Are business plans necessary?

 

You must have asked yourself "what is a business plan good for?" It is true that there are many unknowns and your sales projections are far from being accurate. On top, your business will pivot and adapt to the market 10 times in the next 10 months. So why spend all this time and effort on a document that will not be relevant the minute you print it out?

 

There are many reasons why your business plan is an important document, I will try to point out a few that stand out for me:

 

1. Your written Business plan is an investor's sanity check tool. 

The investor can easily check if there are potential returns that match his risk/reward appetite. Meaning if all the stars align and you do pull off the nearly impossible, the courageous seed investor will get a return that will cover their lost on the other investments they've made. If that huge upside (8-10 X return) is not there, the investment is a no go.

 

Word of caution: Make sure you can back up your assumptions!

Even if the potential upside is there (excel can take anything) but your assumptions are obviously not aligned with industry standards, this will show the investor you are not well connected to reality and that this plan will most likely not likely materialize. Again, this will be a no go. Please back all assumptions with actual data (It is best to talk with industry experts, potential customers, etc.)

 

2. Your business plan forces you to think about your business, not just your technology.

Many Startups, especially high tech startups, believe that if their idea is good and their technology is solid, the rest will fall into place and they will dominate the market in 5 years. Hey, what does it take to reach only 4% of a $100B market? A LOT, it takes a lot of incredible business acumen, right positioning vs. your competitors, solid execution and heaps of guts and luck. Your technology alone will not suffice.

Investors know this well, so if you do not have a business plan, or you do have one, but it is not well-thought out, that means you have no execution plan and thus your chances for success are close to zero. Even if that particular plan will change, it shows you can plan, and that you understand the importance of such a plan.

 

3. Your business plan helps you budget your expenses.

Even though your revenues are unknown, your expenses are controlled by you and should be meticulously planned out and monitored. Planning your expenses helps avoid a second round before you reach a critical milestone, or worse, before you run out of money. At this point, it will be too late to raise a second round. Failing to budget your expenses will result in either a "down-round" (to be explained shortly) or a complete shutdown. Getting an investment is a great achievement, but it has become a trend to overspend the investment on less-than-important items like fancy office spaces, office toys, free beer taps etc. If you lose control of your expenses and drop the ball on your commercial progress you will simply run out of money, fast. Then it will become very difficult to raise an additional round. Investors might agree to invest in a lower valuation- a "down round". A "down-round" means that if you previously raised $2M for 33% Equity, you are now worth $6M. Meaning if your next "Pre-Money" valuation is below $6M, that means your valuation will drop. You and your previous investor/s will be severely diluted and this will be a big stain on your financials signaling red flags to the investment community. In many cases, the previous investor will not allow this "down round" to happen, resulting in no further investments, which will cause you to shut down. In short, please run a tight ship, make sure you plan and stay within your budget and make sure you adapt expenses to the commercial progress.

 

In summary, despite the many unknowns that go with an early-stage business plan, your business plan is crucial for you and the investor.

 

Feel free to get assistance from VCforU when creating your plan, check out our Business Plan package

 

About VCforU

VCforU.com is an Israel-based Data As a Service company that serves over 12,000 entrepreneurs in over 140 countries to create professional investor one pagers and helps investors find relevant startup investment opportunities that match their exact criteria. To learn more about how VCFORU, please visit https://www.vcforu.com

 

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