So this week we get it again: another business publication with a poorly conceived rehash of a misguided academic study saying venture capitalists don’t read business plans.
Why poorly conceived? Why misguided? And why a molehill?
The molehill reference is to the old phrase about making a mountain out of a molehill. In this case it’s making a molehill out of something much smaller than that.
The journalists like that study because it seems like the conclusion is contrarian: It seems to deny what everybody assumes is true. Specifically, it seems to question the usefulness of an entrepreneur developing a business plan.
But the truth is that the business plans that entrepreneurs should write, review and revise frequently were never really there just for VCs to read or not read. They were there to figure out what’s supposed to happen, when and why, how much it costs and who’s responsible.
The business plan is for you to plan your business. Whether somebody else reads it or not, you need to know what you’re talking about; and if you don’t have a plan, it shows.
So it’s a ruse, really: To say that VCs don’t read business plans is like saying audiences don’t read screenplays. The VCs get the results. The plan is for the entrepreneur.
Oh, and by the way, that study they’re citing lately, done at the University of Maryland–it was done almost 10 years ago at the height of the dot-com boom, when it wasn’t clear that VCs were reading anything, let alone business plans.
And of the million or so new businesses that start up every year, only about 5,000 of them are financed by VCs.
Subscribe via RSS
{ 6 comments… read them below or add one }
Great post! I’ve been arguing this for years. The academics who write and research business plans don’t understand them. My link above goes to a similar article that I once wrote debunking the same notion.
If you are a professor or a researcher and you’re reading this, then PLEASE do a study on the correlation between the existence of a business plan and whether the company becomes profitable or stays in business for an extended number of years.
By the way, “To say that VCs don’t read business plans is like saying audiences don’t read screenplays.” Brilliant.
Interesting concept Tim but a VC should read that business plan regardless. Making an investment on nothing more than asymmetric information and a gut feeling sounds a like a recipe for disaster. Without a structure to assist in the investment decision process, such as a business plan, how will the VC apply a rubric to evaluate the merit of the applicants proposal in an objective manner?
Actually, I know many people who read the screenplays as well.
One more thing:
Ken Pirok Says
“If you are a professor or a researcher and you’re reading this, then PLEASE do a study on the correlation between the existence of a business plan and whether the company becomes profitable or stays in business for an extended number of years.”
Interesting concept, but stick to your day job. In statistics, correlation does not imply causation. Ever. It may yield an interesting statistic, which may implore further investigation into your question with an appropriately designed study and model for evaluation.
Josh, I totally agree with you about reading plans. And I put my time and effort and even my money where my mouth is, I read lots of business plans myself, and wouldn’t do an investment without reading the plan.
Re Ken’s study, the core concept there ought to be planning process, not just “a business plan.” We’re already into sloppy thinking when we talk about the plan as a document, a noun, a single thing, rather than a process that involves regular review and managing a plan as assumptions change. And they will change.
We have a language problem in this area. Too many people mean “a formal comprehensive document describing all phases of the business to outsiders” when they say “business plan.” In many cases the formal document isn’t necessary, but the plan, and more important, the planning, is.
Tim
The trick is to strike a balance between planning and action, and to focus on: 1) doing the thinking behind the plan and 2) concentrating on a powerpoint pitch deck not a text based plan. Here’s an argument for why to forget the text-based plan initially: http://tinyurl.com/c9nprd And here’s a guide to what to include in your powerpoint pitch: http://tinyurl.com/cnpzqv Please read them and let me know your thoughts. Thanks.
-David
@David I did follow your links and, since you asked me thoughts …
And thanks for sharing. I appreciate the addition.
Josh K, Are you serious with this comment?: “Interesting concept, but stick to your day job. In statistics, correlation does not imply causation. Ever. It may yield an interesting statistic, which may implore further investigation into your question with an appropriately designed study and model for evaluation.”
If I were you, I would stick to making constructive comments, instead of creating arguments out of semantics and trying to seem smart. Believe me, I understand correlation versus causation completely. I’ll send you my credentials if you ask.
Here’s what you need to understand. In the real world, researchers often look at correlations first and foremost, because they’re easier to find.
The challenge for smart professors becomes constructing research that shows causation. But, this too can be done, and sometimes it is done.
So, the point is to research how or if the business planning process (I like how Tim puts it.) relates to financial success. Period.
Do you get it?