Must I do a business plan?

I was surfing the net for views about business planning in the current financial crisis. I came across a report in the New York Times.

Here is a summary:

Go ahead and write that 50-page business plan about your fledgling venture if it helps you to focus. Just do not bother showing it to venture capitalists, because it will do nothing to improve your chances of getting financing.
That is the surprising conclusion of a new study by researchers at the University of Maryland’s business school.
Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions “under conditions of high uncertainty,” venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business.
“In general, business plans don’t matter,” said Brent Goldfarb, an associate professor of management and entrepreneurship at the Robert H Smith School of Business, who wrote the study with David A Kirsch, also an associate professor at the school, and Azi Gera, a doctoral student. “Nobody is going to read them.”

I’d really like to know more about the questions asked, the sample and size of this study.

The investors I talk to certainly don’t believe everything that is in business plans presented to them. And every investor I know says that they have never seen a business proceed according to plan. However, they still assert that going the process of planning is valuable for the entrepreneur.

Now, I have seen some pretty dismal plans – no market research, no marketing strategy, numbers plucked out of the air, ‘Google did it so therefore we can do it’ type of assertions. Plainly, these plans are not worth the paper they are written on.

I have not seen a start-up or early stage company that hasn’t benefited from gathering real market information. The basis for any planning must lie in a solid understanding of market conditions, customers, the competitors and trends.

Here is what some investors had to say in the report:

Jeff Fagnan, general partner of Atlas Venture in Waltham, Massachusetts, which provides seed money for young businesses, says he looks for “market validation,” hard evidence that the entrepreneur has actually sold his product or at least lined up enthusiastic potential customers. Mr Fagnan says that, rather than reading a report, he wants to hear the evidence in PowerPoint slides, whiteboard presentations or “somebody just talking.”

And this is certainly happening in Australia. If you don’t have sales or rock solid promises of orders then your chances of raising money in this market are just about nil.

Writing a business plan is not pointless – far from it. Entrepreneurs say it enables them to think through the logistics, possibilities and pitfalls of their operations and to clarify their goals.

So the debate about business planning continues. For me, I think you need to get the best possible market information and convert that into some financial projections. You need to understand where your risks are and identify any gaps in your current team/business. The best vehicle to do this is a business plan. But one based on market information.

Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.

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