Do Start-ups Need A Business Plan?

Yes! The WSJ also has some other thoughts -subscription required. I look at lots of business plans in my other life as a VC. My main message keep them simple and focus on illuminating the idea. Only include data you really understand. Some highlights:

• Matt Coffin, founder and chief executive of LowerMyBills.com, a Web site sold to Experian Corp. in 2005 for $330 million, says he used a 10-page PowerPoint presentation that he spent four to six months gathering research for instead of a formal business plan when pitching his idea to investors in 1999. He succeeded in raising $4 million in venture capital by convincing them that the market for people needing a one-stop place on the Internet to refinance was ballooning.
• Tim Petersen, managing director of Arboretum Ventures, a health-care venture-capital firm in Ann Arbor, Mich. says he generally prefers getting five-to 10-page summaries of business ideas or PowerPoint presentations over lengthy business plans.
• Benson Honig, a professor at Wilfrid Laurier University in Ontario, Canada, says his research of 396 nascent entrepreneurs in Sweden from the late 1990s also found no correlation between business planning and profitability. Instead, his study found the biggest predictor of success to be knowing customers in advance. Mr. Honig says he teaches “contingency planning” to his students — or thinking about a business as constantly progressing, changing and making decisions based on the market climate — instead of traditional business planning.

The WSJ also includes links to some relevant research:

Plans and Performance

Study: “Pre-startup formal business plans and post-startup performance: A study of 116 new ventures” by Julian E. Lange, Aleksandar Mollov, Michael Pearlmutter, Sunil Singh, and William D. Bygrave (all Babson), June 2005.

Summary: The study compares the success of 116 ventures started by Babson College alumni between 1985 and 2003, using performance measures such as revenues, employee numbers and net income. Researchers found no statistical difference in performance between those businesses launched with formal business plans — roughly half of the 116 — and those started without them, and concludes that “there is no compelling reason to write a detailed business plan before opening a new business” unless the entrepreneurs needs to raise substantial amounts of start-up capital. Instead, the researchers say start-up entrepreneurs should generally just make some financial projections, especially cash flow, and open the business.

You’ll need a plan to get funded but it’s like the old saying about memos “I didn’t have time to write a short memo, so here is a long one”. Make the time.

Via No8 Ventures