Business Plans (photo by Raymond Yee)
Apparently a new study from the University of Maryland’s business school says that business plans don’t matter and that venture capitalists don’t read them and it will do nothing to improve your chances of getting financing. In an article from the New York Times, they present this surprising conclusion of a new study by Brent Goldfarb, an associate professor of management and entrepreneurship at the Robert H. Smith School of Business, who wrote the study with David A, Kirsch, also an associate professor at the school, and Azi Gera, a doctoral student.
From the article: “they pay little attention to the documentation from entrepreneurs about their academic credentials, work or start-up experience, previous success in raising equity capital, ability to form a top-notch management team or even how much money they want.”
I totally disagree.
I have written many business plans in the past and this study takes on the small sliver of investors called “Venture Capitalists”. For those not familiar with the term, they are institutional investment firms that setup funds comprised of limited partners that can range from wealthy individuals to pension funds. These funds range in size ($10 million to $2 billion) and are high risk investments for qualified investors but usually present a high return over a 5-10 year period.
Venture Capitalists use the fund to invest at specified levels and stages (i.e. Series A, Series B, Series C) that they have already outlined in the fund’s prospectus. These funds are the large investors you read about in the news that put money into a company usually after a business has had angel investors (smaller sub $1 million investment) or friends and family invest in it to get the business off the ground. If the business has built a good product and developed a business model that will scale well, the venture capitalist is a dream investor and with some additional funds to increase traction puts the company in a mega-growth position.
From the article: “Venture capitalists and other investors “will never start by reading a 50-page business plan and examine a full set of forecast financials — they have too little time for this,” Mr. Zehle wrote by e-mail. “But they will read a one-page elevator pitch-style executive summary, and if it stimulates interest, go on to read a five-page executive summary.””
This is true but should have been near the top of the article in the New York Times.
During good business times, a venture fund gets about 2000-4000 business plan submissions per year and it is true many of them end up in the trash. It is like submitting a script blindly to a movie studio. Getting these things reviewed at a cursory level usually involve some personal relationship doing the introduction. It could be an attorney or accountant that works with some of their portfolio companies or if you are really lucky it will be a fellow entrepreneur that has worked with them in the past and made them money.
That previous quote said “they will read a one-page elevator pitch-style executive summary, and if it stimulates interest, go on to read a five-page executive summary”. So how do get to this stage? You have to write a business plan.
I mentioned before that I have written many business plans in the past, some for projects that never got off the ground, some for businesses that never received funding and a few that raised money from this type of investors. What I personally have found, and I would like to hear from people in the comments, is that the business plan is the focus document. It will eventually be read by the venture capitalist partner or a senior associate during the due diligence phase so you going to have to have it eventually or you won’t look like you have truly thought out your business. The one-page executive summary? That is constantly tuned and tweaked from the business plan document and will be your entry document to get to the point and see if there is interest. The five-page summary is expanded upon and goes into a bit more detail on team, business model and operations but still it is rooted in the business plan. Once you are in the door, you will use those two documents to create a 5-7 minute pitch to present your business and keep them engaged so they invite you back for a 20-30 minute presentation. At that point they will ask for your business plan and financials in addition to your projections so the associates at the fund can do some stress tests and prep the partner for your next meeting to see if you can address any concerns (they will always have concerns) and discuss various scenarios if you got different levels of financing and what milestones you would reach in order to demonstrate success.
Lastly, I would add that even though the study focused on just the venture capital sector, other avenues that you may use for raising capital are Small Business Administration loans, local banks, angels, and friends and family. All of these groups are going to expect a business plan. So get started and if you need some help, check out my 15 part series on Writing a Business Plan.
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