Um, About That Business Plan

June / July 2009 By: Greg Fowler Volume 7 Number 3

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Entrepeneurs very often spends weeks cobbling together a business plan that's intended to not only knock the socks off venture capitalists but also cause them to open their purse in support of the fledgling companies. But it turns out, at least according to new research from the University of Maryland's Robert H. Smith School of Business, that a business plan's worth as a fund-raising tool is precisely zero.

Instead, entrepreneurs should be perfecting their business, not spending hours refining how their plan looks on paper, say David Kirsch, associate professor of management and entrepreneurship.

"Spending time and energy tweaking your business plan is a waste of resources. It's a limited-use document that will in no way substitute for the hard work of actually building a business. You're better off investing in your idea, your social network, finding potential investors, potential customers—€”the intangibles around your business that are going to make it more likely you succeed. Invest your time in any other business-building activity but working on your business plan."

Well, now. That bit of research may come as a rude awakening to experts who have long touted the importance of business plans to investors. It's supposed to be a kind of door-opener that will arrest the investor in his tracks, oblige him to read—€”or at least skim—€”it and reach a preliminary decision. But that's not what the research discovered.

Kirsch and co-authors Brent Goldfarb, assistant professor of management and entrepreneurship, and doctoral student Azi Gera, studied the business plans of more than 700 dotcom companies from the late1990s to early 2000s boom era. Kirsch maintains records from a broad sample of dotcoms in his business plan archive, a historical research and preservation project supported by the Library of Congress' National Digital Information Infrastructure Preservation Program.
The researchers compared objective characteristics of each business plan—€”including the contents, team makeup and business model—€”and whether the plan received venture capital funding. Their research, Form or Substance? The Role of Business Plans in Venture Capital Decision Making, appears in the May 2009 issue of Strategic Management Journal.

The authors found that the content of the business plans does not predict which businesses get funded. They don't suggest companies should totally forgo a business plan. They say the document may be useful for organizing thoughts and details of a venture, but they found no evidence that either the content or presentation of the plan influences venture capital funding decisions.

So why do venture capitalists even want business plans if they don't use them to make funding decisions?

"I think VCs like the plans because they skim them to see what people are doing —€”to get a sense of what entrepreneurial activity is happening," Goldfarb said. But an interested VC will learn the details of a business whether it is in the plan or not.

In other words, VCs encourage you to put in the long hours in developing your plan so that they skim it. Just don't expect it to be much of a benefit when it comes to securing an investment.