Plans are worthless, but planning is everything

President Dwight Eisenhower once said “Plans are worthless, but planning is everything”. I agree with this and want to provide a little more nuance to my recent dismissive attitude to business plans.

In a recent discussion at Techstars Boston I heard about an angel investor who is considering a seed stage investment. Even though it is very early in the company’s life, the investor wanted to know whether or not there will be a later need for large amounts of venture capital funding. Angel investors would love to know which path will be taken in advance, because the VC route heralds the possibility of significant future ownership dilution. One of the entrepreneurs in the room noted that for his company he could make up some fancy spreadsheet which showed a business plan for either case. Each would be as plausible or possible as the other, but that wouldn’t provide any real insight to the angels. Spreadsheets like these are interesting scenarios, but absent other information we don’t know how likely they are to play out, so they really would be worthless plans.

My suggestion is to list the hypotheses the company expects to test, and what they plan to learn over the period funded by a seed round, and show how this would lead to one path or another. This is useful for both the entrepreneur and prospective seed investors. The deliverable is a list of the key areas of uncertainty and risk to be resolved through testing and learning, and the possible pathways that lead from the various outcomes. With this kind of plan an angel investor can use their own judgment about the future trajectory of the company. Yes, the output is a plan, but it is certainly not the usual kind of five year, revenue projections pulled-from-air, business plan that we might normally expect.

That is not the end of the story. Those five year plans may be worthless, but the planning really is everything. I do want to see some of those scenarios (check out my short article on presenting financials to dumb VCs). This is not because of the value of the numbers themselves, but because I gain insight into the thinking behind the plans. I get to understand the assumptions being made, the factors being considered (and not), and whether the various parts of the scenario at least make sense together. For example, if you plan to employ 3 sales reps and sell 30 deals a quarter, can you imagine each rep making a sale almost every week? (You would be surprised at the number of plans which fall apart at this level of review.) Entrepreneurs able to present some reasonable scenario show they have the ability to plan. That will come in handy once the data starts to show how the market and the company will perform. The plan probably is worthless; the ability to plan is everything.

[Although this post is written about how things work with for-profit start-ups, the same thinking applies to how donors and non-profits should be approaching new projects. Hence this is a VC:VC post. I wonder how many non-profit ventures do think about things this way. ]

Ride of Spring

As a Venture Cyclist I do feel I need to include a few posts about my riding. Today was my friendly riding group’s first ride of the season – a rite of spring. I cycled 25 miles at a decent pace (for me) on my trusty Bachetta Strada recumbent bike. The temps were 40s and 50s, and with warm, bright sunshine.

As James Brown once said: I feel good!

As a tip-of-the-hat to the 6-panel meme that is going around, here is one from me.

Four Reasons for a Business Model

This week at Techstars during my office hours sessions, I was asked questions by several teams which each time led to the same place: please draw a business model diagram for me. Everyone could, or said they could, but in each case it was clearly not a practiced exercise.

A business model is not a business plan, although the two are often confused. How can you tell the difference? A business model fits on one piece of paper (or one flip chart page or one white board), is referred to regularly, and has all sorts of uses. A business plan is a big pile of paper that even the author doesn’t read all the way through, and certainly no-one else does.

A business model

A business plan

My favorite approach to a business model is (as previously mentioned) the Business Model Canvas. There are other approaches, but, to qualify, it must fit on one piece of paper, and must be a diagram of some kind.

Here are my four reasons to have a one-page business model picture

• Completeness: you can make sure you have addressed all aspects of the business model. This is not exhaustive completeness – it should be quite high level and avoid getting into the weeds – but you get to see if you have any glaring holes.
• Consistency: you can see whether all aspects of the business model are consistent with each other. For example, does the assumption about partners line up with the assumption about channels?
• Clarity: you can see whether (and ensure that) all your colleagues are clear about what you are doing and why. If asked to draw the model independently, would they draw the same thing? The model becomes a concrete focus for discussion about how it all fits together and brings out any misunderstandings or disagreements about what you are doing.
• Communication: you can draw and redraw the model as you tell the story of your business to mentors, advisers, potential recruits, and potential investors. It can focus a staff meeting, board discussion or investor presentation. You can much more easily remember a diagram (and recreate it from first principles) than you can remember a page of text.

If you have started to think about a business you have started to diagram things out. That’s where to start. Take an hour. Certainly stop after 90 minutes. Leave it on a white board. Share it with colleagues and advisors. Let them add post-it notes with questions. Go back to it with at least a couple of people around each time – let the brainstorming drive good thinking.

Don’t sweat the small stuff – even on the nine-sections of the Business Model Canvas, you only need six or seven elements to get going. Every company has “sales and marketing” as a Key Activity, and every tech company has “develop the tech platform” as well (and then “tech platform” shows up on the Key Resources panel, too). Don’t worry about that kind of completeness. Do worry about a value proposition for each customer segment, differentiated key assets and key partners, and revenue and cost components that characterize the economic drivers of the business. Advanced uses of a business model diagram include layering on key assumptions, generating explicit hypotheses, and building out tests of those assumptions.

On a very related note, Steve Blank recently wrote a great post on misunderstanding a business model methodology (and how to fix it). Heidi Allstop of Spill shared this great resource with me for those interested in an online canvas tool.