World champion boxer Mike Tyson once said, "Everybody has a plan, until they get punched in the face."
Starting a business is like a prizefight, and the demand for a written plan as the de facto document in startup investment has always perplexed me.
Sure, you can lay out a proposed path to success, but the road will be full of surprise punches. More important than attempting to forecast is knowing how to duck and weave.
For exactly that reason, many top investors and incubators are shifting their views on written business plans. They would rather see founders building their concepts than spending time writing down ideas. Here's why I believe this dynamic is taking hold, and why business plans may be on the way out.
- Business plans are snapshots in time. Written plans are static, but startups are dynamic. A good drill for startups can be to save the plans that were created at various stages and review how they have changed--and, most important, how reality differed from what was on paper. Sophisticated investors will pay more attention to where a business has been than to its projections for the future.
- The meat of the plan is made up. Financial data exists in most plans only to demonstrate that the author has some basic business knowledge. Hammering out the financial pro formas of a business plan with a potential investor is about as fruitful as debating where you might spot your next unicorn. More important than the numbers themselves are the assumptions and methodology used to get to them. (For example: If I sell X widgets at Y margin, I'll return Z after cost of goods sold.) Those assumptions create real information that can be challenged and discussed.
- A plan can't communicate concepts as well as a demo can. Most people are visual learners. Imagine explaining the features of your favorite tech gizmo in a 500-word essay. Now compare that to a quick demo that shows instead of tells. In terms of communicating the value proposition and growth potential, if customers or investors can't grasp the ballpark value of something after seeing how it works, how is a spreadsheet full of numbers going to change their mind?
The drill-like structure of a business plan may be a valuable exercise to get novice entrepreneurs thinking about the future. But it continues to be a bottleneck for those who have the creativity and drive to build something amazing, but lack the time or skills to articulate and display it in a formulaic written plan. I'd argue that the former talents are more in demand than the latter.
True entrepreneurial skill comes not from knowing whether the punch is coming, but from having a Plan B when it does come. Tyson became an undisputed heavyweight champion because he knew the fight plan would always change. Likewise, savvy entrepreneurs should focus far more on their products and the eventual pivot points than on sticking to a written plan. Investors and customers want to know you are thinking about the future, but they really want to know you can handle anything the future may hold, left hooks and all.
Sam Hogg is a venture partner with Open Prairie Ventures, a Midwest-based venture-capital fund investing in agriculture, life-science and information technology.