A Farewell to Startup Business Plans
I was taught that I have to create a full business plan, ideally 50-100 pages, with a fully developed product and strategy before I can raise venture capital for a startup. Is this correct?
Absolutely not. If you are old enough to be taught this, you are old enough to know better. Indeed, let me go further and say that not only are business plans not required for successful startups, but they affirmatively harm your ability to succeed in any risky venture. They teach you the wrong way to think about reducing risk, waste your time and everyone else’s, and give you few useful tools to cope with and thrive amid chaos.
In other words, good riddance to the traditional business plan, a curse still being inflicted on generations of business students.
First, no one will read it. Even if your mom or dad says they read it, they are lying to you. Second, not only does no plan survive contact with reality, but you also waste precious and irreplaceable months creating an elaborate fantasy universe based upon untethered analysis instead of simply running dozens of experiments to gather real market data and customer interactions with live prototypes and early product versions. Why speculate when you can use that time to find out? Building a startup is science, not science fiction.
Third, business plans and rigid product definitions lock you into a path which deprives you of your freedom to iterate and change. Business plans are the enemy of experimentation and inhibit the crucial ability to execute a key pivot from time to time. Traditional business plans with elaborate products and strategies ossify a “waterfall” planning approach. Except for products which absolutely cannot fail and which are already well understood (like nuclear power plants), such an approach has been rejected by almost all innovative companies. (In The Startup Way, Eric Ries even describes how GE moved away its traditional design processes.) Business plans are honey traps which lull you into believing you know something, when you do not.
A startup must embrace Lean Startup methodology, Growth Hacking, Agile, and Design Thinking, all of which are iterative, experimental, interactive, cross-functional, customer-focused, rapid, and data-driven. Instead of assuming you know the answer, in all its glorious details, break down the customer needs, pain points, and opportunities, understand your core Leap of Faith Assumptions around value and growth, create a series of rapid-fire MVPs, and test those relentlessly until you achieve Product/Market Fit. Unify your growth and engineering strategy so that you can identify and test all the drivers of customer acceptance and market adoption, from activation and engagement to revenue and referrals.
Does this mean you are without standards and discipline? Quite the opposite. If you are creating a venture plagued by uncertainty and chaos, your optimal strategy is not to pretend you have the answers, but to attack the riskiest assumptions first, gather data, and learn. Rapidly iterating a traditional build-measure-learn cycle with close cooperation of early adopters will dramatically reduce your risk and build a series of progressively better, more responsive products that your customers will love. You will have ideally dozens of learnings a day, all of which build upon each other. Meanwhile, your competitor is still on the eighth draft of page 57 of its plan.
I do not know of any VCs who expect a business plan. Indeed, most will likely be polite at the time, but mock you later to their partners, perhaps even laughing so hard tears come out of their eyes. Were I to see a business plan from an entrepreneur, I would ask why you wasted all the time creating a fantasy world instead of simply testing all your assumptions in the same time and gathering real data in the real world. I would at least ask why you did not read and understand the essential books all entrepreneurs should know so that you are using best modern practices. Build it, fail fast, learn, and repeat until the fail part stops happening.
That all said, some aspects of traditional business planning are always good. You should definitely think through risks. Knowing details of operations and execution matters and articulating them absolutely brings clarity to your thoughts. You should understand competitors, including how your customers are solving their problems today, which is a hidden form of competition entrepreneurs never think about. You should create a budget and financial model, not because it will be correct, but because it will give you a blueprint for your drivers of growth and what spending is required. Whatever assumptions you use to create your model should be replaced with empirical data as you gather it, until you pivot and have to start over.
Of course, if you are replicating a well-worn business model, whose execution and assumptions are all well proven, like yet another hamburger joint, an abbreviated business plan might make some sense to give you an execution checklist. Even then, you are depriving yourself of the freedom to be flexible and experiment, feasting on the inefficiencies and old-school thinking of your competitors. Starting afresh with a beginner’s mind and using the tools described above gives you a potentially unfair advantage. Perhaps you will see how to disrupt your competitors and capture their markets while they waste their time sticking to their elaborate business plans.
Save your energy now for more important things and write the 50-100 page summary on your business later when you file your S-1 to go public.