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You want to start a business. So you must have a business plan – right?
No, not really according to Anthony Tjan, venture capitalist and co-author of Heart, Smarts, Guts, and Luck (Harvard Business Review Press, 2012). “My colleagues and I surveyed hundreds of successful entrepreneurs around the globe to understand what it takes to build a great business. One of our most striking findings was that of the successful entrepreneurs we surveyed…., about 70% did not start with a business plan.”
Hey guys! I'm selling business plans here. But carry on...
“Instead, their (successful entrepreneurs) business journeys originated in a different place, a place we call the Heart. They were conceived not with a document but with a feeling and doing for an authentic vision. Clarity of purpose and passion ruled the day with less time spent writing about an idea and more time spent just doing it.
It’s not that all planning is bad. It’s that efforts to write the “perfect” business plan usually lead to being precisely incorrect rather than approximately correct. One problem is that the content that most people focus on in business plans has little to do with the reality that will actually emerge. Many start-up plans emphasize some gigantic potential market and how getting just the smallest sliver of it will make them and investors rich.
At a business’s inception, resources are limited, and the best content for a business plan is real-world data based on testing aspects of the concept. These experiments need not be complex. You want simple, iterative tests that are easily measurable and let you know whether you are winning or not.
It’s not just start-ups. The strategic architecture of any business should incorporate facts from real world testing to allow one to adjust course as necessary. This is what Henry Mintzberg, a seminal figure in competitive strategy theory, once described as “emergent” or “evolutionary” strategy. Mats Lederhausen (formerly global head of strategy for McDonald’s) has his own saying for it: think big, start small, then scale or fail fast.
So don’t worry too much about a business plan. But to guide your thinking, improve a pitch to prospective investors, or better align your teams, consider these design points:
- Identify and clearly articulate your Heart and purpose. Whether you want to call it vision, Heart, purpose or calling, be very clear on the why of a business, the bigger goal at hand
- The team is more important than any idea or plan. The top three priorities should be people, followed by people, and then people
- Think big, start small, then scale or fail fast. As per Lederhausen’s advice, set the right first “start small” milestone; it will usually involve seeing people’s willingness to buy or at least try your product
- Focus on a well-defined market sub-segment or niche. At least to start, think of where you can potentially be the best. This strategy is almost always more successful than being just another player in a massive market
- Understand your business model. How you will make money is more important than pages of Excel showing financials that are simply too hard to predict at this early stage anyway. Understand instead the basic way you will make money – is it through transactions, advertising, subscriptions, etc?
There appears to be a perennial market for how-to classes, books, and templates that promise almost “color by number” instructions for populating business plans. While aspects of those tools are helpful for a structured approach, they are more likely to mislead because of their emphasis on completing the plan of a business before uncovering its soul and demonstrating whether others connect with it. People feel a sense of accomplishment upon completing their plan, but what does that plan really get them? Filling worksheets can never replace zeroing in on the passion and purpose of your business. That Heart has to be there day one. The most researched business plan holds little value without a genuine Heart behind the idea and the Guts to just get it going”.
So there we have it. On exceptionally good authority here’s confirmation that you don’t need a business plan to be successful. And it would even appear that business plan writing is an industry that has less to do with the eventual success of the business, and rather more to do with the interests of the people selling the business plan.
Now that the experts have poured cold water on the need for a business plan, I’ll tell you when you will need one (and I’ll be delighted to help).
As you’ll see from their extensive and lengthy pro forma business planning ‘guidelines’, you will need a very comprehensive business plan anytime you approach a government funding entity such as the IDC, the DTI, or indeed any of the government funded development agencies looking for money, because they haven’t read the article above. Meaning that the IDC for example, as you’ll see from their website, is into business plans – big time. However, what isn’t mentioned in the IDC’s business planning guidelines (or indeed in any of the government development agencies’ guidelines that I have seen), is any notion of the real and ever present danger of being sucked in and dazzled by the beauty of one’s own business plan (i.e. the dangers that Tjan so strenuously warns about); or indeed any mention of instances where grandiose business plans and enormous real-world investments have gone mysteriously and unaccountably silent…
For that you need look no further than one of the major ‘sustainable development’ government funded projects of 2006/7; the setting up of a brand new factory to process Kenaf, a natural fibre. From the Kenaf website we learn that “Situated in Winterton (KwaZulu-Natal) near the KENAF growing fields is Sustainable Fibre Solution’s multi-million rand, state-of-the-art KENAF plant, the biggest and most advanced commercial processing facility of its kind in the world. The 8000 square metre plant has decortication equipment from Temafa of Germany and milling and packaging equipment from Van Dommele of Belgium. With the plant processing up to four tons of KENAF stalk every hour, the quantity and quality of KENAF from Sustainable Fibre Solutions makes an immense and positive impact on the natural fibre industry”.
What is omitted from the website is any news as to how the factory is doing now, or how well it has performed over the past six years (and counting). What is known, is that the “biggest and most advanced commercial processing facility of its kind in the world” was funded as a start-up factory, in a new industry in which South Africa had no commercial history; either in growing the crop, or processing the fibre. In this instance following precisely the opposite of Lederhausen’s advice; starting huge – and for the rest, you tell me…
Because, for whatever reason, the Kenaf website carries no more recent news or information than the original pre-launch announcement: “This state of the art facility will commence(d) (their typo) commercially processing 4 tons of Kenaf stalk per hour in April 2007”. And now?
The inexplicable and eerie stillness of the website – entirely untouched for the past six years – is more Indiana Jones entering a world where time has stood still, than industrial powerhouse. Intimations of a glorious future hang like cobwebs of forgotten dreams as you enter a web realm where 2007 is still in the future, where the World Cup stadiums still seem like a great idea and are yet to be built… The effect is both amazing and unsettling, but not what one expects from the largest and most advanced factory of its type – in the world. The mute witness of the frozen-in-time website infers something very different. More like a text book example of Mintzberg’s evolutionary strategy; but done in reverse. Executed no doubt on the basis of a ‘perfect business plan’.
Now don’t get me wrong. I’m by no means saying that business plans are a waste of time. I’m just saying that you don’t have to look very far to see what happens when too much emphasis is put on the planning side, and too little attention given to what Tjan calls real-world data based on testing aspects of the concept. And whilst I’m at it, allow me an appeal to common business sense. If you’re thinking of starting a business, and I see instances all the time – where getting the funding is the focus rather than the core viability of the business – please think again. Long-term commercial viability, not the ability to attract funding by ticking the politically acceptable boxes should be your aim.
Government funding entities (i.e. IDC, DTI, and the numerous state funded development agencies) aside,the other option for raising finance is to go the commercial lending route via your own bank, or perhaps a private equity fund. In this instance (much) more of your own money will be at risk, which tends to focus your thinking; and consequently the plan itself will be a much shorter and more commercially orientated document. But you will still need a business plan, and it will still need preparation and writing. I’ll be happy to help you prepare a professional business plan complete with the necessary budgeted pro-forma financial statements (you might want to take a look at my page about the use of interactive financial forecasting models and their effect on investors).
So if you need to raise money, I’m afraid there’s no way around it. You need a business plan, and I’ll be delighted to assist. But it’s not in my nature to take on what is always a large undertaking, and not deliver some real value. And the real value comes from involving the owners and management team from the outset in every aspect of the development of the plan. Yes I’ll write it, and yes I’ll draw up the pro forma financials; because those are my skills, and that’s what you’re paying for.
But by closely involving owners and management team in the creation of a business plan, the real value, the value that will stay with you, is the enormous effort of interrogating every aspect of the business and its potential. Effort that everyone will put in. And like a lot of undertakings requiring effort, it will turn out that the value to the company (apart from getting the funding) will be the benefit of a business planning process which uses as Tjan advises “real-world data based on testing aspects of the concept… to let you know whether you are winning or not”. And that, in terms of the benefit of new ideas, direction, and strategy, is difficult to put a price on.
Meanwhile I wonder what sort of investment Kenaf processing is proving to be?(Click on the thumbnails below for an idea of the scale of the factory). Given that the website hasn’t been updated for nearly 6 years – what’s happening is anyone’s guess. But there’s probably a good case for twinning Winterton with Nkandla (President Zuma’s R230m homestead) in terms of return on tax payers’ money.