Let's Share the Wealth: What Comes Before The Business Plan? Everything.

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Entrepreneurs| 5/21/2012 @ 3:34PM |1,967 views What Comes Before The Business Plan? Everything.

Heidi Neck, Contributor 2 comments, 0 called-out + Comment now + Comment now

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Source: Babson Entrepreneur Experience Lab

A colleague of mine, Brad George, and I are working on an academic paper related to entrepreneurship education. Here’s the premise. Those that need entrepreneurship education are nascent entrepreneurs—those thinking about starting a business and going through some of the early motions. However, standard entrepreneurship courses target new business owners—typically not the students sitting in the seats. Nascent entrepreneurs can, of course, progress into new business owners, but we are not paying enough attention to these prospective entrepreneurs. If anything, traditional entrepreneurship education is scaring them away as opposed to unleashing their potential.

Why? Blame the business plan.

According to the Global Entrepreneurship Monitor, 12.3% of the adult U.S. population aged 18-64 years old is involved in some type of entrepreneurial activity. This accounts for over 22 million individuals of which approximately 60% are nascent entrepreneurs. Many of these individuals see opportunities, stay awake at night thinking about their ideas, share their idea with anyone who will listen, sketch possible company logos on napkins, order cheap business cards, and many other small steps that make the entrepreneur feel a bit more legitimate. Yet the plunge from nascent entrepreneur to new business owner seems more like traversing Niagara Falls on a tight rope rather than taking another small step towards legitimacy.

Why? Blame the business plan.

The old adage that the business plan is outdated as soon as it comes off the printer strikes a nerve with me. If we know this then why do we continue to write business plans? More specifically, why do we continue to encourage nascent entrepreneurs to sit down and write a business plan as the quintessential first step on the path to becoming an entrepreneur? Think about it. If an entrepreneur has a really novel business opportunity, does the data required for a “sound” business plan really exist? Do you really know the market size? Do you really understand your core customer? Can you really project five years of cash flows? I’ve read hundreds of business plans and I’m never surprised when I see hockey stick growth projections on the P&L. I’m actually shocked when I don’t!

Eric Ries, author of The Lean Startup argues that one reason startups fail is due to “the allure of a good plan, a solid strategy, and thorough market research.” Ries hints that corporate strategic planning led us to the conundrum that if planning works for the greatest corporations in the world, then it must be good for startups too! Ries eloquently notes, “Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment. Startups have neither.”

Michael Schneider, President of McPherson College, recently cofounded iCollegeCrowd. iCollegeCrowd is an online experiential learning platform for college students. Schneider and his team identify companies with pressing challenges and match students to these challenges. There is no existing data to help solve these challenges; the students have to take action in the real world, collect relevant data, and use that data to design and develop solutions for the company challenges. In many ways, this is the antithesis of business plan writing. The process here is do then learn – the business plan teaches us to learn then do. The only way to learn when we don’t know what to do is simply to act. Even Michael Schneider, a college president and entrepreneur, did not write a business plan for iCollegeCrowd. He saw the lack of experiential learning opportunities in higher education as a significant problem, talked to lots of people and then developed a beta platform that will launch with a few schools, including Babson College, in September. He says, “We need to think about planning differently. We still need to be thoughtful and able to articulate our idea. But rather than writing about it, you need to go out and do something. We need to be more curious and experimental.”

And this is exactly why the business plan discourages nascent entrepreneurs. If the business plan is the first big step taken along the entrepreneurial path, the prospective entrepreneur is faced with a mountain of questions that cannot be answered just yet. What happens when we can’t answer all the questions? We get frustrated. We give up. We procrastinate on writing the plan in a world that has historically educated us to write a plan before we take action. So what should come before the business plan? Perhaps not everything but it’s important to get traction (note that action is part of traction!) around an idea before the logic of business plan writing makes sense. Getting traction requires testing ideas, getting market feedback, shaping ideas, enrolling customers in your design—it’s a continuous cycle of intentional iteration and learning. The goal is to start and do something—to see if the opportunity can or should really be turned into a business. Of course, the byproduct of starting and acting is that you will collect “real” data that can later be used if you need to eventually write that formal business plan.

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Noah Parsons 3 days ago

First a quick bias alert: My company makes LivePlan, an online business planning solution. With that out of the way…

I have to disagree (to a point) with these kinds of sensationalist articles. Yes, a long, in-depth, printed business plan is no longer necessary for many businesses. But, the planning process is still a critical component of starting a new business. Planning, in whatever form it takes, helps entrepreneurs think through the basics of whom they are going to target with their new business, how much it’s going to cost to deliver the product or service, and what strategies they will use in marketing and sales.

A business plan, or a business model, helps entrepreneurs think about aspects of starting and running a business that they might not have thought about before. The feedback we often get from our LivePlan customers is that our tool made them think about their business in a new way, often helping them refine their ideas and pivoting before they had even invested any money in the business.

Another issue I have is that the “no business plan” crowd tends to only be talking about web-based businesses and other technology businesses that require very little capital to get up and running. The reality is that the majority of new businesses that start in the US are not these types of businesses. They are restaurants, shops, service businesses, and entrepreneurs building physical products. These types of businesses typically take significantly more capital to build and the risk is fairly high. In these scenarios, budgeting, cash flow modeling, and other forecasting is a critical component to the startup phase. Entrepreneurs need to understand if the business will work financially they way they envision it. Sometimes, the planning process forces an entrepreneur to completely rethink their initial vision because they realize that they can’t build a profitable business the way they initially thought they could.

I do agree that business plans should not be agonized over, with months of time wasted writing detailed, 40-page plans. Instead, the plan framework should be just that – a simple framework to jot down the initial business concepts and budgets. From there, the plan should be constantly revised and updated as new information from customers arrives. Ideally, the business plan helps entrepreneurs identify a set of metrics to track (beyond just cash and profits). These metrics could include customer engagement with a product or service, number of tables turned every night, number of new prospects generated, etc. Entrepreneurs should live and die by these metrics as that is what will drive the business. The business plan should be a tool for identifying these metrics and then for tracking them.

Finally, business plans are very useful at communicating the mission and goal of the business to business partners. Getting everyone on the same page is always a good idea and ensures that an entire team is working towards a common goal.

In summary, business plans in the form of long, printed, detailed documents are truly not that useful. But, the planning process, and short-form business plans and budgets should still have a place in every entrepreneur’s toolbox.

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Kevin Cullis 7 hours ago

100% agreed with the premise here. You can’t steer a parked car no matter how much you discuss where you’re going.

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