I gather from a stream of emails I\u2019ve received that there are a lot of misconceptions on the relationship between a business plan and getting seed money and\/or angel investment. So here\u2019s a list of reality checks to apply to all those lists.<\/p>\n
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Business plans are necessary but not sufficient<\/strong>. Even a great business plan won\u2019t get any investment for any startup. Investors invest in the team, the market, the product-market fit, the differentiators, and so forth. And they evaluate the risk-return relationship based on progress made, traction achieved, and market validations. The plan gets information the investors need; it doesn\u2019t sell anything.\u00a0One of the most serious misconceptions is the idea that\u00a0the quality of the writing and presentation of a business plan is going to influence its ability to land investment. Sure, if you consider the extremes, a poorly written plan is evidence of sloppy work. If it\u2019s hard to find the important information, that\u2019s a problem. But barring extremely bad plans, what ends up being good or bad is the content \u2013 the market, product, team, differentiators, technology, progress made, milestones met, and so forth \u2013 not the document.<\/li>\n- All businesses should be using business planning regularly<\/strong>. They should have a plan to set strategy and tactics, milestones, metrics, and responsibilities, and to project and manage essential numbers including sales, spending, and cash; and they should keep that plan alive with regular (at least monthly) review and revisions. Business plans are for business planning, and management; not just for investors.<\/li>\n
- Nobody has ever invested in a business plan, unless you count what they pay business plan writers and consultants<\/strong>. People invest in the business, not the plan. Just like people buy the airplane or car, not the specifications sheet.\u00a0The plan is a collection of messages about past, present, and future of the business. It\u2019s past facts and future commitments. People invest in milestones met.<\/li>\n
- The normal process goes from idea, to gathering a team<\/strong>, doing a plan, and executing on the early steps to develop prototype, wireframes, designs, and ideally traction and market validation. And the plan is constantly rewritten as progress is made.<\/li>\n
- Investors come in only after a lot of initial work is already done.\u00a0<\/strong><\/li>\n
- The startup process does not \u2013 repeat, NOT \u2013 go from idea to plan to funding<\/strong> and only then, execution. You don\u2019t go for funding with just a plan. That\u2019s way too early.<\/li>\n
- Investors do<\/em> read business plans<\/strong>. Regarding the myth that investors don\u2019t read business plans, I\u2019m in a regional group of angel investors, we\u2019ve had maybe 80 people as members during the eight years since it started, and the vast majority of us would never even consider investing in a company without seeing the business plan.<\/li>\n
- But investors don\u2019t read all the business plans they get<\/strong>; and they often reject deals without reading the plan. To reconcile this point with the previous, note that investors read the plans during due diligence, as a way to dive into the details of a startup they are interested in. They don\u2019t read them as a screening mechanism. So a lot of startup founders who don\u2019t get investment are telling the truth when they say investors didn\u2019t read their plan. Investors rejected them based on summary information or pitch.<\/li>\n
- On that same point, the process with angel investment today<\/strong> starts with an introduction or submission through proper channels (gust.com, angellist.co, incubators, 500 startups, and so forth). Investors screen deals based on summary information in the profile or a summary memo. The deals that get through that filter will be invited to do a pitch in person. Those that still look interesting, after the pitch, will go into due diligence, with is a lot of further study of the business, customers, market, legal documentation, and the business plan.<\/li>\n
- Business plans are never good for more than a few weeks<\/strong>. They need constant revision. Things are always changing. People don\u2019t expect the big full formal plan document anymore, not even investors. Keep a plan lean, review it often, revise it as necessary, and use it to run your business. Use it to steer the business and keep making course corrections. That\u2019s what a plan is supposed to be these days.<\/li>\n<\/ol><\/div>\n
- All businesses should be using business planning regularly<\/strong>. They should have a plan to set strategy and tactics, milestones, metrics, and responsibilities, and to project and manage essential numbers including sales, spending, and cash; and they should keep that plan alive with regular (at least monthly) review and revisions. Business plans are for business planning, and management; not just for investors.<\/li>\n