Are Business Plans Useful in helping ventures Succeed ?
Business plans are multidimensional project plans and predictive models for an evolving venture which provides guidance on how the experiment will unfold. Creating accurate predictive models for business is similar to predicting one’s future based on planetary positions. The rapidly evolving variables in the market render the plan an obsolete predictive model. Conventional business plans are only useful to attract funding from banks or rookie investors. Seasoned Investors like Sequoia Capital, know the obsoleteness of these plans and seek a lean informative slide pack instead of a 30 page overloaded business plan.
In a business plan, one is trying to be a jack of all trades. It is practically impossible to understand the target market and their preferences till the firm starts interacting with the consumers. Interaction with the customer moves the plan from paper to reality, allowing new insights to the surface, leading to significant changes in product design, delivery method, positioning strategy and even pricing. Business captures insights on the go, altering the course of the venture every day. The learning cycle soon outpaces the planning cycle rendering long-term plans useless. On this basis, the business plans become obsolete minutes after they are finalized. Unless one is a serial entrepreneur or is pre-dispositioned to luck in the venture, the initial predictive models are always likely to be way off the mark. Every serial entrepreneur knows that their assumptions are possible, way off the mark and will radically alter course every day. It is better to use a lean approach in creating venture plans and modify the plans as one progresses in the venture.
As I will discuss in a series of related posts on this blog, except for rare venture ideas that took off successfully right at the launch, most of the investment ideas go through multiple cycles of iteration before they achieve the elusive and magical “product-market fit.” Most ventures will reach the business graveyard during one of the interim cycles.
Entrepreneurs and Intuitive Sense of Venture Concepts
Most prolific entrepreneurs never wrote a business plan or a marketing plan for their ventures. Steve Jobs has famously said that ” Apple does not do Market Research.” It is not that Apple does not any do kind of market research. Of course, they do, they just don’t do the conventional market research.Entrepreneurs should have a good intuitive sense of their market which can be developed into a day to day emergent strategy. This intuitive sense or inner knowing comes from cooking and boiling in the domain (conscious research), being observant of the interstitial spaces in the market (opportunity recognition) and should have a perfect timing (developed intuitive spectrum), which are all common denominators of venture success. Carrying out market research to validate one’s intuitive sense of the market is one thing, doing market research to develop an inner knowing of the potential in a market is akin to placing the cart before the horse.
Involvement of third party B-Plan Writers increases chance of Failure
Writing detailed business plan oneself is already an exercise in futility, but hiring someone else to write one’s business plan is like asking someone else to do the exercise for you. Most of the B-Plan writers/software use outdated third party data to collate market research and extensively use the “Cut and Paste” features of document processors. I know many B-Plan writers who are amused at the gullibility of their clients. It may not be a bad idea to ask a B-Plan writer to structure your thoughts in a business plan format. Startup founders should think of business plan writers as document writers versus venture planners. If the venture planners cannot connect with your venture concept, their inputs can increase distance from founder’s intutitive sense leading to failure. [highlight]As the distance from the entrepreneur’s intuitive sense increases because of third party involvements, the likelihood of significant error increases in the venture success.[/highlight]
As the distance from the entrepreneur’s intuitive sense increases because of third party involvements, the likelihood of significant error increases in the venture success
Business is a Series of Failure Touchpoints
Businesses are inherently prone to be “dead on arrival”. As per Kauffman Institute’s research, 75% of the startups fail over a period of 5-7 years. Business is nothing but a journey of failures which teach the entrepreneurs excellent life lessons. Entrepreneurs are like tiny tots who have an idea of a painting or a dish and want to experience it in reality. As I have found out in my research, the most difficult thing in life is to take an “intuitive idea” to “reality.” An entrepreneurs dream of an easy journey in bringing their ethereal hunches to a business concept is always short lived. Entrepreneurship is hard, very hard in some cases and is the best life lesson one can learn on the job. A lesson that the world does not move according to our whims and fancies. A lesson that our irrational exuberance may lead us to catastrophic disappointment. A lesson that the world is a very complicated place made up of billions of evolving possibilities, and we need to learn emergent strategy versus classical planning, if we want to win in any area of life.
Assuming that an entrepreneur has taken their “intuitive sense of the market” and accurately converted it into a “product-market” proposition, along comes the challenge to transcend i.e. “successful execution.” If business plans don’t allow one to create a useful predictive model for the venture, it is even less helpful in business execution. Mike Tyson had famously said that “Everyone has a plan till they get punched in the face” and running a successful venture is like getting punched in face every day. The context around business changes so fast that one has to remain always on their toes to navigate the venture. And here is when”Know That” versus “Know How” becomes so important.
“Know That” Vs “Know How.”
Running a successful business requires “Know How” which is is about Intuitive Expertise, i.e., unconscious competence in successfully running a business. Unconscious Competence is acquired after being in the trenches developing muscle memory with a lot of deliberate practice. Unconscious Competence is the sole reason why serial entrepreneurs do marginally better in ventures than rookies. It is similar to learning to drive. If one has learnt driving well during initial training and applied that learning across multiple contexts i.e. busy traffic zones, highways, playground and school zones, different countries, etc., one develops as a good/great driver in the subsequent years with practice. There are similarities between driving skills and business management. Both require a foundational theoretical learning but, intuitive expertise comes from applying that knowledge to multiple contexts and converting understanding to skill.
Business Plans in the Entrepreneurs Head
Great business plans are in an entrepreneurs head where they are obsessed about every detail. Now, ask a business owner about their business plan and they could hardly remember the sections of the business plan. The 5000$ plan is gathering dust somewhere while the business plan writer is laughing away to the bank. Instead, if entrepreneurs learn some bit of hands-on financial modeling, it will help them better in understanding how the business is likely to perform based on initial assumptions. In training novice entrepreneurs, we always insist that they take a basic course in modeling their financial projections in excel and then project a worse case, probable case, best case scenario. It is enlightening for the startup founders to learn soon, that the venture has a mind of its own and majority of the time, is at significant financial variance basis their original assumptions.
In summation, business planning is different from business plans and one will be better served if one does lean business planning combining it with financial modeling, rapidly changing strategy as the venture evolves.