To Investors, Startups Without Business Plans Are Expensive Hobbies
If you sold your last startup for $800 million, you probably already know how to build a business, and even conservative investors won’t worry about the quality of your next business plan. But for the rest of us, don’t believe the Silicon Valley myth that all you have to do is sketch your million-dollar idea on the back of a napkin and investors will line up to give you money.
Based on my experience as an investor and mentor to aspiring entrepreneurs in Silicon Valley and elsewhere, one of the quickest ways to kill your credibility and your startup is to offer a poorly written business plan, or none at all. There really is no excuse these days, with samples on the Internet, business-plan books in every bookstore and dozens of apps to automate the process.
A great business plan doesn’t have to be a book in length, with extensive financial statements. Most good ones I see are in the range of 25 pages, which is more than enough to describe concisely all the business what, when, where and how. The plan must simply answer every relevant business question that you could imagine from your team, partners and investors.
In fact, the process of organizing and documenting these elements is the best way to make sure you understand the answers yourself. Would you be comfortable buying a house from a builder, or building one yourself, with no plan on timeframes, costs and features? I hope not. Most investors tend to think of startups without a plan as expensive hobbies.
There is no magic formula for a formal business plan format or sequence, but I would recommend the following 10 sections, in this sequence, with relevant content:
- Executive summary
- Problem and solution
- Company description
- Market opportunity
- Business model
- Competition analysis
- Marketing and sales strategy
- Management team
- Financial projections
- Exit strategy
A business plan that skips one or more of these topics is not complete, so don’t jeopardize your one chance to make a great first impression by offering a partial plan. It only takes a little extra work to make it a professional document, with a cover page, table of contents, headings and page numbers. Don’t try to impress constituents with technical terms, jargon and acronyms.
If you don’t have the time to write things down, or your writing skills leave something to be desired, don’t be afraid to get some help. No executive I know writes all his own contracts, but every smart one owns every one that is written for him, and understands every element. An entrepreneur who can’t manage a plan probably won’t be able to manage the new business.
Of course, if you don’t yet understand all the elements, it’s time to learn. My advice here is to check your ego at the door, and find a mentor or a partner who has business experience and domain knowledge to help you plan a viable business. Your idea may be technically right, but without a business plan, it could be dead right, which is not the result anyone is looking for.
There are no guarantees, but various studies have found that entrepreneurs who create a good plan generally double their chances of securing funding and building a successful business. In any context, and especially in the high-risk world of startups where more than 50 percent fail, you need every advantage that you can get.