When It's Time to Throw Out Your Business Plan
Every entrepreneur eventually faces that gut-wrenching decision to make a major shift in strategy, to throw out the old playbook and reorient the team toward a new business model.
In her excellent book Founders at Work: Stories of Startups' Early Days, Jessica Livingston interviewed the founders of a number of technology start-ups and distilled a number of attributes shared by successful entrepreneurs. One key attribute is a willingness to "throw out the business plan" and instead focus resources on a newer, better alternative. Consider these two examples of radical strategy shifts that keyed future success.
- PayPal co-founders Max Levchin and Peter Thiel originally developed device-to-device payment capabilities for the Palm Pilot. To help their users, they also ported the payment software to the Web. They quickly found that the demand for Web-based payments were orders of magnitude larger than device-to-device payments, and refocused their efforts on creating the easy-to-use Web payments system that became PayPal.
- Hotmail co-founders Sabeer Bhatia and Jack Smith raised $300,000 of venture capital to create a Web-based personal database called Javasoft, but immediately discarded the plan and shifted gears toward creating web-based e-mail.
These were gut-wrenching, bet-the-company decisions. In both cases the founders walked away from good business plans in order to pursue even better plans.
So how do you know when it is time to throw out your business plan? It is a truism of military strategy (first formulated by Moltke the Elder) that no strategy survives first contact with the enemy. What Moltke meant was that an initial strategy should create a diverse array of options, with the decision on which option to pursue driven by unfolding events. Moltke was fighting against the tendency to form a rigid, inflexible start-to-finish battle strategy that was pursued regardless of conditions on the ground.
Entrepreneurs face the same risk; their unwillingness to revamp their plan, or even throw it out entirely, can limit or even destroy their business. Entrepreneurs must constantly strive to evolve their plan and take advantage of the options presented to them by the marketplace.
At Avondale, we are always on guard against complacency. Following the current plan is always the path of least resistance, but not always the best path for your business to take. We have five tips to help entrepreneurs keep their business model fresh:
1. Don't be satisfied.
Find a way to constructively challenge your ideas about what is possible and how your business can do better. If necessary, hire someone or bring in a coach to help you through this process. Karl plays that role at Avondale, constantly asking, "WTF are we doing?" We would not have built the successes and options we have today without Karl continuously challenging the team to re-think the business.
2. Create a constant stream of options.
We make an explicit choice each year to reinvest some of our profits into exploring new business opportunities and building options for future businesses. Remember that the value of your business is determined by the value of current operations plus the value of the options you have created. If you invest all of your time and resources into current operations, you may be leaving a lot of value on the table.
3. Invest with discipline.
We set explicit objectives and metrics for our new business investments. E.g., our objectives might be to build a large customer pipeline within the first six months, land one significant deal in the first year, and become self-funding in the second year. We then define metrics around those objectives (e.g., what constitutes a "large" pipeline? What constitutes a "significant" deal?), and we are prepared to cut off that investment if we do not achieve our metrics.
4. Test and learn.
As an entrepreneur, you hold a significant advantage: when you find ideas that work you can implement them more quickly than large companies can. However, to do so you must train yourself and your team to have a "test and learn" mentality. Every customer interaction, every product idea, indeed every business decision gives you the opportunity to test and learn. Embrace those opportunities to try new approaches and evolve your approach to the business.
5. Exploit your successes quickly and wholeheartedly.
Since ours is a people business, we are constantly pushing the team to hire more people more quickly so that we can put additional resources behind our early successes. By hiring more aggressively than the current business supports, we are forcing ourselves to invest in building adjacent business opportunities that can profitably employ those new hires.
This is not to say that you should bet the company every day in every way. However, you should be disciplined about periodically questioning the key elements of your current plan and asking yourself and your team whether it is time for evolution (or even revolution)!
Have you had success throwing out your business plan? What challenges have you faced? Please let us know in the comments below or email us at email@example.com.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.