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