My 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 publication that first brought my attention to the University of Maryland’s professors’ work) were quite angry. I thought it would be interesting to look at some of those comments and respond from a young VC’s perspective.
Here was one of the comments on PEhub:
What this Maryland study proves is that VCs no longer read or value business plans. Hmm. Wonder if that might explain why VCs have been failing of late in producing $1 billion homeruns, especially by building companies that have the wherewithal to achieve freestanding, sustaining value via IPO exit instead of lesser concerns aimed at quick flip exits by and large to previous portfolio companies… Maybe VCs ought to start demanding and reading business plans once again.
In the right context I agree with the first sentence. VCs do not value the formal, 50 page business plan as a means of initially screening investment opportunities. However, I’m not sure that the second point is a logical extension out of the first. It is clearly true that there has been a major dearth of $1+ billion exits of venture funded companies recently, but I do not believe that it is due to a failure to read (or write) business plans. In the near near term there have clearly been major disasters in the financial marketplace that have made IPOs not possible and have driven down the value of exits by M&A. Beyond that there are probably other structural issues in the venture capital marketplace causing fewer IPOs. One clear cause is that many web-based businesses can be created very capital efficiently, and thus it may make sense to more moderately fund a business to a smaller, non-IPO exit value. There may also be a (probably rational) lack of demand by major mutual funds for holding stock in younger technology companies at obnoxious valuations. But I do not think the fact that VCs don’t like reading huge business plans prior to taking an initial meeting is relevant to the issues facing the venture industry.
Another comment from PEhub
There are many poseurs that say things like, don’t make your plan 50 pages, no one will read it. If you are asking for six figures or more from an individual and they won’t even take the time to read a 50 page plan then ask them for more, it shows an ignorance that deserves to be exploited.
Imagine if you had to carefully read a 50 page plan prior to deciding if you were going to take a meeting with someone you had never met before. Now imagine that you get 5 to 20 of these plans a day. This is simply not efficient. Well-known investor are deluged with ideas looking for funding. If you want to succeed in getting a meeting with a potential investor then you need to get your point across quickly and succinctly. A 50 page plan is the total opposite of this; too much detail for an initial interaction with an VC.
I would like to make it clear: you usually do need a slide deck (maybe some people would call this a plan) to get a meeting with a VC. It’s a bit of a formality to be sure, but it is also a signaling factor that you as an entrepreneur aren’t ridiculously naive. The professors talk about this as being similar to the formality of exchanging business cards. I’m still trying to think of an analogy that fits better but haven’t yet come up with one. A VC wants to make sure that a meeting with an entrepreneur doesn’t waste both of their time, so that VC needs to know that the market is one that the VC is interested in and that the entrepreneur is … well, have you seen the Ali G skit where Ali G pitches venture capitalists on the ice cream glove? I’d estimate at least 1/3 of the plans that come into my fund without a warm introduction are, honest to goodness, a bit like that. Note that the issue captured by Ali G is different than a poor market fit - for example I recently got a pitch for funding a movie. We don’t do movie financing, so the business plan was very helpful in quickly screening out the opportunity. But a small slide deck would have been just as effective in that example as well, so the business plan really didn’t serve the entrepreneur or me any real purpose.
Comment:
I think this study shows why the situation of VC looks bad. Networking and social interactions are the determinant principles of VC funding. And the result… Poor returns…
I haven’t been in venture capital long enough to know for sure, but I’m still willing to bet that relationships and introductions were very important 10/15/20 years ago when VC returns were super strong. VCs fund people. People who hopefully execute plans, but still, people.
When I get interested in an idea I spend a lot of time working closely with the entrepreneurs to flesh out the business plan. I am not sure if I have seen a case where a founder walks into the fund and raises capital without the venture team spending a huge amount of effort working through/helping build and suggesting changes/modifications to the business plan. Thus, the initial plan submitted to the VC is less important of a factor in forecasting how that company will do post funding than the final plan agreed to by the VCs and entrepreneur at the end of the fund raising process.
Also, I think that is important to note that much of the business planning process is captured in the financial model. Customer metrics and costs to create technology are now capture-able in Excel much more easily than a word processor. I blogged about this a while ago in “Financial models - not as attractive as fashion models, but still useful.”
Oh, an one more thing: ENET, a Boston area tech entrepreneur networking group, is having a session on business plans. “Investor Guidance on Business Plans and Presentations” is on May 5, with some good speakers. Very experienced seed investors and one VC will be discussing the materials you should have when approaching an investor.
