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Is a Business Plan Necessary?
/ January 22, 2007 11:24 am

Before you dedicate your life to crafting a business plan the length of a book, read these two paragraphs from the 1/9/07 edition of the Wall Street Journal in an article called "Enterprise: Do Start-ups Really Need Formal Business Plans".

A study recently released by Babson College analyzed 116 businesses started by alumni who graduated between 1985 and 2003. Comparing success measures such as annual revenue, employee numbers and net income, the study found no statistical difference in success between those businesses started with formal written plans and those without them…

“What we really don’t want to do is literally spend a year or more essentially writing a business plan without knowing we have actual customers,” says William Bygrave, an entrepreneurship professor at Babson College in Wellesley, Mass., who says he generally advocates “just do it.” Entrepreneurs must be nimble, and will be more apt to stick with a flawed concept they spent months drafting, he adds.

I think that Prof. Musgrave’s study is so right. Here is the entire study if you’d like to read it. This is the plan’s abstract:

This study examined whether writing a business plan before launching a new venture affects the subsequent performance of the venture. The data set comprised new ventures started by Babson College alums who graduated between 1985 and 2003. The analysis revealed that there was no difference between the performance of new businesses launched with or without written business plans. The findings suggest that unless a would-be entrepreneur needs to raise substantial startup capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan before opening a new business.

The phrase “unless a would-be entrepreneur needs to raise substantial startup capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan” merits discussion. Most venture capitalists require a business plan as part of due diligence. This doesn’t mean they spend more than ten minutes reading the plan, and it certainly doesn’t mean that they believe it. :-) A great plan won’t make a lousy idea successful, and a lousy plan won’t necessarily stop a great idea.

Most of the plans that we see at Garage are too long and too detailed—to the point of reducing credibility. Here is my prior blog posting about business plans that you might find helpful. The gist of it is:

*Perfect your pitch, then write your plan.
*Use the business-plan exercise as a way to get your team on the same page.
*Keep it short: ten to twenty pages.
*Spend no more than two weeks writing it.
*Don’t get obsessed with with details in your financial forecast because it should be one page long.

However, don’t draw the wrong conclusion from this study: “Analysis, planning, vision, and communication are unnecessary.” This isn’t true. What is true is that a business plan should not take on a life of its own. It is a tool—one of many that may help you get funded (or, more accurately, hinder you from getting funded if you don’t have one) and may help you get your team working as a team. But it is not an end in itself.

Note: This piece was originally published on Guy’s blog How to Change the World and is posted on DMW with the author's permission. Guy’s bio can be viewed here.


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12 Comments

  • Hi,
    It is not necessary if you have a solid idea then you will succeed. There are so many things you have to look when you are starting any new venture, just having an good idea is not enough, you need to have knowledge and strategies and proper strategy execution is far important then just having a strategy under your belt.

    So with business plan, you need some strategies and perfect executions.

    Business Plan Writers

  • Hi,
    It is not necessary if you have a solid idea then you will succeed. There are so many things you have to look when you are starting any new venture, just having an good idea is not enough, you need to have knowledge and strategies and proper strategy execution is far important then just having a strategy under your belt.

    So with business plan, you need some strategies and perfect executions.

    Business Plan Writers

  • For running a successful business, it is necessary to write a solid business plan.

    Business Plan Service

  • Great ideas, thank you so much for sharing.

  • A business plan will mitigate some of the risk that goes along with launching a new venture or buying an existing business. I have often seen struggling businesses purchased by entrepreneurs who have a clear direction and action plan on where they want to take the business. In many cases, this can be the difference between success and failure.

  • Investing has changed in the last 5 years. It has not changed in terms of process – fundamental analysis is still the same it was 5, 10, 15, 50 years ago. What has changed is the access to information. The Web has provided investors with a whole new world of information that can be used when making investment decisions.

  • You definitely need a business plan when operating a business so you can arrange prices, costs, profit, and other things. Without one, your business won’t go too far.

  • A Business Plan is necessary in 95% of cases. Especially when you are entering a new industry.

  • The studies mentioned in this blog seem to be comparing ventures with or without a previously written formal business plan. The key word here is formal. Entrepreneurs having no formal business plan will probably have an informal one. Successful entrepreneurs must have a clear vision and an action plan. Whether this is formally written or not is not the point. The most important is to know where you are going and what you are trying to accomplish.

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  • A business plan is NOT a guarantee to get approved for a loan. As you and myself have experienced, it’s not going to be the first and most important thing banks will look for. They will first look at other factors — e.g. your credit history, your previous experience in the business, your collateral, your assets BEFORE they even look at the business plan . I know of several entrepreneurs who just forego writing the whole plan and just sent in an executive summary, and got approved for the loan.

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