Business plans? Business models? Do you really need them?

For a long time I have wanted to write a post about the irrelevance of business plans. I was waiting for an appropriate time, and a high profile example to cite in my post. Twitter just got VC funding with no business plan and no business model.

I confess that I have not used Twitter. I rarely use SMS or texting either. These mediums strike me as one way bursts of irrelevant chatter for the ADD (Attention Deficit Disorder) crowd.

If you haven't seen or used Twitter check out Donna Bogatin's post which included an old screen shot of a Twitter message.

This message is a good example of why I don't use it...it is meaningless chatter. I just don't have time for it, and don't see value in it. Hmmm...maybe that is because I have trouble expressing myself in 140 characters or less.

Now, back to business plans - In all my years in startups and all my work with VCs I don't ever recall seeing a written business plan. The fact is that investors do not read them. Here is the inside secret... investors invest in people not business plans. Early stage investors know that great people can make a mediocre idea work, but mediocre people can't make a great idea work.

Powerpoint rules - An earlier post "How to handle the first VC meeting" explains how to get a VC meeting and what to present. Ten Powerpoint slides is all you need. A short demo or screen shots takes care of the rest. But, in the back of their minds the VCs or Angels are really evaluating YOU...how you react to questions and criticisms, how quickly you think on your feet, your energy level, passion, and vision.

Early stage investors understand that they just don't know a lot of things. Competitors may emerge, business models will change or become apparent later on, a better application of the technology or idea may emerge, and the political/legal/business environment might change. Shit happens. The key is how the entrepreneur responds. In those early meetings the investors are evaluating how you respond to questions, challenges, and new ideas. They may focus a lot on your past as a guide to how you will react in the future. These things matter a whole lot more than a business plan...that is surely overly optimistic and filled with unfounded assumptions.

Paul Kedrosky has another take on why business plans are actually not good for you. Two reasons. First, because VCs are professional nit-pickers. Give them something to find fault with, and they'll do it with abandon. I generally tell people to come to pitch meetings with less information rather than more. Sure, you'll get pressed for more, but finesse it. Presenting a full and detailed plan is, nine times out of ten, a path to a "No" -- or at least more time-consuming than having said less.

Profits are a different issue. Being profitable too soon gives investors, rightly or wrongly, an idea of what the margins are on the business, as opposed to what they could be in some perfect world. As a result, it takes a mighty force for them to not start wading in with discounted present value worksheets, and the like, thus hammering your valuation and generally making funding much more complicated (and equity consuming) than if you were wildly unprofitable.

Big corporations like business plans. The one place I have seen them used is inside big corporations. Big companies require all kinds of plans and justifications for making an investment in a new product or new piece of equipment. Big companies have teams of MBA's skilled at poking holes in financial projections and shooting down projects. Big companies have a lot more at stake, their business is more predictable, their revenues and costs can be reasonably forecast. So, business plans make sense for them.

Business plans are used to examine cost and risk. Powerpoints are used to create a vision of opportunity. This is why entrepreneurs should stick to short Powerpoint presentations and avoid detailed business plans.

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Comments

[Andrew]

Traction always helps too. If the unproven startups can find traction they will have a great chance in closing a round.

[Chuck Sacco, PhindMe]

Agree that less is more when it comes to presenting the finer points of a plan, but for most startups the process of developing a plan is invaluable. It's painful, time consuming, and no one may ever read it, but it forces a virgin team to grapple with the realities facing them.

[John]

Getting at your tangent rather than your main point, Wired has a particularly thoughtful piece on Twitter's value. I think the author gets more out of the app than most of it's users, but here is the essence:

"Individually, most Twitter messages are stupefyingly trivial. But the true value of Twitter — and the similarly mundane Dodgeball, a tool for reporting your real-time location to friends — is cumulative. The power is in the surprising effects that come from receiving thousands of pings from your posse. And this, as it turns out, suggests where the Web is heading... Twitter and other constant-contact media create social proprioception. They give a group of people a sense of itself, making possible weird, fascinating feats of coordination...Critics sneer at Twitter and Dodgeball as hipster narcissism, but the real appeal of Twitter is almost the inverse of narcissism. It's practically collectivist — you're creating a shared understanding larger than yourself."

The article is online here:
http://www.wired.com/techbiz/media/magazine/15-07/st_thompson

[CoryS]

Yeah, Andrew hits it: usage traction > great management > great b-plan. [Oh, btw, this is way less than 140]

[Don Dodge]

Cory, succinctness and clarity in 140 characters are gifts I unfortunately don't possess.

Andrew, I agree customer/user traction helps a lot. The Web 2.0/social network/consumer apps have a much easier time of gaining early traction than traditional software products.

Chuck, Agreed. The exercise of writing a business plan is good discipline for the founding team and helps get everyone on the same page. The business plan is more for the founding team than for investors.

John, Thanks for the link to the Wired article on Twitter. Lots of friends use it. Scoble thinks it is the greatest. It is just not for me.

Thanks for all the comments. I truly appreciate them and learn a lot from all of you.

[Mark Curphey]

In an interview with Scoble it looks like the Twitter folks have done a lot of thinking about biz models.

http://scobleizer.com/2007/07/27/twittering-from-twitter-about-twitter-with-twitter/

This was however a great post, the kind I was expecting to come out for a long time. Many entrepreneurs focus on predicting revenue and not focusing on costs. One is controlable with few paramaters, the other has a lot of paramaters to accurately predict IMHO.

[Peter]

Great minds really do think alike. I wrote this piece on business plans just a few days ago.

http://smartstartup.typepad.com/my_weblog/2007/07/how-to-do-a-bus.html

A well-thought out business model, OTOH, is essential.