What makes a great entrepreneur? Is running a successful business a skill you’re born with, or is it one you can learn? Over the course of three columns, Your Business guest contributors Michael Wade and Mark Arnason will attempt to answer those questions. Part two takes aim at a key element of conventional wisdom around entrepreneurship – the business plan:
It’s true that a good business plan can anchor an entrepreneurial venture.
Once a company has been operational for some time, it has a well-defined value proposition, and it generates positive cash flow, a plan can help attract the necessary growth financing. The problem is that business plans are typically not helpful when ventures are in their early, formative stages.
An anchor is designed to keep you in one place, which is precisely what an entrepreneur should not do. The usefulness of a business plan diminishes precipitously as an entrepreneur moves away from the original idea. In most cases, the plan is only valid when it is written.
Pierre Omydar, the founder of eBay, credits the fact he didn’t have a business plan for the success of the company: “EBay was open to organic growth – it could achieve a certain degree of self-organization. So I guess what I’m trying to tell you is: Whatever future you’re building … don’t try to program everything.
“Five-year plans never worked for the Soviet Union – in fact, if anything, central planning contributed to its fall. Chances are central planning won’t work any better for any of us.”
Surveys from the Inc. 500 suggest fewer than 25 per cent of successful entrepreneurs create business plans at start-up. Those that do write them will generally stick to informal “back of the napkin” types of documents. Our own experience with high-tech founders over 15 years confirms this.
But everyone from bankers and accountants to business professors and consultants say business plans are necessary. The fact is, you only need a business plan for one reason: to get financing.
This brings up another important misconception. Financing is not typically a part of the early stage of a company’s creation. Banks fund assets, not ideas, and venture capitalists fund momentum and sales.
Unless you have a proven entrepreneurial track record, or you have created some kind of unique scientific breakthrough that has huge commercial potential, it will be difficult to secure financing outside a network of friends, family, and your own sweat equity.
There are numerous examples of ventures that start with minimal financing. Dell and Subway were both launched with less than $1,000 (U.S.). In fact, 98 per cent of new ventures start with no venture capital or angel financing at all. Further, surveys from the Inc. 500 rank credit cards ahead of VC funding as a source of start-up capital.
All the millions that dot.com firms such as pets.com received in the early 2000s didn’t put them on the pathway to success. In fact, it probably hurt them. With money comes the temptation to spend it – on offices, people, advertising, and infrastructure – all of which takes an entrepreneur’s eyes off what is really important. Things like making sales, building networks, and improving product or services.
Business plans can be very useful in helping an entrepreneur think through the full implications of an idea. And they definitely come in handy when the time comes to pursue funding. But their negative potential as ‘anchors’ in a particular place and time mostly outstrips their benefit – particularly in the early stages.
April 22: Embrace the unexpected.
Special to The Globe and Mail
Michael Wade is professor of innovation and strategic information management at IMD in Switzerland. Prior to that he was academic director of the Kellogg-Schulich Executive MBA Program at York University in Toronto.
Mark Arnason is senior vice president of product development and strategy at Longview Solutions and he has taught entrepreneurship for the past 15 years as an adjunct professor at the University of Waterloo.