Dr Jeff Cornwall

Why do we write business plans? What purpose do they serve?
Guy Kawasaki had a post yesterday on a recent study by Bill Bygrave from Babson suggesting that business plans are highly overrated. And to a large degree, I agree. (Guy as a link to a Word Document version of this study at his post about this study).
Now before all of my students throw up their hands in joy over this statement, I need to explain further. For while I think too many entrepreneurs spend way too much time on their business plans, many of these same entrepreneurs do not spend enough time on actual business planning.
Let’s look carefully at Prof. Bygrave’s summary of his conclusions from this study:

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.

That is only true if would-be entrepreneurs have done all of the homework that goes into writing a sound business plan. I know for a fact that the population Bygrave surveys in this study (alumni of Babson) get very good training in new venture analysis and planning. So his subjects all should know how to use these tools in preparation to launch their ventures. It really doesn’t matter if they actually go the final step and write it down in a formal business plan.
Business plans are a way to document sound analysis and good planning of your new venture. Whether you actually write this document is to a large degree irrelevant. What does matter is that you go through the process of evaluating the market for the venture, analying the potential profit margin it can produce, and reflect honestly on your personal readiness to make it happen. So it is the process of planning, not the actual plan, that really matters.
So why do I have my students write a plan at the end of their studies? It is basically a final exam in their last class with us to show that they understand how to analyze and plan their new venture. Too many people think that a business plan is the beginning, middle and end of starting a new venture. The business plan is simply a reflection of a sound process — it is not the actual process.
In reality, investors like venture capitalists use it in the same way. They want evidence of sound analysis and planning, and the business plan is a way to capture the work an entrepreneur has done in these critical steps.
Guy Kawasaki has it right in his conclusion about this study:

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.

So to all of my students this semester — get back to work on your business planning!
(Thanks to Bruce Schierstedt for passing this along).