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.
That means, the study said, that they pay little attention to the documentation from entrepreneurs about their academic credentials, work or startup experience, previous success in raising equity capital, ability to form a top-notch management team or even how much money they want.
"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."
That assertion flies in the face of the conventional wisdom that writing a business plan is one of the first and most essential tasks an entrepreneur should undertake, Goldfarb acknowledged. But, he says, the report's conclusions jibe with the feedback he gets from venture capitalists.
Jeff Fagnan, general partner of Atlas Venture in Waltham, Massachusetts, which provides seed money for young businesses, said he agreed with the study's main premise. "I've never given funding to an entrepreneur who had a business plan with him when he walked into my office," Fagnan said. "Never. Most of the information you find there, five-year financial forecasts and so on, is not relevant."
He says he looks for "market validation," hard evidence that the entrepreneur has actually sold his product or at least lined up enthusiastic potential customers. Fagnan says that, rather than reading a report, he wants to hear the evidence in PowerPoint slides, white board presentations or "somebody just talking."
But if he does not look at their business plans, how do entrepreneurs gain an audience with him? "The No.1 way is referrals" by a respected figure in business or banking, Fagnan said. If he asked the people referred to him for a business plan, "they would probably say they don't have one," he said.
Greg Herro, chief executive of LifeGem, a maker of speciality jewelry in Elk Grove Village, Illinois, laughed when asked about the business plan he wrote to show to venture capitalists and other professional investors a few years ago.
"It was no use to us whatsoever," Herro said. "Investors might read a business plan's executive summary, but they have no interest in the endless pages of nonsense that entrepreneurs like me put out. If you don't have a track record or actual sales, they are leery."
By contrast, because LifeGem, which he and three partners founded in 2001, has strong cash flow and sales that increased 15% last year to $4.5 million and are steady this year, he predicts he has a good chance at raising up to $2.5 million soon.
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. "A business plan can be helpful in identifying opportunities in a competitive landscape," Fagnan, the venture capitalist, said.
More important, according to Stefan Zehle, co-founder of the British business Coleago Consulting and co-author of Economist Books' Guide to Business Planning, published by Bloomberg Press, a business plan can be a crucial warm-up exercise for getting through the venture capitalists' door.
Venture capitalists and other investors "will never start by reading a 50-page business plan and examine a full set of forecast financials-they have too little time for this," Zehle wrote by e-mail. "But they will read a one-page elevator pitch-style executive summary, and if it stimulates interest, go on to read a five-page executive summary."
Goldfarb of the University of Maryland's business school, agreed that if writing a plan helps entrepreneurs "develop a 150-word elevator pitch, that would be a positive result," though he added that they should then practice the presentation "to anybody who will listen and challenge you."
He urged entrepreneurs to keep any plan that they submit to professional investors to 15 pages, starting with four or five bullet points that explain their business. Herro of LifeGem recommended a somewhat different plan of action, saying "you should put as much time as you possibly can in writing a comprehensive business plan for your own sake," then compress it into "a very streamlined, need-based outline" for prospective investors to scan.
Scepticism about the usefulness of business plans has its incongruities. Fagnan of Atlas Venture confessed that he is a judge of the Massachusetts Institute of Technology's annual business plan competition. And Goldfarb said his research report, which examined 1,063 requests for early first-round financing to a venture capital firm in the Northeast from 1999 to early 2002, created a ruckus at his school.
"We require our MBAs to do a business planning course, and our work got some press just before this requirement was due," he said. "Some of the MBAs then questioned the assignment."
Brent Bowers, a longtime small-business editor at The New York Times and The Wall Street Journal, is author of The Eight Patterns of Highly Effective Entrepreneurs,(Doubleday). His column In the Hunt scrutinizes the changing world of small business and the colorful characters who inhabit it.
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