The traditional business plan can have many pitfalls especially for new entrepreneurs.
The historical approach for an entrepreneur looking to start a business has been to first generate an idea, then do some market research, then write a business plan, then attempt to raise some money, then build a product or service and then try to sell what was built. Their business plan will often be structured like this:
1. Cover sheet
2. Table of contents
3. Executive summary
4. Problem and solution overview
5. Market and competitive analysis
6. Product / technology
7. Business model and go to market strategy
8. Management team
9. Current status and accomplishments to date
10. Financial projection / use of funds
The traditional business plan, however, has many pitfalls especially for new entrepreneurs since so little is known about their potential idea, the market opportunity, and their specific customer pains. Entrepreneurs will often write their business plan in a vacuum, full of invalidated hypotheses, hockey-stick financial projections and unrealistically short timelines. What’s worse is that investors and bankers, the audience for business plans, seldom read them—especially if it’s for something that has yet to generate any substantive revenues. That creates a huge opportunity cost for the entrepreneur as their time could have been better spent on performing customer development and working to validate key aspects of their business model.
The thinking today is that the business plan is dead. Much of the current literature around the Business Model Canvas approach and the Lean Startup methodology dismisses the business plan outright (since a plan with so many unknowns is not a very good plan). The Lean Startup model emphasizes taking action over planning and de-emphasizes the role of the business plan for early stage startups.
However, sometimes an entrepreneur must develop a plan for a very early stage investor or as part of a competition. In those cases, I still think there’s a place for a business planning document, especially as many of the standard audiences for them (e.g., investors, bankers, etc.) are still looking for one. Often too, the startup team may want to have a guiding document that captures to-date efforts and short-term plans.
So what should an entrepreneur do if tasked with creating a business plan? In working with student entrepreneurs at Drexel University’s Charles D. Close School of Entrepreneurship, I developed an approach that combines the lean startup, action-based approach to starting up with the structure of a business plan document. The emphasis for this document is on providing details to the reader about the idea, the value proposition, the customer development plan and the short-term key resource funding strategy.
Here’s what it looks like with some additional details for selected sections:
- Cover sheet with the startup’s value proposition statement
- Target customer segment(s) with details on validation efforts to date
- Solution statement with details on Minimum Viable Product development/plans
- Business model canvas (using Alex Osterwalder’s format with descriptions of hypotheses validation efforts and an emphasis on what is yet to be learned)
- Team details including their roles in the startup’s customer development activities
- Planned business model testing process and overall approach to validation efforts
- Market size and future customer creation concepts (going on some base assumptions, I want to hear how they would scale the business)
- Company building scenarios (more of a vision of future culture and processes)
- Key resource funding strategy (what’s needed in terms of key resources and money to get to the next critical validated stage of the startup)
Hopefully this hybrid can serve the purpose of combining action with planning. It should provide entrepreneurs with a viable short-term plan that provides sufficient insights into the startup while serving as a document that is actionable and actually helps them accomplish the activities that matter most to an early stage startup.