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Business plans? I've heard of them  

Dan Shapiro asks the question and also provides an answer:

... what to do when an investor requests that you conjure an obsolete 30-page document from the ether and send it to them that evening [?]

(...)

Whenever an investor asks you for your business plan, send them the same damn packet you send to everyone else. In our case, that was a 3-page “executive summary” and a dozen slides giving an overview of the business with some screenshots of the product (it was mobile, and 2006, so there wasn’t any easy way to send them a demo). Don’t apologize and don’t mention the business plan.

Sound advice in the tech startup context, but I'd like to dig a little further into it.

Business plans are outmoded, right?

Business plans are universally reviled among tech startups, both on the entrepreneur side and among investors. And that's fine. Most tech startups operate under conditions of extreme uncertainty, and large swathes of a standard business plan become utterly irrelevant in those conditions. Five year financial projections? You gotta be kidding. Even providing a high-level plan of what features will be built can be misleading. "We'll build what the users tell us they want through A/B testing their wallets" is a better answer for that section.

That said, as Dwight D Eisenhower (and no doubt many others) put it:

Plans are worthless, but planning is everything.

There is, of course, the romantic notion that a couple of hackers with a dream, a garage coffee shop, and a couple of old computers high-end macbook pros (this is the 2011 version of the dream) will just build, build, build, and out will pop a magical startup success. And it does happen sometimes, in very specific circumstances where the stars were aligned just right (I'm looking at you, Github).

But most of the time, those startups fall flat on their face. If all you do is build it, they won't come - 99% of the time at least.

So, what does "planning" mean in the context of a startup?

Context is everything

The answer, of course, depends on what type of startup you're building. Here are some examples of things that even a scrappy startup should think about, even if no concrete decisions are made:

  • Is there competition? What's the competition like? What will we do better? What will we do worse? Which features will we focus on? (basic competitive analysis)
  • Is there demand for this feature set? If we're building a B2B startup, can we get potential customers to show enthusiasm and even sign non-binding letters of intent before we get started working? In a B2C context, can we get people excited about it? In other words, does the idea pass basic validation tests? (basic customer validation)
  • What are the minimum features we're going to build before we get our first set of users on-board? (basic planning)
  • Is this a growing market? Will the rising tide float our boat or will we have to fight for survival in a shrinking market? (basic market research)
  • Do we have the skills in-house to build all this? Will we need to budget for external work for part of the product? Should we do it in-house (slower, but better) or outside (quicker but more expensive and probably lower quality)? (basic planning)
  • When do we run out of cash? By when do we need to show traction so that we can go out and spend 6 months raising the next round of funding? (basic financial forecasting)
  • What's our route to market? How will we reach users concretely (note: "viral" is not an answer to this)? (basic marketing)
  • What's the vision driving us? Why are we in this, other than making a bit of money? Is this is worth 3 years of our lives even if we fail? (basic mission statement)

And so on.

None of those need to be answered to a great level of detail. But if you haven't given any thought to any of these, you are not ready to start your business. Of course, you may start it anyway, and you may even succeed, but smart founders try to stack the chances for themselves, not against themselves.

So, about that business plan...

Going back to the original question, one thing that's implicit in Dan's answer is that they did answer all those questions before they went pitching. Nobody ever said that a "business plan" has to be a boring 20-page document. It can be a boring presentation too! (or even a fun one, if you actually want funding)

When an investor asks for a "business plan", really they're asking for some kind of "emailable thing" that they can look at afterwards to help make up their mind about whether to invest. No intelligent investor is going to say "sorry, I can't invest, because your business plan is a PDF of a presentation, instead of a word document."

And you should have some kind of executive summary or slide deck that you can pass around to leave people with something they can look at. And Dan Shapiro did have that. So, although their business plan didn't fit the template from 40 years ago, they did have a business plan. And they sent it to investors who requested it, and got their funding.

Business plans aren't obsolete anymore than letters are. They've just evolved to match the times. Letters have become emails, and business plans have become executive summaries and pitch decks. If you want to raise money, you still need a business plan - the 2011 version.

More from the library:
The mid-size market
Networking in the middle
How to approach an angel investor