Will Your Business Plan Attract VCs?
If you're raising money for your company, don't waste your time perfecting a business plan. So says a recent study from University of Maryland's business school. The study's authors found that the content of business plans had minimal effect on venture capitalists' investment decisions. Entrepreneurs' success in cultivating relationships with VCs proved to be the most influential factor in securing funding.
Jon Chait, partner at Dace Ventures in Waltham, Massachusetts, agrees with those observations. "We discourage a lot of effort on business plans for early-stage companies, because their plans evolve at least 50 percent from their initial goal in the course of a year," he says. Obtaining a warm introduction is important not because investors do not read unsolicited plans—in fact, Chait reads dozens of them—but because it shows entrepreneurs' ability to build partnerships. "It's part of the skill set," he says. "By blindly submitting something, you're not taking the opportunity to show off that strength."
The information found in business plans isn't entirely irrelevant, however. Many of those details end up being evaluated over the course of due diligence. But a deck of PowerPoint slides or an informal outline may be more helpful for identifying the most salient points. "Part of the test is whether what the management thinks is important is what investors agree is important to the company," says Dan Googel, principal at Easton Capital Investment Group in New York City.
So if a 25-page company road map won't grasp VCs' attention, what will? Chait and Googel both look for entrepreneurs who have tested their company's business model with seasoned entrepreneurs and potential customers. And in the current recession, investors are wary of directing rounds of capital toward intriguing concepts that have yet to generate cash flow. "There is less of an appetite for companies with ideas based purely on the number of users they can obtain, but without a focus on how to turn a profit," Googel says.
Although a formal business plan is not of much use to venture capitalists, the same is not necessarily true of other sources of capital. Azi Gera, one of the University of Maryland study's authors, stresses that a well-written business plan remains critical for funding such as bank or government loans. "VCs can evaluate the soft processes of an entrepreneur better through other means," he says. "A banker doesn't have that ability."
PRINT THIS ARTICLE