I was recently pointed at an interesting study by several professors at University of Maryland’s Robert H. Smith School of Business. These professors’ study analyzes the impact of written business plans on a startup’s chance of successfully raising venture capital. Their conclusion (as summarized by PEhub): high quality written business plans do NOT increase the odds of raising venture capital.
The professors are correct.
Your written business plan is not the most important thing
Early in the venture funding process you, as a startup founder, have two simple goals:
- Get a meeting with the VC
- Convince the VC to begin diligence on your startup
That’s it.
Far more important than your written business plan is HOW you are introduced to the VC, because this gets you past the first point above. Your best bet is to have been a successful CEO who was previously backed by that VC (yeah, I realize this is probably not you, but think about how much easier it will be the second time!) Your next best bet is to be introduced to the VC by an entrepreneur with whom they’ve worked before. Or, try to find someone on a board of directors with them who will introduce you.
I’m not trying to trivialize this. I realize you do not likely have these connections. But they can be made. I see first-time entrepreneurs who have gained the confidence of very successful CEOs/founders all the time. First-time entrepreneurs who pretty much had no business getting the attention of these big time CEO-types! Many of them didn’t know these successful CEOs/had no connection to them prior to founding their startup, yet they have been able to convince these CEOs to act as advisers. People who are able to get these well-known entrepreneurs involved are also more likely to be the resourceful-type founders who create legitimate businesses.
Use a short investors’ presentation
After you get this introduction you will want an investor’s presentation. (Ok, so I maybe trivialized the introduction step a bit.) Your presentation should be short – long presentations do not get read by busy VCs. Sorry, but that is the truth. You will increase your luck with a shorter presentation vs. a 50 page business plan. I often point entrepreneurs to a template investors’ presentation on the Common Angel’s blog as a good starting template for their presentation. By all means write a great plan, one that will help you run and operate your business. Just don’t expect that same plan to get you funding.
Your final business plan may be different than the one you started with
I think the professors’ conclusions would be different if they had been able to look at the final presentation (and business plan behind it) given to the venture partnership just before funding was approved. My partners and I spend lot of time working with entrepreneurs prior to seeking approval from the fund’s partnership for an investment. Beyond the traditional due diligence work is time we put in to refine the business plan and the investors’ presentation seen by the funding approval group. We do this with both first time CEOs and entrepreneurs who have sold businesses for hundreds of millions. It is an important step, not only in planning for the business, but also in setting expectations on how we as a fund will work with the founders.
And, academically, I’d bet that these final plans are statistically significantly higher quality than the average plan submitted to VC funds.
April 13th, 2009 at 11:38 pm
This is a great post. I have mixed feelings about writing out a full business plan. I do agree with you that it probably does not have a huge influence as far as getting the attention of VCs is concerned, but I believe the mere exercise of going through the thought processes needed to write a plan is where the true value is.
All of the discovery found during the business plan process is what enables you to confidently approach VCs.
April 14th, 2009 at 11:17 am
I haven't written a full business plan since 2004. Total waste. Instead, we prepare well thought out presentations on all key areas. And of course, we have internal bottom up quarterly targets that we works towards. I actually had a VC once tell me he would not meet us until we sent him a full business plan to review. I passed on that opportunity.
April 14th, 2009 at 2:43 pm
Yes. The actual written plan is no longer a real part of the fund raising process, but the act of getting the team to put all the important ideas and strategies on paper can be quite valuable. I have seen a similar level of value created through the financial modeling process, as it shows where $ will be spent and what should, in theory, be produced. Estimates of costs to build different features, time required, how many customers will be sold with certain levels of marketing/sales spend… a lot of that can now come out of a financial planning process.
April 14th, 2009 at 4:21 pm
[...] , a social-news startup it bought for $75 million two years ago , with the help of some venture A written business plan does not get you venture capital – startable.com 04/13/2009 I was recently pointed at an interesting study by several professors [...]
April 15th, 2009 at 12:56 pm
I concur, this is a great post! Healy's insight about the difficulty of getting an introduction is great. If it were easy, everyone would have a prominent person to introduce them, and such an introduction would no longer distinguish between promising and less promising entrepreneurs. This is precisely the problem with business plans. They are easy to produce, everyone has them, and they no longer signal anything about the entrepreneur's potential. The smart entrepreneurs recognize this, and focus on the things that are difficult to produce (sales, customers, quality introductions).
April 15th, 2009 at 3:39 pm
[...] post on the 13th “A written business plan does not get you venture capital” seems to have waded into a world of controversy. Some of the comments left on PEhub (the [...]
August 29th, 2009 at 2:15 pm
[...] Venture capitalists don’t want to see your business plan | Startable – Healy Jones’ & Prasad Tha… http://www.startable.com/2009/04/13/written-business-plan-does-not-get-venture-capital – view page – cached I was recently pointed at an interesting study by several professors at University of Maryland’s Robert H. Smith School of Business. These professors’ study — From the page [...]