You're starting a new business. Should you take the time to write up a business plan?
Absolutely! says David F. McShea, partner at law firm Perkins Coie. Absolutely not! says Will Hsu, co-founder of the LA-based start-up accelerator MuckerLab, and an entrepreneur in his own right.
Here's their reasoning--you decide which makes most sense for your business:
What's wrong with not having a business plan?
McShea: Many business ideas sound great--until you really stop and think about them. Writing a business plan may actually convince you to dispense with or change your original business concept and create a better, stronger business concept instead. It is much cheaper to do this on paper than with a payroll.
Will your business go according to the plan? Doubtful. But knowing that you will need to reevaluate your business plan when circumstances change is no reason to forgo creating one, any more than knowing that you'll need to bushwhack a washed out trail is reason to throw away your map and compass.
What's wrong with having a business plan?
Hsu: The biggest risk in starting a company is the so-called "product market fit risk"--it is the risk that the target customer will not purchase or use your product at the price you have decided charge. An entrepreneur's time and energy should be put into solving that problem by talking to as many customers as possible and continuing to iterate the end product and the pricing. Time spent on writing a 40-page business plan would be better spent talking, selling, and understanding customers and their needs.
What's the biggest advantage of having a business plan?
McShea: The knowledge you gain from the hard-headed research, analysis and thinking you must do. This will enable you to make wiser business decisions and execute more smoothly and efficiently. It can be the margin between business success and failure.
Another advantage is that preparation of a business plan will enable you to portray your vision for the business more credibly and persuasively to potential investors, business partners, customers and employees. Many prospective investors will ignore you if you don't have a written plan to share.
What's the biggest advantage of not having a business plan?
Hsu: Faster time to market. By cutting out the months needed to do research and write a business plan an entrepreneur can focus on building products and selling to customers. As a result, the entrepreneur can beat competitors to market and begin to get real data back around the needs of the customer. This will increase the probability of success for the new venture significantly.
The business plan-centric approach to company building forces an entrepreneur to focus on strategies and plans as the first step of the process. By not having a business plan entrepreneurs will be forced to focus on their customers first and foremost.
For courting investors, a short 10-15 page presentation that summarizes the business opportunity is good enough. In fact, at the early stages, most investors do not ask for a business plan--they care much more about any data you can give them that helps them understand how much product-market risk has been mitigated.
What's your advice?
McShea: Write your business plan clearly and simply. Use concrete words, and minimize jargon. An average reader should be able to clearly grasp what your product or service is, how it creates value, who will use it, and what is the market opportunity. Beware of inflated hype--it's a turn-off for most savvy investors.
A business plan isn't static. Your strategies will evolve as circumstances change and you learn what does and does not work. But with a plan, you'll know more clearly what path you've taken and what path you're on, even as you correct course to achieve your ultimate goals.
Hsu: Don't create a business plan. Purchase a couple large whiteboards and write down all the things that typically are included in a business plan: target customer, pricing, product, value proposition, promotional channels, positioning, competition, etc. The most important part is to rank what the entrepreneur believes will be some of the major reasons the business will fail (e.g. "my price is too high"). This combined exercise should take less than a couple days, and it's completely fine to be wrong--whiteboards can be erased.
Secondly, start building and selling the product to its presumed customers. Use this customer development opportunity to get as much data on the highest risk factors (is my pricing too high?) and go back to the whiteboard and adjust your strategies and plans. As you continue to build and sell your products, check off the risks that you have proved or disproved which will help you change your strategies and even the product itself for better acceptance in the marketplace. The whiteboard may well become a living road map to success.