Are Business Plans Worth It Anymore?
February 5, 2010
A couple months ago this was a heated discussion, each side clamoring that they were correct. The established position was still claiming that it was still necessary - that planning 3 to 5 years, or even further would allow you insight into what will happen down the road. On the flip-side of the coin, the new crowd was claiming that planning so far ahead could not be done… that technology is developing so quickly you cannot predict where your company will be so far in advance.
Before I go any further, I want to clarify what I mean by business plan. I believe Mark Suster said it much better than I ever could in this post:
“So, definition: when I talk about a business plan I’m not talking about a 40-page Word document outlining your market approach. That died with waterfall software development. I’m not even talking about your 12-page Powerpoint presentation that you need to raise venture capital or to talk with potential biz dev partners.
I’m talking about your financial spreadsheet. I will quote a prominent, well-known entrepreneur whom I like and respect and who told me when he was raising money, “I don’t know how much I’m going to charge for my product so why should I create an artificial spreadsheet?”
Here’s why. Your financial model tells a story. Let’s take your revenue line. It should talk about how many customers you think you will acquire and how much you’ll charge for your product. If you can’t estimate the former then I would suggest you haven’t done your homework before building the product. Do you really want to spent $100k building a product to discover through Customer Development that the market is too small?”
Am I saying do not do any sort of planning? Of course not! Intelligent planning with core metrics, and smart assumptions are very healthy for your business.
“See I don’t care if your projections prove wrong over time. I care about your assumptions going in. I care about the thought that you’ve given to the customer problem. I care about how much you’ve thought about market share, competitors, adoption rates, etc.
My suggestion is that you do a detailed MONTHLY plan for the first 24 months and then an annual plan for what we call the “out years,” 3,4 and 5. Why do VC’s care about these years? Good ones don’t care about the granular details in a startup but they do care about how big the market is, what share you’ll get and what assumptions you make about pricing over time and other market factors. VCs care that you’ve thought about these issues.”
Mark goes on to describe some additional metrics that are important, and if you want to check out jump to his post here.
I will end on this last quote, as I completely agree:
“Each quarter you should review your model. What assumptions proved wrong in the last quarter. How does that change your assumptions going forward? Too aggressive about the rate of customer adoption? Better to model that now. You might then slow down your burn rate or raise more money. Your funnel wasn’t wide enough? Do you need to rethink referral deals or do you need to improve your conversation rates to hit the same revenue numbers. Or do you need to raise prices? Or lower revenue assumptions.”
Do not put your business on autopilot, constantly re-evaluate and retune to improve your performance. Happy starting, and keep up the good work!
What are important metrics to you, what do you keep track of and maybe what metrics could you be better at keeping tab on?
- Jeffrey Vocell
