Business Plans? Are they necessary?

An article in the New York Times details the opinions of several business plan experts about the importance of an entrepreneur writing a business plan. A study was conducted in 2009 by the University of Maryland’s business school to find out how important business plans were to venture capitalists, who fund entrepreneurs and start up businesses (New York Times). It was found that several venture capitalists rely more on experience and gut feeling rather than the details of an entrepreneur’s business plan (New York Times).

Brent Goldfarb is a professor at the University of Maryland, teaching various management and entrepreneurship classes (University of Maryland). He has a Ph.D. from Stanford University and specializes in the relationship of new startup businesses and technology (University of Maryland). According to Goldfarb, the most important component of a business plan is the first few pages of a business plan, which should include bullet points that explain the business in a concise manner (New York Times). He was even as bold to say that, “In general, business plans don’t matter… Nobody is going to read them” (New York Times).

Another expert, Stefan Zehle, is an expert in business planning, marketing, and forecasting (Coleago). He has worked on projects for AT&T as well as several other international telecom companies and co-authored the book, “Economist’s Guide to Business Planning”(Coleago). Zehle feels that writing a business plan is crucial for the entrepreneur because it gives the entrepreneur a realistic idea of risks and possibilities. He explains that venture capitalists never read a full business plan or “examine a full set of forecast financials” (New York Times). Instead, venture capitalists will read a piece of the executive summary to see if they are interested in the plan.

It seems as if business plans are often too lengthy for venture capitalists to take the time to read in entirety. While it is still very important for the entrepreneur to write a full, thought out, detailed business plan, when seeking financial resources from a venture capitalist, the executive summary is the most important. In the executive summary, the entrepreneur has to “hook” the venture capitalist to keep their interest so they continue reading.

This study has the potential to undermine the importance of a full business plan. New entrepreneurs may not understand how important it is to develop a business plan despite the opinions of several business professionals. The truth is, a well-developed business plan puts risks into perspective for the entrepreneur. With a business plan, the entrepreneur is able to fully understand the opportunities and threats to their business in order to see if their plan is really feasible. Aside from this, it gets the entrepreneur to think about risk analysis and it allows them to really understand their business, which will be beneficial when it comes to elevator pitches and Q&A sessions with venture capitalists.