs.” They also concluded that there are two major groups of entrepreneurs who do it: high-growth oriented startup entrepreneurs and entrepreneurs seeking external financial support.

…not all the time.

However, others think differently saying “No” to a business plan.

Brian Hamilton, Chairman of Sageworks, believes that entrepreneurs don’t know how their startups would work in reality. In new business, the areas like product, pricing, marketing, and distribution are unpredictable in the beginning. Entrepreneurs make hypotheses about different aspects of their business and test them in reality. It’s one of the features of a founder, to be flexible and bold, to change the plans that don’t work or work not good enough. At the same time, the business plan can be even harmful; it creates pressure on the entrepreneur, forcing them to follow the wrong path instead of creatively evolving and shaping the future of their business.

Neil Patel says that writing a business plan takes a lot of time and effort which should rather be spent on developing the business itself. Starting a business is an energy- and time-consuming process, so as human beings, entrepreneurs should set priorities. If you prioritize writing a plan, rather than focusing on sales, marketing, development, etc., you lose valuable time.

Our world changes faster and faster every day. Technology is evolving, customer preferences alter, macroeconomic conditions vary. Nowadays, the situation when your business plan will be outdated after a short period of time is very real.

Tony Robbins said: “The most painful mistake I see in first-time entrepreneurs is thinking that just having a business plan or a great concept is enough to guarantee success. It’s not. Business success is 80% psychology and 20% mechanics. And, frankly, most people’s psychology is not meant for building a business.”

Guy Kawasaki said: “I believe that is no longer necessary to write a business plan. You can’t foresee the future five years from now. You know, you’d be lucky if you can foresee one year from now. And even one year from now, you gonna be one year late. Because you just don’t know.”

Find The Golden Mean

The recent study of Greene and Hopp shows that the question is not about whether a business plan should be done or not, but WHEN. According to their research, the most successful entrepreneurs were those who wrote their business plan between 6 and 12 months after deciding to start a business. This increases the probability of venture viability by 8%. They also found that the optimal time to spend on the plan is 3 months, less or more time will have no effect. Writing a business plan during activities such as talking to customers, getting the product ready for market and thinking through promotional and marketing activities, increases a startup’s chances by 27%.

In conclusion, I’d like to say, that if you plan every step of your future venture or rely only on inspiration and creativity, the most important what you should do is to have faith in yourself.

Oh, and what about my friend? I advised him that if he wants to start a business, he should make a simple spreadsheet, a roadmap of his financial costs and revenues. These figures and percentages should reflect the goals of his business. I also told him to keep it close to his garbage bin, because after some months of production, sales and payments; after his enterprise starts running, he will have to throw it away.

And THEN create a real business plan.

____________

Sharing is caring!