What did the founders of Dell, Twitter and Facebook all do before starting their companies?
The answer: they didn’t write a business plan.
Yup, according to a number of research studies the large majority of very successful entrepreneurs skip writing a business plan and are even less likely to do market research. But are they wrong? Could they have improved their chances of success if they had taken the time to layout their businesses ideas on paper?
According to many local MBA programmes, business experts, and popular ‘how to’ entrepreneurship books, the answer is yes. They preach that business plans are vital for raising money, thinking through future business problems and creating a clear vision for your business.
A few dissenters, however, disagree. They believe that business plans are a waste of time and those hours are better spent working on the business.
To settle the debate, researchers have explored whether start ups that write business plans do better than those that don’t.
A group of researchers at Babson College in the United States followed 116 start-up businesses for eight years. They found that start ups who spent time writing a business plan did not out perform those that skipped the process altogether. A recent study sheds some light on why this might be.
Planning and business success
A team of researchers led by John Dencker from the University of Illinois did a study on 436 new businesses. He found that if an entrepreneur had a good general business knowledge and the industry in which they were setting up their business, than spending time on planning proved beneficial.
However, if the entrepreneur had limited knowledge of business and a limited knowledge of the industry in which they were planning to set up a business then planning increased the probability of failure.
Intuitively this makes sense. Having a good knowledge of how a business will operate will help the planning process and the assumptions you base your plans on will most likely be correct. However, if you have limited knowledge of an industry, if the business model is unclear with unproven planning and the market is dynamic and fast changing, then planning is more likely to be a waste of time. So should you write a business plan?
The short answer is: it depends on the situation.
Situations where planning is more likely to be beneficial
- The final business model is clear and proven.
- You have a good understanding of the market.
- You have a good understanding of the industry sector.
- You have a good understanding of how to set up the business.
- The market is stable and slow changing.
Situations when planning is more likely to be harmful
- The final business model is unclear and unproven.
- You have a limited understanding of the market.
- You have a limited understanding of the industry.
- You have a limited understand of how to set up the business.
- The market is dynamic and fast changing.