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Dec 20 2010

Should a startup write a business plan?

There’s strongly conflicting advice out there about whether it’s worthwhile for a startup company to write a business plan.

On the one hand, classic business advice says that having a written plan is essential. You must study your competitors and learn their profit margins down to the penny. How can you succeed if you don’t know where you’re going and write that down in detail? This is advice we’ve received at the Community Business Partnership, from business counselors and the GrowthVenture FastTrac class. Most of the entrepreneurs there are looking to start well-established types of companies such as accounting and event-planning businesses.

On the other hand, many tech entrepreneurs tell you that business plans are overrated. A study of Babson College alums who started businesses found “there was no difference between the performance of new businesses launched with or without written business plans.” Plans may get written to satisfy investors, then are put on a shelf while the business’ direction changes more quickly than a document can keep up. Why invest time in writing a plan that you know is going to change as soon as you get feedback from users?

There have been successful companies that wrote obsessively detailed business plans, and successful companies that didn’t write a plan at all. So how do you decide how much planning to do?

For an established industry and product, the pace of innovation is probably relatively slow. In this case, it makes sense to take the time to study your existing competitors in great detail: the state of the art won’t have changed much over the course of writing your plan. The lessons have probably been learned and documented, so it’s better to read about the lessons rather than suffer through them yourself. Understanding why the successful companies made the decisions they did is valuable.

For a new industry or product, the pace of innovation is probably quite fast. No one knows what the lessons are because no one’s tried this kind of product, service, or advertising model before. There may be less historical information for benchmarking or studying competitors. The existing players, being smaller, are less likely to be public companies, so their financial information is probably not available.

Most importantly, if you take months to stop and exhaustively study competitors, others will have surpassed you. You’ll have lost a significant amount of time that you could’ve spent developing your product. Your real competition may not be a well-known company, but another startup working faster than you.

Venture capitalist and former Apple evangelist Guy Kawasaki suggests spending “no more than two weeks writing” a business plan, and advises that it “should not take on a life of its own… It is a tool…But it is not an end in itself.” As Dwight D. Eisenhower said, “Plans are nothing; planning is everything.”

Several people chimed in about this question on facebook. The predominant thinking was that it doesn’t hurt to write a business plan, and investors will require it.

At White Glove Apps, our compromise for now is to come up with a product plan for the next three months. We’ll also write just an executive summary, say 2-3 pages, with key numbers to make sure our plan is financially viable. Numbers like how much we can expect to get paid per customer, and how many customers we can expect to have. We may lay out multiple strategies and say how we’ll decide which one to go with.

Is your startup writing a business plan?

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