Should You Write a Business Plan?

Writing a business plan at the time of the lean startup sounds like a weird idea. No?

• just have an idea;
• have not done your homework with the Value Proposition Canvas and the Business Model Canvas;
• are dreaming your project instead of starting it (yeah, there are many wannabe entrepreneurs around there)!
• have not discussed with any potential customer;

Among other ones, these are reasons not to write a business plan. Of course, when you’re starting a project, you should have a rough idea about the potential market. But you should start by focusing on the pains faced by your target customers. And trying to figure out how to solve them.

A business plan is time intensive: starting from scratch, it takes at least 50 hours to write it. If you have already done it and know what to include in it. Of course, if you need to proceed to an extended market research, it’s not enough. Time is the most valuable asset entrepreneurs have and therefore, you need to carefully think about why you should (or not) write your business plan now. If it is to raise money… yes, it’s a valid reason. But again, think about the cost of opportunity (how much you could achieve during this time – how many prospects you could call or meet?). To invest this time, you should have a decent probability of getting this money!

The most frustrating in writing a business plan is that the moment you click “save to PDF”, the document is already outdated. Why? Because if (and only if) you have already started, things are moving fast. You may have more offers to do, received great news about a potential partners, an employee could have resigned, etc.

In my experience reading many business plans over the past 10 years (a bit less this pas year), the biggest learning you get is to understand how the founder / the company thinks and sees the opportunity. How the founder writes and the completeness of the business plan tell you probably more than the actual words contained in the document. You can also understand quickly if the founder understands all business skills required to start a business.

Forget about the solidity of the financial projections. Institutional investors (Venture Capital) want to see a business which has the potential to be make CHF 50M turnover or to be sold for CHF 100M. Which makes your financial projections quite a bit hard to believe. Almost all business plans that I’ve seen reach sales of CHF 40-50M at year t+5, which is OK if you’re a startup that should be able to scale (as every startup – if a new business has not the potential to scale, people should stop to name it “a startup”). The reality is somehow different, however ;-)!

A common “rule” among investors is to divide the sales projections by 2 (or 3) and postpone them from one year. If you’re not bankrupt or stopping the project in the mean time, you’ll see that’s often not wrong. Unfortunately! Doing financial projections is a great exercice for the founder, however. It makes you think about scalability and the key elements of your potential exponential growth. It also shows quickly if you have an idea of the business or not (I remember reading a business plan projecting a CHF 100M turnover at 2nd (!) year after starting up – immediately discredited and I’ve probably not spent more time reading it!). Many entrepreneurs hate this financial projections exercice. As you do not really know. A 12 months budget is always more accurate (at least on the costs side!).

As my old friend André, certified public accountant, told me once is that

“A budget is a correct addition of wrong numbers!”