90% of start-ups go bust, often due to poor planning. Founders know they should write a business plan, yet many never do – spouting lame excuses based on misconceptions and cognitive biases (see footnote[1]).
Or else, they throw together a sketchy, useless plan. Or an over-optimistic one they don’t believe. Or produce a plan way too late; ignore expert feedback; or don’t actually use the plan.
Even if the start-up survives, poor planning probably wasted lots of time, money, and opportunities.
So here I explain why you should write a business plan – and why excuses for not doing so are flawed. (And my next post explains how and when to write a plan.)
A parable
A builder has an idea – no, a vision – for a skyscraper. It’s so vivid in his head – he talks about it so animatedly, so truly believes in it – that he just knows he doesn’t need an architectural plan or that kind of crap. Besides, it might take him weeks, he’s not sure he can draw, and it wouldn’t progress things anyhow. Don’t plan, act!
Admittedly, he’s more of a wannabe builder, as he’s never actually built anything before. But he’s googled an article called Build Your Very Own Skyscraper by a top property developer (D. Trump), and can figure out the rest as he goes along. Fired up with excitement and self-belief, he buys some tools and sets to work.
What are the chances his skyscraper won’t get built, or it collapses? Maybe 90%?
You, dear reader, are the builder; your start-up is the skyscraper; and here it is, built without a plan:
or, more likely, this:
What are plans for?
An architectural plan lets you examine a building design from different angles, check that all its elements make sense (e.g. elevators, lighting, plumbing, parking), and get expert opinions (from structural engineers, quantity surveyors, planning authorities) before construction begins. You can revise the design in response to feedback, or abandon it if it seems unsafe or uneconomic. This process takes time and effort – but saves far more during construction, and cuts the risk enormously.
A business plan is a simulation
Similarly, a business plan lets founders examine a start-up idea on paper, check it makes sense, run it past experts, revise and improve it, and decide whether to go ahead. It’s a simulation of a business, in words and numbers.
Writing a plan helps you flesh out your idea; clarify your assumptions; research missing information; consider alternatives and different scenarios; spot gaps and inconsistencies; pre-empt problems. Founders are forced to think through, discuss, perfect, and agree on all aspects of the business in advance. The process takes time and effort – but it’s far better than just starting the business and seeing whether it goes bust.
The financial projections in a plan are especially important, as start-ups ultimately stand or fall on whether they make money before they run out of cash. Once calculated, these projections produce your first year’s budget, ready to go.
They also show whether you’ll need to raise money via an investment, grant or loan. Most investors will want to see your business plan. Even so, the plan is mainly for you, not investors. Before convincing them your start-up has potential, you must first convince yourself.
It’s also a crash course
Businesses often fail if their founders haven’t run one before, and don’t know how to – that is, they are incompetent. Like the builder; or perhaps even you, dear reader. For everyone starts out incompetent at difficult tasks. You couldn’t walk, read, ride a bike, play the piano, or speak a foreign language on your first attempt – and running a business is just as hard.
Writing a proper plan is a safe way to learn and practise the basics, from budgeting to market analysis. It’s a crash course in business – Business 101. Experts mark your ‘homework’ (as you should get feedback on your draft plan), which you can keep amending till you get it right.
Minimising incompetence is also why you should start a business in a domain where you (or another founder) already have some expertise. If you know about cookery, you could consider starting a restaurant, but not an airline. Otherwise you’d have to learn everything from scratch – not just business management – and there would simply be too many ways to screw up.
Lame excuses
As a business plan is clearly crucial, you’d need a shedload of misconceptions, mental blocks and attitude problems to avoid writing one. Or to throw one together that’s sketchy and useless. Here are some excuses founders often give:
“Writing a plan is boring/difficult”
Did this ever save you from doing homework? If it seems like a reason not to write a plan, then you’re not cut out to start a business – which requires immense discipline, hard work, doing things you don’t want to do or know how to do, and generally acting like a grown-up. If there’s one thing worse than homework, it’s your start-up going kaput, because you didn’t feel like planning.
“Doing achieves more than planning”
As Nike says, just do it! But sprinting off in the wrong direction without a map is counterproductive. Planning is relatively fast and cheap – for instance, online research for a business plan can teach you things in minutes that might take months or years of doing to find out.
The daftest business idea I ever came across was for a tablet-like device – a digital video player – specifically to play classical music videos. (This was before the iPad.) The founder had spent loads of time and money doing. But a little bit of planning (assisted by Google) would have told him that the classical music market is small, and the classical music video market is minuscule – so his start-up was a non-starter.
“Business is easy”
…so you’ll just figure it out as you go along. But if it’s so easy, why do almost all start-ups fail?
Maybe you’re very intelligent or well-educated, and assume that gives you the edge. But book-smarts aren’t so useful: a zoology degree won’t help you build a skyscraper. Your competitors will be smart too, and with far more relevant experience. And you may lack other key abilities, from people skills to creativity. A co-founder can help cover your gaps – but it still won’t be easy.
“Only the product matters”
Founders often focus on creating a product, to the exclusion of all else. Maybe they think only products are important, because as consumers that’s what they see, buy and use. But the rest of a business is essential too: products don’t sell, market, distribute, support, strategize, invest in, or account for themselves. Even the best products can fail, if competitors are better at these aspects.
If product development is your expertise or sole interest, find a co-founder who’s keen to run the business side. Tech start-ups often have two founders: a product specialist (CTO) and a business specialist (CEO).
Product development can also be a displacement activity from other concerns:
“I don’t want to think about it”
…because of fear and denial. Deep down, you suspect your start-up has a fatal flaw, so you don’t want to examine it from all angles. Maybe you lack business experience, so you fear unknown unknowns; or you sense looming storm-clouds, such as superior competitors. But if you don’t deal with things like this the easy way (on paper), you’ll surely find out the hard way. And if you can’t contemplate failure, don’t start a business.
“Won’t a lean plan or pitch deck do?”
Some tech founders use the lean startup methodology. This involves rapidly developing and revising a minimum viable product (MVP, i.e. prototype) to get early feedback from customers. The start-up idea is summarized on a single sheet called a ‘lean plan’ or ‘business model canvas’, which is quick to revise as you try out different product iterations. This is fine, as there’s no point writing a full plan until you have settled on a product and market.
But once you’ve established those, you should still write a proper, detailed business plan (say, ten pages bare minimum). A lean plan is no substitute – for even if customers love your product, you won’t know if the market is big enough, or whether you could turn a profit, or need to raise money, or of other problems down the line. Some people might want a classical music video player, but not for what they’d cost if you could only sell 1,000 of them. Such things need careful research, modelling, and thought – i.e. proper planning.
If you’re considering a pitch deck (a pretty PowerPoint summary to interest investors), you probably think…
“Investors may not require a business plan”
While many professional investors will insist on a proper plan, some won’t. This is because they can spot a dud a mile off; but you can’t. They’ll only meet you if your idea has potential. And they will ask you difficult questions – the same points your business plan would cover, so you’ll need to have thought it all through. If they’re still interested, they will do their own research (‘due diligence’) before deciding to invest – again, the same kind of research your business plan should include.
So you may think you can get away with just a lean plan or pitch deck. But you’ll need a proper plan to deal with difficult questions, due diligence, and most importantly, to run your start-up.
Remember, a business plan is mainly for you, not investors. They don’t risk much money with a seed round, and they expect a high failure rate; but failure will hurt you, both psychologically, and in wasted time, money and opportunities. And if you raise money from family or friends, you won’t want to hurt them, either.
“My start-up isn’t like an old-fashioned business”
“…so we don’t need boring stuff like plans, budgets, board meetings, etc.”
Many late-1990s dotcom start-ups also thought this; they went bust.
In fact, all viable businesses are essentially the same: they provide products/services which they persuade people to buy for more than they cost to produce. So they use standard structures, departments and roles (owners, board, CEO, CFO, etc.) This is done because it works.
However disruptive you may think your start-up is, it’s not that special; you haven’t invented a whole new way of doing things, or new laws of economics. The same basic principles apply to you as they do to a florist, Netflix, a private school, and McDonald’s. All need a business plan.
“You can’t predict what will happen”
“…and plans often go badly wrong, so there’s no point making one. As Mike Tyson said, ‘Everyone has a plan until they get punched in the mouth’”.
But if you anticipate the punch, you may be able to dodge it. Unplanned start-ups often have a gloved fist heading their way, which they don’t even notice – because they stepped into the ring without knowing who their opponent was, or what a boxing match involves, or even what a gloved fist looks like.
A business plan helps you avoid disaster. Of course, it won’t guarantee that your start-up will succeed (due to the vagaries of talent and luck), but it may show that it can’t succeed – that a knockout is inevitable; worth knowing before you start the business.
The right attitude
Writing a business plan can almost be fun. Again, think of it as a simulation – an opportunity to try out different ideas on paper. You may enjoy the brainstorming, discussion, research, or financial modelling. You’ll discover a lot, perhaps with a “Eureka!” moment; e.g. Airbnb was initially for convention attendees to sleep on people’s floors, until the founders realised the potential.
A plan should make you feel better about the whole thing: more confident that your start-up will work; excited about a new, improved idea; or if you abandon it, relieved that you dodged a bullet.
Summary
A business plan is a simulation of a start-up, to try it out and improve it on paper before deciding whether to go ahead. Writing a plan is also a crash course in business. Both of these greatly reduce the chance of failure.
A plan is also useful for raising money, but you’ll need one before you reach that stage.
Avoid all excuses not to write a proper, detailed plan. You’ll be glad if you do – and probably regret it if you don’t.
My next post explains how and when to write a plan.
Thanks to Cat and Ari for helpful comments. Photos from shutterstock.com
[1] Such as these, plus others linked to in the text:
- General bullshit excuses: rationalization, motivated reasoning
- Procrastination: present bias
- Overconfidence: hard-easy effect, optimism bias, overconfidence effect, illusory superiority
- Overestimating the chance of success, because Google and Amazon: availability heuristic, survivorship bias, base rate fallacy, neglect of probability.