Part of this is response to Don Dodge’s opinion on the Microsoft BizSpark site that VCs don’t look at or need business plans.
I agree that, from a VC’s perspective, business plans are a waist of time; however, the process and building of a plan arms the entrepreneur with a disciplined view of their intended or current business, their projected revenues and expenditures, as well as their feature set as it competes with their present and future marketplace(s).
Too often, entrepreneurs fail as the result of not knowing the market well enough or not adequately sizing it, knowing the full cost of entry to the business. Without one, internet entrepreneurs have a great idea and perhaps some code – maybe even some users and/or revenue. With one, they have a stated direction, some level of introspection of their ability to deliver and and an analysis of risk.
Business plans can serve a VC well (even if they aren’t presented during the pitch): They save the VC time and money because they increase the entrepreneur’s ability to have the right pitch and more thoughtful answers. Ultimately, they increase the VC’s opportunity for a home run.
This is not to say that all ideas are good, just that the best ones are those most easily defended. A good defense takes preparation. This is not to say you’re going to present all you know or even have it available in your slide deck. The prepared startup should at least come away with a “Come see me when” statement or know better whether or not to pitch at all.
Also, more often than not, I’ve heard entrepreneurs come back with “they liked the idea but they wanted me to go in “x+1”” direction; where “x+1” changed from VC to VC. Having a plan helps them consider what “x+1” is before they get in the room. A plan and competitive analysis helps them avoid being in a gelatinous state or DOA. It also helps them know how much money they need and how much they’re already worth.
Lastly, a short story: A startup I provided services to this spring received $1M+ of private seed funding (repeat seed) from a knowledgeable VC. The VC didn’t need a plan either; yet, if the management team hadn’t gone through the business planning process, they would not have known they needed to make a change on their team or to adequately compete, found they needed to add new features and change their licensing structure or most importantly, found a previously untapped, measurable revenue stream opportunity.
Do you need startup advice or help with your plan?
(photo by ex.libris on flickr, creative commons)
