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Wednesday, March 24, 2010

Yet another business plan defense

Nearly every entrepreneur has heard about the value of a business plan. Two new publications I found today — one in the Wall Street Journal, one in the Journal of Business Venturing — both reminded me of this topic and updated what I know about it.

This is not the first time I’ve considered the topic. Right now on my hard disk, I have about 15 articles from the business press and about two dozen academic articles. This doesn’t count books, including the four books I bought to teach business plans last year.

This semester, I am also helping one of our undergraduate honors consulting teams write three business plans in less than a month. Due to the accelerated schedule, we had to decide which part of the standard format to use from Jeffry Timmons’ wonderful abbreviated handbook.

Of course, I also blog about business plans here on this blog.

The Controversy

Ever since I met a job candidate several years who did his thesis on business plans, I have been following the debate in academia and the popular press about whether or not startups should do business plans.

Two of the more convincing arguments in favor of business plans are that business plans are a way to communicate with external constiuencies — like investors — and that it provides discipline to the authors. Arguments against focus on the inherent incompleteness (or obsolescence) of the plan and the opportunity cost of preparing one.

Academics — as they are wont to do — also argue about whether there’s a large N, well-controlled statistical study that shows benefits (or lack thereof) for firms that do business plans.

All of these arguments are applicable to potential high-growth startups in technology-based industries. If anything, the stakes are higher — a restaurant might start with a $50,000 capitalization while a photovoltaic company today needs more than $50 million.

Latest in the Business Press

Today the WSJ small business section ran an article endorsing business plans by a business plan consultant. The defense was framed in the negative — a list of “common misconceptions”:
  1. Business plans aren't necessary unless you're planning to raise capital from banks or VCs.
  2. Investors don't take business plans very seriously. They know that the numbers are garbage.
  3. Nobody reads business plans any more. All you need is a deck of PowerPoint slides.
  4. Nobody has a crystal ball that can predict your business's future. You're better off figuring things out as you go.
  5. Business plans aren't necessary for a company that's already up and running. They're a distraction from running your business.
Here in Silicon Valley, I have heard entrepreneurs argue that the PPT deck is more important. My sense is that the PPT deck is what it takes to get seriously considered, but then some sort of real data — whether a Word document or a spreadsheet — is necessary to get a VC investment. (Angels seem to make their own rules).

Latest Academic Research

Also recently (in academic timescales), the top entrepreneurship journal (JBV) ran an article by a German-American team reviewing the business planning literature. Alas, as seems true for some academic journals, the paper was accepted in October 2008 but not published until January 2010. (Also regrettable is the use of an unmanageable paper title length.)
As in any good meta-analysis on a mature but disputed research stream, the conclusion is roughly: “they’re all correct because there are contingency factors that explain when business plans are and are not useful.”

For example, the authors conclude that brand new startups get less value from business plans than more established startups. The former face so many uncertainties about the unknowable that (the authors argue) that the “go obsolete” argument outweighs the value of the “planning is good” argument.


In my own experience — as an entrepreneur and now as a teacher — I’ve come to three conclusions:
  • Every firm needs a business plan — but only selectively as time, information and needs allow. There is a huge benefit to some parts of the planning, but the specific needs will vary both by company and (as in the JBV 2010 study) the company’s age.
  • Business plans must have numbers, even though they are GIGO. A back of the envelope calculation allows the entrepreneur to identify assumptions, risks, and at least an order-of-magnitude sanity check of even the simplest plan.
  • Opportunity costs are relatively low for business students to write at least a simple business plan. The undergrad (or MBA) core covers all the basic skills, and thus a very rough business plan can be done by a competent business student in less than a month. (For example, we’ve had very good luck sending business students to help students from the award-winning SJSU industrial design program.)
These are not scientific findings, but these are the advice I’d give an entrepreneur or student today.

So if a nascent entrepreneur asks: “Should I write a business plan?” my answer is simple: “Yes, but…”


Jan Brinckmann, Dietmar Grichnik and Diana Kapsa, “Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms,” Journal of Business Venturing, Volume 25, Issue 1, January 2010, Pages 24-40. DOI: 10.1016/j.jbusvent.2008.10.007

Thursday, March 4, 2010

Prosaic tech startups

Commoditization — or at least the business strategies of companies in mature industries — has become the norm for many tech companies. Wednesday morning, the Merc quoted Yahoo CEO Carol Bartz as accepting Yahoo’s shift away from innovation:
On the valley's perception that Yahoo is no longer a cutting-edge engineering company:
"We did lose that. . . . The comparison we get a lot, for instance, is Google. They've got a $4 billion engineering budget, and we've got a $1 billion engineering budget. We're not going to play with phones and broadband; we've got to play in our own space."
This is something that is increasingly central as I teach technology strategy to Silicon Valley engineers. Last semester, Exhibit A was the transformation of HP from innovation leader to the Fiorina-Hurd penny pinching era.

With my MBA students tonight, it was a much smaller story, that of JibJab the online greeting card company.

Two years ago, JibJab parlayed its clever political satire and ability to milk PR on the Tonight Show to create a viral hit during the Xmas 2007 season.

Since then, I’ve used JibJab with students to illustrate business models and the freemium idea. It’s a simple company to understand, unlike enterprise software, B2C/B2B social networking plays, and other more complex stories.

Today, JibJab has acquired many traits of a company in a mature industry, starting with the fad nature of its original business. The bouncing heads were novel then but now are old hat. (It also once claimed a pending patent would protect it from rivals, but now has non-exclusive rights to a third party patent.)

The company faces the challenges of any other entertainment studio of producing compelling original content on an ongoing basis. And if it’s not differentiated, its goal may be to create loyalty to the brand and the service to keep the customers it’s already won.

None of these are bad things. But it’s yet another example that success for many tech companies is less about innovation, and more about sales/marketing (ads, PR, distribution) as well as the ongoing challenge of execution.