To business plan or not to business plan

Does your company really need a business plan?

I have been researching the question of whether companies really need business plans for over a decade now, and have always found conflicting information on one issue. But I’m pretty confident at this point of my answer.
Before I tell you, I need to disclose that I certainly have a bias. My company develops business plans for entrepreneurs and emerging companies. In fact, we’ve developed business plans for over 2,000 business over the past 10 years. So taking away business plans takes away a part of my livelihood. But, I think you’ll agree with my points as you read on.

To begin, there is absolutely no question that you need a business plan if you are seeking virtually any sort of significant funding besides venture capital. All banks require a business plan. If you want a grant, you won’t be considered without a plan. And virtually all angel investors ask for your business plan as their first diligence item.

The key area of contention is venture capitalists. While VCs in general request business plans, there are several who have gone on record as stating that a slide presentation is enough for them. However, what the entrepreneur who hears this needs to keep in mind is that these are typically the VCs that fund “been there, done that entrepreneurs.”

These are the entrepreneurs who have grown numerous companies to massive scale before, and have amazing cash flow visualization skills. That is, they can forecast the business in their minds; they understand the key drivers of success, the obstacles they may encounter and the related costs and revenues. Armed with this unique insight and track record, their business plan would be a mere formality that is not required by potential investors. In fact, these are typically the entrepreneurs that the VCs compete to fund.

For the rest of us, the business plan serves two equally critical functions.

The first function is as a marketing document. The business plan helps the entrepreneur to succinctly communicate their company’s vision and offerings. Without a succinct vision, no investor will invest, no partner will partner, no executive will join, and no customer will buy.

The second function is to confirm the feasibility of the venture. The process of conducting market, customer and competitor research and developing detailed marketing, operating and financial plans forces the entrepreneur to look at all aspects of their business.

This process includes going through an analysis of Porter’s 5 Forces, which is a time-tested framework to expertly assess your market and develop a winning business strategy.

Vator’s Bambi Francisco recently conducted a video interview of serial entrepreneur and Zynga founder Mark Pincus. Pincus makes the great point that “picking a good macro” is absolutely critical to your success (click here to watch the video). Without conducting the feasibility assessment as part of the business plan development process, it is impossible to know whether your macro is good or bad.

So, in summary, even if a particular venture capital firm doesn’t require you to develop a formal business plan, you as the entrepreneur should develop it anyway. The marketing and strategic benefits more than justify the cost.

(Note: this post was republished to feature on VatorNews homepage)