A long time ago I worked at the Small Business Development Center at Florida State University (it’s long since been closed). Sometimes it was a harrowing experience for me because I’d never owned or managed a business before and I was supposed to provide guidance and advice to business owners. The only problem was, I was totally clueless and there was no one else in center that could help me; I was all alone. (One really cool thing did happen to me while I was at the Center, I got to meet Jack Sams, the guy who headed up the team from IBM that negotiated the DOS deal with Microsoft. That’s a story for another time.)
Fortunately for me, most of our customers where people who were just as clueless as I was about starting a business. With those people things were usually fairly easy; just listen to their story, nod in approval several times and provide information about all of the business licenses and other stuff they’d have to do before they were “officially” in business. And…don’t forget the business plan, you have to have one of those. That was the party line and I knew it well and I knew you had to have one and it needed to be detailed. I even had the Ernst & Young business plan outline; if you could complete all of the sections in that business plan, you’d surely have one kick-ass business.
Unfortunately for me, one day somebody challenged me about the value of the business plan. What made it even worse; she challenged me in front of a group of startup hopefuls at one of the Center’s small business seminars. Of course I repeated the part line, “business plans are a must.” To be honest, for most of the people I worked with, the business plan was a very good thing; if they weren’t willing to put some effort into planning, then they probably weren’t suited to running a business. Regardless, the woman’s questions about the value of the business plans haunted me for a long time; it seemed to me that she made some valid points about the usefulness of the business plan.
That brings me to the present; it seems like a lot of people “in the know” are starting to poo poo the business plan when it comes to Web startups (notice that I’m limiting this discussion to Web startups). I think there’s still a lot of support for good old fashioned business plans, but it seems to be waning. The reason that seems to be given most of the time is that the plan is “out of date” as soon as it’s complete and therefore it is simply a time consuming exercise in futility. Most of the advice I’ve read says to ditch the plan in favor of a PowerPoint (or other tool) presentation and a prototype (preferably a working prototype).
I think the “out of date” argument against creating a business plan is valid, but I think there’s more to it than that. I think the “no business plan” trend is really due to the falling cost of creating a Web business. In terms of time, I think it’s often possible to create a working Web site in less time than it takes to create the “old fashioned” thorough business plan. In other words, it’s more costly to do in-depth planning than it is to build something and test it in the real world. What could be better than real customer feedback? The difference between the cost of completing an in-depth (notice, I said “in depth”) business plan and the cost of creating the actual Web product/service is what I’ve called the “planning premium.”
I think the primary issue is that the business plan sucks one of the most critical resources out of a startup: time. If the plan takes more time to complete than is required to create the actual product/service, then it’s not terribly smart to pursue the plan. I think some planning is necessary; you’d probably want to know if there are competitors and you should probably have a somewhat educated guess about the size of the market, but in-depth analysis prior to product/service creation may no longer be necessary. The rule of thumb should probably be: Do enough planning, but it should be in proper proportion to the Web product/service being created.
Lastly, what does the reduced cost of doing a startup mean for funding? Money is always an issue because people have to support themselves (and maybe even a family) while working on their startup, but it seems like most of the startups that need large sums of money, don’t need the money to create a service, they need it to scale the service (think Medium). However, there are two things that come along with funding that I think are usually overlooked: mentoring and connections. That makes me wonder if organizations like TechStars and YCombinator are the VCs of the future for Web companies. Some money is necessary, but mentoring is like gold. And, which is the scarce resource? I don't think it's money.
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