Business plans are still one of the most important documents any company develops.
It used to be that one of the first things the founding team of a start-up did was write the business plan. The thinking was that the company's business plan was written expressly for venture capitalists and was essential to raise money. However, it has become clear that venture capitalists do not expect — and will not read — a traditional business plan. Does that mean that the business plan is a useless, obsolete document?
I have a different, more pragmatic view of a business plan's value and believe it still is one of the most important documents any company develops. The reasons are varied and considerable, but the most important motivation to invest the time in writing the plan is the absolute need to clarify the corporate goals, objectives and plans of the fledgling startup.
Driven by this goal, the process of writing the business plan becomes more important than the final document itself. During the creation of the plan, the founding team will need to develop in-depth answers to questions about its mission, product direction, market availability and strengths and weaknesses.
Let me briefly cover two examples of key questions that will need to be resolved. The first is the capitalization table (cap table for short): What ownership of the company is awarded to each employee and how the company will be valued when seeking investments are key parameters here. Another critical element is how the company will allocate its scarce resources. For instance, which markets and customers will be chosen for the initial “beachhead” target? How will the budget be allocated between product development and the sales/marketing efforts?
Coming up with clear answers to those questions will force healthy discussions between the team members and hopefully create an alignment in purpose that will be beneficial.
The plan will become a living document used throughout a company’s existence. And, no one should be surprised if the first business plan looks nothing like one a few years later. It will go through many iterations and could change often.
Of course, writing a business plan is a great exercise because it will service as a vehicle to get funding, though most VCs prefer a short PowerPoint presentation that distills the information from it. During an in-person meeting, the VCs will ask tough, penetrating questions and will expect well-thought-out answers. After a rigorous effort to get a business plan polished and finished, the presenters should be well prepared to answer those probing questions clearly and without hesitation about the corporate philosophy, the product roadmap and the financial plan.
Going through the exercise of developing a 30-page or longer business plan will help the founders get a keen understanding of their business. They will need to drill in on the financials and take apart all assumptions and then justify them –– great training for a VC meeting. Any startup executive presenting in front of a VC will be responding to a host of “what if” scenarios and will be expected to understand all of the business levers. If there is any interest at all from a venture capitalist, financials will become a critical part of the discussion.
Through the process, the founding team may find that the company needs to move to a different market segment. It may point out weak areas within the team, which will spawn conversations about resources. For example, no one may have the savvy to manage the financial aspects of the business or how to market the company and its products.
As the company grows, portions of the business plan can be repurposed as web content or executive commentaries and blog posts or as recruiting tools.
Getting started may seem daunting, but shouldn’t be. After all, the plan begins with open communication within the founding team. Presumably, the members like each other and work well together. Resources are available that offer a series of questions to ask, as well as business plan templates. Business books can be found in brick-and-mortar bookstores, online or a public library. Mentors and other startup executives often are willing to lend a hand.
Technology startup executives who need to keep the company nimble and evolving as needed shouldn’t think that a business plan is for fundraising only. A well-considered business plan can be a multi-purpose document with a variety of uses.
— Michel Courtoy is a former design engineer and EDA executive who sits on the board of directors at Breker Verification Systems.