In Defense of the Business Plan

The business plan is under attack and deservedly so. Why spend so much time writing a fictional plan when you are pretty much certain that the odds of it translating to reality are near to zero? Framed this way it is indeed difficult to see why a rational person would venture out to write a business plan! As my colleague Toni Dávila recently pointed out Business Plans Should Move to the Back Seat.  

What it’s not

However, critiquing the business plan based on its predictive performance may miss the point . The culprit perhaps is the word “plan,” that leads us to believe that a business plan is something to be executed with minimal deviations from the original, akin to conventional capital budgeting or financial plans.  That is definitely not the case. A business plan is not a plan!

Picture: Denise Chan
Photo credit: Denise Chan

This would not come as a surprise to those who have read and interiorized the classic William A. Sahlman piece on business plans: How to write a great business plan.” He rightly pointed out (long before the slew of criticism thrown at business plans for their poor predictive track record as well as the dot-com bubble, vastly fueled by investments in dubious and not so rigorous business plans):

“What’s wrong with most business plans? The answer is relatively straightforward. Most waste too much ink on numbers and devote too little to the information that really matters to intelligent investors. As every seasoned investor knows, financial projections for a new company – especially detailed, month-by-month projections that stretch out for more than a year–are an act of imagination.”

What it is

A business plan is essentially a document that presents the entrepreneurs vision and execution plans with its associated risks and rewards for consumption of investors. The goal is to help investors assess the business and make an informed decision. It is essentially an analysis and communication tool for the entrepreneur to provide the investor, akin to a due diligence report when buying a company for example. Therefore, if as an entrepreneur you are bootstrapping your business or are at a stage where the uncertainties are too high for you to grapple with, the business plan may be of little utility.

So indeed Business Plans Should Move to the Back Seat when demand uncertainties are too high and need to be further investigated and comprehended. In such cases the goal should be to search for a scalable business model through a deep understanding of the market by rigorous research and most importantly experimentation in the field. This crucial phase of the entrepreneurial process definitely does not require a business plan to be written beforehand!

Why it’s important

Photo credit: Ken Tegardin

However, it is also certain that it is during this process that the entrepreneur generates the insights and knowledge that will form the basis of the business plan that will allow her to approach investors to raise financing for her startup if so desired. A business plan apart from providing information to investors is also a symbol of you as a person . It reflects how thoughtful, thorough, honest and diligent you are. Whether the plan is a 40-page document or a 20-slide pitch deck, at the end of the day it should reflect you and your vision and convictions while providing the necessary information to investors to make an informed decision.

Furthermore, we must also realize that a business plan is just the start of long journey full of ups and downs for both investors and entrepreneur. Risk is unavoidable in a startup and there are no tools that can predict the future with any accuracy. Thus it is crucial to realize that, “a business plan must not be an albatross that hangs around the neck of the entrepreneurial team, dragging it into oblivion. Instead, a business plan must be a call for action, one that recognizes management’s responsibility to fix what is broken proactively and in real time.” After all, investing in a fledgling startup is an act of faith based on trust. Both parties must strive to uphold that trust in the long journey to nurture a new venture.

One thought on “In Defense of the Business Plan

  1. Good post, Anindya. I just read your colleagues post about business plans moving to the back seat as well. You both had some good points. I tend to be a little more on your side of things. Any good plan in business or military (I’ve been in both) must be well researched, well thought, out, but also be flexible, and have backup plans…contingencies. Most new startups that I’ve seen don’t fail because they over-planned…they fail because they had NO plan. The trick is to keep it flexible…adaptable, and see it as a work in progress. But I do agree with Toni in one sense because I do think too many people spend so much time on their initial business plans that they miss opportunities and don’t actually have time DO the business they were passionate about. I was talking with one of my good friends who’s starting an event planning business, and she was really stressed about having everything perfect right off that bat. I gave her some advice to not stress so much about the initial perfection, but get some key things done that would allow her to get started and learn on the fly. She took my advice and a couple months later she’s getting some clients and her business is at least off the ground. So, as I said on Toni’s post, I think the key is balance.

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