Entrepreneurs tend to follow the "don't think, just do" model of starting a business. This gumption can serve founders well in the early days, but it often causes them to overlook some of the essential aspects of building a business.
Writing business plan is a valuable experience for any company founder, but many founders view it as a useless exercise. Much of this has to do with the parameters by which a business plan is defined. In simple terms a business plan should be a document that forces you to look at where your business is now and where you want it to go, and make decisions relative to that trajectory.
"The reason you need a map, the reason you need to have any sort of plan is because, if you don't know where you're trying to go, you don't if you're any closer to it," said Andreas Stavropoulos, managing director of Draper Fisher Jurvetson.
Your business plans will exist in different forms for each stage your company is in and it will prompt new actions for each set of goals you set out to achieve. Founders usually begin to think about their business plan when they are first seeking funding, but according to startup lawyer Peyton Worley of Cooley LLP, raising your first round might not require a full-on plan.
"A traditional business plan may or may not be appropriate. But, something that is concise, portable, that easily shows what you're doing, as well as the quick core story of your product or technology, that you should definitely have," Worley said.
That "quick core story" will become the foundation for your pitch.
Crafting the pitch
The pitch is an essential building block for the business plan of your startup. The pitch pushes founders to evaluate how they define their business and, the majority of the time, it is what potential investors are looking for.
"What matters is the entrepreneur's ability to communicate the unique insight and inspiration of their idea along with it's scale (why it's a really big market opportunity) and it's defensibility (why they have an unfair advantage based on unique intellectual property, technology, data, network effects, or something that makes it hard for others to imitate). These concepts are best communicated via the passion of the entrepreneur," said Bain Capital Ventures' Scott Friend.
When you're first launching a startup, a traditional; business plan might not be wholly necessary. A business plan might help to show that you have preempted some of the questions that investors might ask, but it's not something that VCs will want to sift through. Most VCs consider the founder, or team, more important than the business; and a quick pitch conveys more of the entrepreneur, and his or her vision, to the VCs. So, keep the business plan short and focused on the pitch when you're first launching.
When composing your pitch, keep it short and use lots of pictures. Investors are busy, and you need to be able to quickly explain why you make a good steward of their resources. On the most basic level, your pitch should include these three things:
- Who you are
- What problem you are solving
- What you need
There aren't many founders who can walk into a pitch meeting with a reputation that precedes them, so you should include a slide with your team members and individual pedigrees. Explain the pain point you are addressing and the total addressable market. Also, don't be afraid to ask for what you need. Clearly explain what kind of capital and support you are looking for and how you are planning to use it. Ultimately, show the investors that your business is a good investment.
"Something that gives you the idea that if they're putting dollars into your business that it has the chance to grow and evolve into a meaningful business," Worley said.
Once you have secured funding and your company is moving toward becoming a "meaningful business," it is time to develop a traditional business plan.
Developing the plan
Planning is only ever helpful if it drives you to action. This is why you, as a founder, should spearhead the process. As someone who has the ability to allocate resources, you need to understand how you, and your team, see the growth of your company.
When you set out to create your business plan, keep these three things in mind:
- Approach it as a living document
- Set actionable steps toward your next milestone
- Don't think too far ahead
"I think the value in that business plan document, and in keeping it alive, is that it periodically forces some of the tougher strategic questions for a business," Stavropoulos said.
Think about the goals and assumptions you made at the onset of your journey as an entrepreneur with this specific company. Maybe some of the assumptions you made earlier were correct or incorrect and, knowing what you know now, you might want to change course or adapt.
"There's still no substitute for that thoroughness and discipline in thinking on the what-ifs and all the details," Green said. "Because, you unearth both due diligence issues and risks associated with the business, but also other opportunities to see if, in fact, you're in sync with the management team about the thesis for the investment itself."
Just as a pitch will be helpful when you are seeking your initial round of funding, your evolved business plan can help you in future fundraising rounds. Entrepreneurs can raise too much capital, but setting milestones can help you avoid that pitfall. Setting milestones, and agreeing on the actions to reach those milestones, will help you set expectations and raise the proper amount of capital.
"If you don't even have the agreement on those discrete milestones, and you're just betting algebra on some spreadsheet, then who cares? You're not necessarily doing anything different than what you were doing before," Stavropoulos said.
The mark of a good business plan is one that encourages action, but is also one that is flexible enough to facilitate changes in direction if they are needed. A big part of maintaining this flexibility is not thinking too far ahead. Too many founders see the massive financial opportunity that an IPO or acquisition may bring, and they build their business toward that payday. Avoid early exit talks and, instead, focus on building a great business and getting to that next milestone.
"The reality is if you are building a great company, you are going to have great options," Stavropoulos said.
At some point, an IPO might be a milestone for your company, but it should not be one of the initial goals you set because it might muddy your ability to make decisions that are best for the business or the customers.
"The surest way not to make money is to seek it," Green said.
The time at which you should begin turning your pitch into a true business plan will be different for each company, but certain companies should consider writing their business plan early. Businesses that exist in a market where there is a lot of competition need a business plan to help differentiate their offering. Businesses in an area with many external dependencies, or one that is dependant on the market, needs to establish their contingency plan for changes in those external factors. Lastly, businesses that operate with a low-margin need a business plan to understand how quickly they can scale their business.
Conner Forrest has nothing to disclose. He doesn't hold investments in the technology companies he covers.
Conner Forrest is a Senior Editor for TechRepublic. He covers enterprise technology and is interested in the convergence of tech and culture.