Why Web 2.0 Plays Still Need a Business Plan

web20.gifThere has been quite a bit of buzz lately about Web 2.0 startups, and the importance (or not) of having a formal business plan in place. The whole Paul Graham, YCombinator, Kiko failure has brought all of this to the forefront. Is business planning important? You bet.

My thoughts, in no particular order:

1. A web 2.0 play is still a business. Peel back the fancy fonts and the minimal 2-color palettes and what do you have? The answer: servers, storage, office space, payroll, expenses, etc. Granted, it is becoming increasingly more cost-effective to bootstrap these types of plays, but at the end of the day, it is still a business. If you aren’t viewing your play as a business, then you are trying to monetize a hobby. Different animal. In that case, you don’t need a business plan, you need a day job.

2. It helps to frame your thinking for investors, new employees, etc. Fairly self-explanatory. By reading your business plan, a new employee can “get vertical” very quickly. If you are considering taking on investors, then having a business plan allows a potential investor to go “beyond the pitch”, and really ascertain your level of understanding of your industry, your competitors, your assumptions, etc.

3. It helps you iterate your business. By going through the motions of writing a business plan, you will simultaneously “iterate” your business as you write it. You will come up with additional revenue streams, identify previously unforeseen threats and opportunities, etc. There truly is something magical about putting pen to paper, or hands to keys, as it were. I promise you that your idea will take on new meaning when you’ve written a business plan for it. Just as “no plan survives first contact”, “no idea survives first planning” … I promise you it will evolve.

4. It helps YOU get down to the nuts and bolts. The act of writing a business plan affords the entrepreneur the opportunity to get very “hands-on” with the business model and the strategies behind it. If you are preparing to raise capital, this is a very important exercise, as you will get the tough questions sooner or later.

5. It doesn’t need to be the Grapes of Wrath Part II. I think many people shy away from creating a business plan because they think “why should I put all of this effort into writing a 100 page document when I could be pushing code instead?” Great logic, but a poor assumption. A good Web 2.0 business plan can be written in less than 20 pages. For that matter, a good “non-Web 2.0” business plan can be written in less than 20 pages. The best business plan I’ve ever laid eyes on was actually only one page long. ONE PAGE!

6. It shouldn’t take 6 months to write. To go along with #4 above, business plans shouldn’t take that long to write, and I know that many entrepreneurs are anxious to jump right in and start bootstrapping. However, most competent entrepreneurs can shell out a plan in less than two weeks. If it takes you 6 months to write a business plan for a Web 2.0 startup, you should seriously consider another career field.

7. It serves as a roadmap and a validator. As I’ve stated on this blog before – no plan ever survives first contact. Agility is a critical skill these days. However, having a business plan in place allows you to have a firm idea of where you were initially headed when you signed that term sheet. It also serves as a validator for you …. how close were we to the plan? We deviated, yes … but are we straying too far from where our vision is/was?

8. It is a valuable learning experience. For all of the reasons listed above, as well as some others. You will be a better entrepreneur because of it. The same could be said about pitching, financial modeling, etc.

9. It sends the right signals. Contrary to what some would have you believe, there are still investors who will insist on a business plan. Sure, there may be some that will open their wallets for a slick pitch, but their confidence in you as the jockey will go considerably if they know you’ve got a handle on things. And having a business plan in place certainly allows you to get a handle on things. Remember, having a “handle on things” doesn’t just take into account what you’ve done and what you’re doing currently, but also what is to come.

10. The odds are in your favor. Most businesses fail. Most of those businesses don’t have well-thought-out business plans behind them. Gee.

Can you start a business without a plan? Yes.

Can you be successful without a business plan in place? Yes.

Can you fail even with a business plan in place? Yes.

However …

Are your chances of success greatly magnified with a plan in place? Without a doubt.

Cheers.

6 Comments

  1. Scott,

    Great article describing why a business plan is still needed. I’ve written an article describing my thoughts on it on my blog as well. Some random thoughts:

    * Work on the product first and then write the business plan. Working on the product leads to undiscovered country and to be honest, the product will change during the initial development such that your original idea is nowhere to be found.

    * Writing the one page executive summary is 10 times harder than writing the business plan – I should know, I’m banging my head against the wall trying to put my one pager together. However, it does force a person to focus their product and be concise. If you can’t be concise when describing your product, you don’t really have one.

    * Writing a business plan and working on product development can and should happen simultaneously. If all you do is record your mutterings when writing the software, half of it is written.

    * Realize a business plan is never finished – you’re always going to be making changes.

    * Paul Graham’s comments show the striking difference between Silicon Valley-Boston-Seattle entrepreneurial scene and Atlanta’s.

  2. To Scott- I just wrote about this same thing today. Kismet. The Inc 500 list just came out and only 49% of the companies listed had a business plan. I was a little shocked by that. What would be more telling is what percentage of the 250 wished they would have developed one.

    To Josh- The Atlanta entrepreneurial scene is so different and I think it has something to do with one of Scott’s early posts about lateral/serial entrepreneurship. Its just not promoted, not in the business community or in the media as an option to inspire people. I went to school in Pittsburgh of all places and one thing I remember about the boom is that these startups reach out to everybody and I do mean everybody.

  3. Josh/Kimberly – thanks for dropping by!

    Kim – good point re: the Inc 500.

    There are definitely some grassroots efforts underway to change things in the southeast. Time will be the ultimate judge, of course.

    Josh – I definitely agree with your point re: simultaneous development. Putting together a plan (business model, financing, overall strategy) and building a prototype or a product are not mutually exclusive activities, as you’ve pointed out. Very good point.

    Cheers.
    Scott

  4. After reading and agreeing that no voyage can be made with all the steps planned out I place the following question. Web 2.0 is a reality hype and it’s selling and going to sell big. Scott do agree that in terms on the net you obviously need a serious amount of critcal mass in terms of users, and being so is there a specific thought process in formulating a BP to be able to capture such a mass.

  5. Hi there, Miguel, and thanks for stopping by. I’m not sure I fully understand your question, but I will try to answer.

    First, I should reiterate one thing. A business plan is not there to plan out all the steps. That would be a project plan, or a work breakdown structure (WBS). Rather, it is there to lay out conceptually how the business will be operated, and and what strategies management will use to capture market share.

    That being said, clearly any business plan should focus squarely on hitting the critical mass, for both profitability and liquidity event purposes. How will you attain profitability, and how will you reach a point where a liquidity event becomes a viable alternative?

    Exactly how you will capture the critical mass becomes largely a sales and marketing issue, which is driven by execution of the plan as a whole.

    Cheers.
    Scott

  6. Emmett Childress · November 17, 2006 at 2:51 pm

    Good stuff! I had to entice my partner with contest money (50k first prize) in order to get a business plan done. Business is business. If an idea is sound then a plan can only make thing s better…right? It’s funny how many opportunities I say “NO” to because people want to make money but not conduct business. Am I wrong for wanting to know which direction I was headed in before I took off with both guns blazing?

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