Introduction
According to antiventurecapital.com, only 40% of Inc 500 founders had written formal business plans before they launched their companies.[1] Of that 40%, “65% said they had strayed significantly from their original conception, adapting their plans as they went along. In a similar vein, only 12% of this year's Inc 500 group said they'd done formal market research before starting their companies.”[2] In an interview with Amar Bhide, a Columbia Business School professor - whose research on the subject is encapsulated in his book ‘The Origin and Evolution of New Businesses’ – he stated that the recent data about Inc 500 companies was not surprising and is consistent with what he found in his survey of Inc 500 founders way back in 1989. “According to that research, 41% of the founders had no business plan at all, 26% had a rudimentary plan, and only 28% had a formal business plan.”[3]
To plan or not to plan
Since writing a business plan seems like common sense why do so many successful companies not write one? According to Dr. Bhide, “There are several factors. Many, if not most, successful businesses get started in fields that are characterized by high turbulence or change, change that is not being generated by the entrepreneur.”[4] In these kinds of fields there can be very little information available with which to write a business plan. Secondly, “when things are changing rapidly, the time you would spend on doing the analysis or the plan is incredibly costly because many of the opportunities are fleeting, and if you don't seize them immediately, they're gone. So in these highly turbulent markets, the costs of doing the analysis or writing a plan exceed the benefits.”[5]
The importance of Management
Scott Rabinowitz, Who works for DHR International emphasizes the importance of the management team associated with a start-up. Mr. Rabinowitz specializes in finding talent for venture fund portfolio companies states that, "VCs are drawn to patterns of management accomplishment. The wrong management team can be just as costly as any product development error."[6] Investors know this too. In fact some investors just skip to a business plan's management team description. “If they see one or more senior management members previously worked at a successful startup, managed a similar development project, or were top revenue producers at larger companies, then they read on. Better business plans also outline what specific management positions will be filled with new investor money.”[7]
Conclusion
Some might ask “Why not submit only the resumes of those in the management team as the most important indicators of the company’s likely success?” Considering the data, one could assume that looking over the management teams resume’s would be enough, and for some it might be, I am not of that opinion. While it may not be cost effective for the venture capitalist to read through all business plans presented to him/her, I still believe there is merit in examining the potential direction the company wants to go in. The plan should account for the variable reality of implementation and not be overly concerned if the business plan is not carried out to the letter, but due diligence and preventative assessment, especially with the rising costs of starting a company is not only prudent but an indication that the management team is committed to the vision to which they are seeking investments. If I were a venture capitalist, I would want to see the business plan. In addition the business plan however, I would also fully vet everyone on the management team’s resume and past successes and failures.
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