Why you should stop writing a business plan (and what to do instead to 5x your chances of raising money from venture capitalists)

 By Martin Luenendonk| 2017-08-10T15:48:05+00:00 June 29th, 2017|

“If you have a dream, you can spend a lifetime studying, planning and getting ready for it. What you should be doing is getting started.” – Drew Houston

Writing 20-pages of meticulous plans about your startup is not going to make you money.

You won’t get an investor to invest in your business because you had written a book about what you are planning to do.

What gets you money?

Actually putting your ideas to the test – showing results in real life, not on paper.

Starting a business is time-consuming and it’s hard. Don’t make it worse by spending days or weeks in front of your computer creating a lengthy business plan.

Essentially, do not waste time planning how you will take over the world but go ahead and do it.

If you’re not quite convinced, keep reading.

I will show you why exactly your business plan will be a waste of time.

But since you’re not just here to find out what you shouldn’t do, I’ll also give you tips on what are the actions that will help you raise 5 times more money from VCs.

So, let’s get started.

Pitch Deck Course

Why writing a business plan is not going to help you

If you read startup guides, quite a few of them tell you to have a business plan.

While planning is not a bad idea per se, spending a lot of time writing a complex and lengthy plan is not a good idea.

And here are the five key reasons behind it.

#1 Business plans waste your time

Writing a business plan is not something you should take lightly, experts say.

You don’t just sit down and come up with a business plan in 3 hours. If you do, your plan is probably not a solid one and you’ll need to rewrite it at some point anyway.

For a good business plan, you will need to conduct market research and calculate financial projections.

You must carefully outline your core ideas and assumptions and then create a fully-fledged strategy for achieving your plans.

Sounds like a quick job?

It takes time. You’ll need to spend weeks in front of the computer, writing, researching and revisiting your ideas.

This might mean you don’t do anything else.

All this time is away from product development, marketing and raising money.

All you are doing is writing words on paper – not creating anything tangible.

#2 Business plans don’t generate momentum

Startups need momentum to succeed.

You need investors and customers talking about your product – Googling you instead of you researching them.

A business plan is not going to generate momentum. No one is going to get excited about a business plan.

Heck, investors don’t spend more than 4-minutes reading an investment pitch deck. Why would they spend 20-minutes reading your in-depth business plan?

Investors want actions and results, not a hypothesis of what might be.

And your business plans means nothing to a customer. They want products.

#3 Business plans aren’t reliable

There’s a saying, “The only test worth doing is a real test”.

What this means is that a hypothesis on a piece of paper is not a test. Your calculations on paper will essentially just be calculations on paper.

The only reliable way of testing something is to go out and test it – in the real world.

You can’t count on your market research to be right if you’ve never asked a customer directly whether they like your product (and have a prototype of the actual product for them to test).

In short, you can’t trust your business plan will happen as you planned it out. It won’t provide you with a reliable roadmap to success.

#4 Business plans won’t reduce all the risks

Similar to this point is the fact your business plan won’t reduce risk.

This is often the biggest cited reason for writing one. People say, “Oh, you’ll reduce your risk with a meticulous plan.

But can you really reduce risks as a startup?

Sure, you can limit them but there are so many risk factors in startup life that just by having words on the paper, you won’t reduce them all.

The reason is how many startup risks are not even known to you when you start planning.

You might not realise the difficulties in manufacturing your product until you get it to product development.

Heck, a competitor might bring something unexpected on the market just as you are launching.

Millions of things could happen with a startup and you won’t be able to adequately plan for them. You just need to move past and beyond.

#5 Business plans won’t attract money

But perhaps the most convincing argument should be that about money.

A business plan won’t give you any more investment from business angels or venture capitalists.

Investors don’t go around looking for business plans.

They look for startups that are working and growing.

For the investor, it doesn’t really matter what you are planning to do in the future. They want to know what you are doing right now.

David Kirsch and Brent Goldfarb from the University of Maryland’s School of Business have actually studied the effect of a business plan in terms of venture capital funding.

The shocking findings?

The content of a business plan had no impact on startup’s odds of raising venture capital. In fact, whether you had a business plan or not had no effect whatsoever.

You could show up without a plan and your odds wouldn’t be any different. So, why waste weeks on writing the business plan in the first place?

Investors are not investing in business plans.

They invest in people – so much so, that one guy has attracted $2 million without having a product to pitch for investors.

A business plan is really an irrelevant document when it comes to attracting investment from venture capital and angel investors.

How do I have the confidence to say this?

Just look at one of the biggest VC firms out there, Y Combinator. The company has openly said they don’t read business plans. They simply don’t care.

In addition to that, I’ve interviewed hundreds of successful entrepreneurs and VCs… all of them said: ‘Don’t write a business plan, it’s a waste of time’.

So, what other proof do you need to NOT write a business plan?

Investor readiness checklist

What you need to do instead to increase your chances of raising money

So, if writing a business plan won’t increase your chances of attracting money, what will?

How do you increase your chances of generating investor interest and launch a startup successfully?

You could find the solution from the answer Sam Altman, the president at Y Combinator, gave at an EconTalk podcast when explaining the firm’s logic of not reading business plans.

“We would rather spend the time working on their product, talking to users. What we care about is: Have you built a product? Have you spoken to users? Can we see that?” he said.

Essentially, the answer lies in spending your time doing these four actions.

Fill out the Lean Canvas

You should swap a lengthy business plan to the Lean Canvas.

Alexander Osterwalder’s Lean Canvas was a result of the Lean Startup ideology and its different components proposed by the likes of Eric Ries and Ash Maurya.

The canvas essentially strips out the essence of a business plan into nine points that help you focus on problems, solutions, key metrics and competitive advantages.

Business Model Canvas

Source: Wikipedia

You can view those nine segments as part of three separate groups, all essential to startup success:

  • The product (problem, solution, key metrics, cost structure)
  • The market (unfair advantage, channels, revenue stream, customer segments)
  • The unique value proposition

You won’t need 20-pages to create this business model canvas, instead of your lengthy business plan.

Everything should fit on a single sheet of paper and you will get a good idea about your current idea, your assumptions, as well as your startup strengths and weaknesses.

It’s a good idea to just print out the empty canvas and set a timer for 30-minutes. Go through each section, filling it out with as much information as possible.

Once the times is up, you’ll get a great idea of the things you know and the issues you need to work on more.

Once you have your assumptions outlined, you’ll start identifying the risks and the areas that require more attention.

And these will lead you to the next key practices that’ll help gain more investor attraction than a traditional business plan.

Validate your assumptions in the real world

Now, as you have outlined your core assumptions, you need to go out and test them.

It’ll be the best way to figure out whether your assumptions are correct and it gives you the chance to tweak them and your products or service if they aren’t.

There are two core areas to focus on:

  • Customer pain points
  • Financial metrics

Let’s look how you can validate these the most effectively.

#1 Validate customer pain points

To know whether you know what the problem truly is for the customers, you need to actually talk to them.

You won’t know if your new shirt buying app is a hit unless you know what aspects the potential customers most hate about buying shirts and whether your proposed solution could solve those issues.

Talk to customers

Source Talking to Humans.” Photo Credit: Tom Fishburne

How do you talk to people?

You could use the following tactics:

How to validate assumptions with customers

These offer you the chance to talk directly to potential customers and get their feedback.

You can also just check social media and conduct a keyword search on Google.

  • What are the people searching solutions for?
  • What are the pain points in current products and services that people mostly complain about on social media?

The other channels you should focus on browsing for real customer pain points include:

channels for customer validation

Looking at these elements can help you identify the struggle customers have with existing products and the queries they are trying to solve.

Unlike some market research reports, the information you get is accurate and up-to-date. You do, in fact, get it in real time with the real language customers use to describe their pain points.

#2 Validate important financial metrics

You should also validate important financial metrics.

Indeed, when it comes to investor interest, finances are at the top of their concern list – investors want to see what your growth predictions are and more importantly, what results do you base these predictions on.

What are the top metrics a startup has to focus on?

Startup metrics

The key at the early stage is on actionable metrics. These are specific and observable metrics. The metrics that could change if you made changes the product or the service.

Eric Ries, entrepreneur and investor, has written a superb guest blog post on the topic and it’s definitely worth a read.

Essentially, Ries is saying that you want to focus on actionable metrics instead of vanity metrics because the former helps you understand and improve your product or service.

A vanity metric, such as a specific number of clicks on a website, is not going to tell you anything. People clicked your website, so what?

Instead, you want to look at which sources result in clicks that lead to conversions. Perhaps a guest blog you did is adding to clicks and 98% these lead to a sale.

In terms of validating your financial metrics, fast iteration times are crucial. You don’t want to spend months developing a fledged out version of a product only to find out no one wants it.

The point is again well illustrated by Tom Fishburne for the book “Talking to Humans.

Seeing a pattern

Source Talking to Humans.” Photo Credit: Tom Fishburne

You can’t keep testing forever if your metrics don’t show traction or boost in revenue. Do start iterations and move on or tweak your product if the data is telling you to do so.

On the other hand, don’t wait forever to talk to investors about the traction you are getting. You don’t need 500,000 customers before you can start talking to investors!

Why investors like this more?

OK, it sounds all fine and dandy but what is the benefit of doing that?

Why would an investor give you 3, 4, 5 times more money just because you’ve gone out and validated your assumption in the real world?

The above shows you’re not just assuming things about your startup.

You’re not just theorising about the possibilities and especially the pain points. Indeed, you’re actually creating a startup that answers real customer pain points instead of projecting problems on to them.

You know what customers want and you can show the investor that.

You can make a statement, “Customers want to receive their products faster – in one day – and they are willing to pay for it” and when the investor objects to you being able to know this, you can say, “I’ve asked x number of people and this is what they all say”.

In terms of the finances, as I’ve mentioned, investors care about growth above anything. They need to get 10x returns or they aren’t happy.

Sure, you could just promise this based on predictions.

But showing them actual growth that projects further growth is definitely more convincing.

Anders Linsdorf, CEO of Sensor Six, said well in an interview,

Some people may object to money being the central purpose of a product…but since money pays for salaries, electricity, office space, health benefits, taxes etc. the success of the product must somehow be traceable to this.

Create a prototype

Of course, you also need to focus on developing your actual product or service.

Building a minimum viable product (MVP) is a great way to see what your customers actually think of the product and how it will perform in the real world.

With the help of an MVP, you focus on validating key three theories:

Validating your MVP Prototype

When you are creating an MVP, you need to follow these crucial steps:

  1. Focus on the primary user and the core problem you want to solve. Don’t focus on the symptoms, just the problem.
  2. Add the main functionalities that validate the customer pain point and leave out anything else.
  3. Define the metrics that you can use to test the functionality of your MVP. Use the SMART goal strategy (Specific, Measurable, Achievable, Relevant and Times).
  4. Create a proper feedback route – do both observations and consumer-led analysis.

When you’re creating an MVP, you should use existing products or services. You don’t need to create everything from scratch.

For example, allow the customers to log into your product with Facebook login, instead of creating the whole system from scratch.

You also don’t want to just focus your efforts on a single MVP.  It’s much more effective to create multiple testing cycles, perhaps with little tweaks. As you get responses, you can plan the next iteration.

Why investors like this more?

The reason creating a prototype works better than a business plan is because it actually shows how the product or service will perform.

We can all create and design crazy-good products on paper – making them work in the real world, with real limitations and regulations is a different thing.

You can see how the product performs, how customers actually would use it and then use the information to perfect and improve.

Again, you’re not just assuming things will work a certain way, you are actually figuring out how the performance will be.

Now, you might be thinking this is all good but why would the investor care how the product works? Aren’t they just there to make money?

Well, prototypes not only show the investor you actually know how to make your product idea work – and that it actually works. But they also give important information regarding the financials.

When you build an MVP, you get a much better idea of how much the product will actually cost to manufacture.

You learn about the production cost and the cost of things going wrong.

Again, this ensures the metrics you use to calculate things like revenue and CAC are relevant, reliable and data-driven.

Higher startup valuation checklist

Acquire real customers

The final important thing you should be doing instead of wasting time writing a business plan is all about creating a customer base.

It’s nice to have an idea for your startup and a hefty book-like business plan.

But it’s not going to pay your bills, now is it?

If you strip down a successful startup to its core, the main thing would be the startup’s ability to attract paying customers.

Instead of wasting time typing away your strategies to obtain customers, you should do the following:

How to find customers for your startup

Overall, you want to start generating the momentum – create hype around your product.

You want to start marketing online and offline. Start with your friends and family and move beyond to reach out to your alumni or previous colleagues.

Get people talking and signing up for your product – the more interest you generate, the more people you’ll have trying to product or service right from the start.

Why investors like this more?

The reason this works better is rather obvious.

No investors would rather see a well-written business plan than a company that hasn’t figured out all the details but which still has 20 paying customers.

Your ability to have people paying for your product or service will trump any business plan – always.

If you have paying customers, a huge waiting list or just hundreds of signups, you show there is momentum and traction.

Clearly, people believe in your product or service. They are actually interested in trying it out – your idea at its purest essentially works.

Furthermore, if they are already paying for it, your business model is also validated to some extent. You can say to the investor, “Hey, look here’s my product, here’s how I’m going to make money and here’s the number of people who agree with me”.

Like I said before, you’ve proven people are actually willing to pay for your product in real life, not in theory.

Stop planning for the future and start creating the future

What you should get out from the above is not that planning is somehow a bad practice.

You definitely need to have a plan for your startup.

The point is to not waste time creating a lengthy and meticulous plan for others to read – to think that a document of 20-pages will save you from problems and help you win over investors.

Because it won’t.

You need an action plan – just for yourself.

You need to have your assumptions about your startup and the core ideas. But instead of looking at these assumptions in every angle and generating a wall of text, you need to test them.

You need to take your well-crafted assumptions into the real world. Talk to potential customers, create a prototype for them to play with and track the essential metrics.

And when you have that, you can go to the investor and you can say, “Hey look what I’ve done”.

By focusing on results, you can show how much potential there is ahead of you and the investor will invest. Wouldn’t you agree?

You might not have 5,000 paying customers and your startup might need a lot of tweaking.

But that’s the point of a VC. You need their investment to help you move forwards. That’s why investors aren’t expecting to see a fully functional startup (you don’t need money if you’re a huge hit already) or pages of plans.

They want to see momentum, they want to see proof and they want to see action.

Essentially, they like to see someone who is clearly able to get shit done and start moving.

This tells them that by putting their money in, the person is going to work hard and make money for them.

So, what are you going to do today to start creating the future you want for your startup? And what is stopping you?

2 Comments

  1. PETROS PAPAZACHARIOU June 29, 2017 at 11:07 am - Reply

    The idea about “stop business planning” has already a history.
    1997: New Economy – mind share and not financials is the key……
    2001: “Dot bomb” only $5 trillions (but many new millionaires!)

    • Martin Luenendonk June 29, 2017 at 1:46 pm - Reply

      Hi Petros, the key message here is: Planning is important, but writing a 60-90 pages business plan is NOT when you want to raise money from most investors.

Leave A Comment

Share This