Yesterday I described why, for most startups, a business plan is a waste of time.
What you really need to plan out your growth is some market data, which only comes from – you guessed it– the market.
My advice for starting a business is to develop your product or service as cheaply as you can (or even develop just a description of what you plan to offer), and try to start selling it.
Skip wasting time on writing a traditional plan, and instead invest that energy in establishing a benchmark for what it costs in time, money and prospects to close a sale. Once you have a baseline, try to improve your efficiency over time.
Let’s say, for example, it costs you $16.60 to get a prospect (or a website visitor, or someone to visit your trade-show booth or a shopper to come into your store). If you have to pitch 15 prospects before one says yes, your cost per customer acquired is $249 (15 x $16.60).
Now let’s imagine you charge only $200 for your product. With a marketing cost of $249, you’re under water and need to either raise your price or get more efficient at selling.
Start by getting more efficient. Let’s say you tweak your pitch and, over time, get your cost per customer down to $135.
Now start nudging up the price and see if you can keep acquiring customers at $135 each. Imagine you’re able to get your price to $250 without compromising your ability to get a customer.
You’re now clearing $115 per sale, and, assuming you’re making your product for less than that, you’re in business and have the data you need to plan out your growth.
So where do you get the money to run your tests? You save it up, the old-fashioned way. Nobody is going to give you a startup a loan based on a business plan. Banks ask startups for a business plan because they think they should, but your plan is not how they decide whether or not to loan you money. Typically, they base their decision on how much equity you have in your house and personally lend you the money for your startup.
Spending months writing a business plan can make you feel like you’re being productive, but it’s really just busywork. Hiding behind a spreadsheet won’t help you get a business off the ground. What you need first is some real-world data, and you won’t get that from sitting in front of Excel. It comes when someone says “yes” to what you’re selling.
With some real data, if you want, you can start to write a business plan for scaling up your company. I think too many of us make the mistake – often encouraged by well-meaning bankers and advisers – of writing a business plan before we start.
The problem is, until you have real-world data, the business plan is pure fiction.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.