Why Almost Every Startup Needs a Business Plan (Lean Startups, Too)

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With the ascendance of the lean startup model, with its emphasis on early and constant customer feedback and startup pivots reflecting the same, more and more entrepreneurs are asking themselves, “Why bother with a business plan? It won’t survive long enough to be worth the effort to create it.”  Count me as a contrarian here.  In my view, even lean startups should start with a business plan, even if the expected life of the same can be measured in months or even weeks.

I think the key to understanding why you need a business plan, even if pivoting early and often is part of the plan, is in understanding what a business plan for a startup is all about.  Let’s start with what it is not about.

A startup business plan is not an operating plan.  It is not a cookbook for running the business: indeed, it is not really targeted at the folks that run the business.  In the high impact entrepreneurship space, a business plan is better thought of as an investment plan, and it is written for potential investors.  As such, the business plan should illustrate how the entrepreneurial team and idea might be turned into a business that can make a lot of money for investors.

Note that I said the business plan “might” show how the startup will make money for investors.  The point is that no one—including even semi-competent potential investors—expects a startup’s business will evolve as laid out in the first business plan.  Even in a more conventional startup model (and more so in a lean startup setting), the chances that, looking back after a successful exit, the path the company actually followed more than vaguely resembles the path projected in the initial business plan is pretty slim.  But that is not the point.

What, then, is the point of the startup business plan?

I think there are at least two cases to be made for why creating a business plan for a lean startup is just as pertinent as it is for any other start up.  First, the process of creating a business plan—at least a credible one—demonstrates that the entrepreneur is capable of thinking about his or her idea in business and investment terms.  That the entrepreneur can conceive of his or her baby, so to speak, as a tool rather than a child; as something that has to serve crass commercial and financial masters, as well as a prerequisite to serving any higher values.  In twenty-five years in and around the venture capital business, I can assure you there are lots of entrepreneurs who can’t or won’t think of their baby in business/investor-centric terms.

Beyond demonstrating something important about how the entrepreneur thinks about his or her baby, creating a business plan provides a sanity check in that a good plan will demonstrate that there is at least one plausible way the entrepreneur’s baby can be turned into a solid business and investment opportunity.  Finding one plausible business model for a new idea is, in my mind, like finding life somewhere in the universe.  Given how vast the universe is, if you find life in one place, it is bound to exist somewhere else.  Similarly, if you can make at least one convincing business case for an idea, there are bound to be others out there.

Now, as firmly as I believe that a good business plan is something every entrepreneur should get done before going after sophisticated investors, let me point out a qualifier and an exception.  The qualifier is that a good plan doesn’t have to be a long plan.  Depending on the technology and business model, a good plan might be as short as 8-10 pages, or as long as 30-40 pages.  Again, remember that the plan is targeted at potential investors; it is not an operating plan for management.  Second, there is one major exception to the business plan requirement.  If you are one of those entrepreneurs with a track record of creating substantial returns for sophisticated venture capital investors, you can probably get away without a business plan.  Otherwise, get to work—you might learn something.