While most of us do business every day, we barely write a plan for that. But when it comes to starting a business all of a sudden people start asking for a business plan. While this might seem odd at first, there is good reason behind all this.
A plan is not just for some unknown investor–it is for you and your team! I am a great fan of focus and commitment. In order to survive the ups and downs in startups you have to fit a certain profile. However, knowing where your partners are saying they are and handing in a written document stating this are two separate things. Manifesting this commitment in written form has usually a deep impact on people and I am sure that if you haven’t done so already, you will see what conversations you will spur doing so.
A plan is about a vision you should have and be able to communicate. In seed and early stages, a business plan is barely ever going to predict what’s going to happen in the long run. Even short to medium term is hard when your product doesn’t exist yet or is still a prototype. But aside from getting everyone on the same page (literally), a business plan is also a good indicator of how well your idea is crafted, if you can see beyond the initial product, having a vision that is greater than just developing something and hoping for people to come.
A business plan is the acid test of a relationship. Some businesses don’t qualify as an investment because they are service based instead of product based (I will dedicate another post to this later). Seeing through your idea and understanding what you have in mind is exactly one thing you should be able to reveal concisely and focused. When you pull an investor on board, you need to be effective in your communication in order to work on what’s most important: the product. And trust me: I don’t enjoy sitting in a shareholders meeting for 4 hours (and yes, I did have that as well).
Planning involves some basic knowledge about business and shows how good you are aside from product-based development. In order to write a complete business plan, you should have some knowledge about the market (past, present, and future trends), competition, and financial planning. If you miss out on any one of this completely, it might indicate a lack you might not have identified. I don’t expect engineers to run sophisticated LBO-models but instead justify their financial needs as well as proving some sanity in the numbers. After all, business is about numbers.
About the validity of the plan in comparison to real life remains something for future to prove. We have barely seen a plan that was hit by the buck (most under- or overperformed tremendously). And I know some investors use business plans to make sure that they have something in writing that does not conflict with their investment limitations (e.g. geography, industry). However, I have also seen some companies go down because investors were tying their future tranches to certain milestones.
So, regard the document as a form to come to a mutual understanding for all parties. And make sure your investor knows where you are in your plan. Once we start being interested, we will monitor your business closely, checking it with your business plan. We have seen startups hitting milestone after milestone according to plan and hence gaining a lot of momentum and outrageous valuations.