For a long time I have wanted to write a post about the irrelevance of business plans. Twitter got VC funding with no business plan and no business model. Three years later they still have no revenue model, but their investors are very happy.
I confess it took me a while to figure out 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. Twitter users have evolved from simple updates of what they had for breakfast to more insightful quotes, inspiration, and pointers to interesting pictures, videos, and web content. If you haven't seen or used Twitter check out this old (2007) screen shot (left) of a Twitter message from Dave Winer for an example of where it was, and one from yesterday (right) for where it is now.
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. They are always dealing with incomplete information and unknowns. 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. 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. PowerPoint's 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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