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Traditional business plans have little value as a fundraising tool according to new research from the University of Maryland. The study finds that, although the planning process is important to business success, the business plan itself is an inefficient means of communication between an entrepreneur and an investor. By their nature, business plans are highly non-standard and are therefore laborious to review and compare to other non-standard plans. After studying the business plans of more than 700 companies, the Maryland researchers found that time constraints prevent venture investors from studying each plan in detail – and that investors make initial screening decisions based on sparse information… not on a formal business plan.
The lead researcher of the study, Dr. Brent Goldfarb, says that a traditional business plan is a limited-use document that will in no way substitute for the hard work of actually building a business. He adds that entrepreneurs should invest their time in other more important business-building activity, not spending weeks perfecting how their business plan looks on paper. The research does not suggest companies should totally forego a business plan because it may be useful for organizing thoughts and details of a venture. However, since there was no evidence that the plan influences venture capital funding decisions, entrepreneurs should not get bogged down in the creation of an elaborate plan.
And bogged down they get… A 2007, Wall Street Journal article entitled Do Start-Ups Really Need Formal Business Plans? affirms that budding entrepreneurs can spend months – even years – polishing convoluted 50-to-100 page business plans. Critics of such elaborate planning contend that it runs counter to what’s at the very heart of the entrepreneurial spirit: the ability to learn and adapt through business-building experience. “Just do it,” says one business plan critic, Dr. William Bygrave, an entrepreneurship professor at Babson College in Wellesley, Massachusetts. “What we really don’t want to do is spend literally a year or more writing a business plan without knowing we have actual customers.” Entrepreneurs must be nimble, but they will be more apt to stick with a flawed concept they spent months drafting, he adds. Tim Petersen, managing director of Arboretum Ventures, a health-care venture-capital firm in Ann Arbor, Michigan says he generally prefers getting 5-10 page summaries of business ideas or PowerPoint presentations over lengthy business plans. “I’ll have to confess, it’s not always crucial to have the 60-page business plan” he says. While most entrepreneurs seeking funding should have their ideas well-formulated, “some people will get a little caught up in the perfection of their plan,” he says. Some believers in elaborate business planning admit that formal planning foes have valid points. Tom Kinnear, executive director of the entrepreneurial studies institute at the University of Michigan, says writing a business plan shouldn’t take more than three or four weeks. “There’s no question that some people are obsessed with writing plans that are too wrought with detail,” Mr. Kinnear says. “Early on, all you really need is a compass.” The business plan problem is summarized in Harvard University’s Between Invention and Innovation: “We should not be surprised that entrepreneurs experience an apparent shortage of funding while large sums in venture funds remain undisbursed. Efficient markets do not exist for allocating risk capital to early-stage ventures. Serious inadequacies exist in information available to both entrepreneurs and investors.”
So how does an entrepreneur present their business to investors? Don’t be troubled. A wide range of innovative online tools have emerged to address the business plan problem. These tools assist entrepreneurs in everything from business planning and modeling to investor prospecting and fundraising. Whereas entrepreneurs were previously limited to a word processor and a small funding network, they can now access powerful online tools for business modeling, planning, and seeking capital. The tools also assist investors and business supporters (i.e., incubators, consultants, service providers) with screening and monitoring entrepreneurs and their business information.
EquityNet (www.equitynet.com) has spent over seven years addressing the business plan problem. EquityNet’s patented software system simplifies the planning process by prompting entrepreneurs for only the information that is most valuable to their business and investors. This allows entrepreneurs to create, model, and share their very own “Business Analysis” report in hours, not months. Most importantly, EquityNet’s Business Analysis is a standardized, in-depth report that investors actually read and prefer to traditional business plans. A survey found that over 50% of the entrepreneurs who complete the EquityNet system succeed in raising capital. That’s 10 times the industry average of 5%.
For more information on EquityNet’s software for entrepreneurs, visit: www.equitynet.com/entrepreneur.aspx
For more information on the topics discussed in this article, check out:
The Role of Business Plans in Venture Capital Decision Making
Do Start-Ups Really Need Formal Business Plans Business Plans are Virtually Useless
