Business scholars have concluded that venture capitalists pay little or no heed to those magnificent, 50-page business plans produced by young companies, preferring instead to rely on instinct and experience to sort the myriad opportunities before them.
That’s especially true about the stuff on educational credentials, prior start-up experience or success raising capital, or the wondrous prior achievements of management team members.
“In general, business plans don’t matter,” concluded Brent Goldfarb for the New York Times.
The senior author of the counterintuitive paper is an associate professor at the Robert H. Smith School of Business, a part of U. Maryland.
The conclusion was no surprise for Jeff Fagnan, a GP at Massachusetts-based Atlas Venture, which provides early-stage funding to small companies.
“I’ve never given funding to an entrepreneur who had a business plan with him when he walked into my office,” Fagnan confirmed for the Times. “Most of the information you find there…is not relevant.”
Fangan looks instead for “market validation.” For him, that means whether the company has actually sold its product or minimally, secured likely customers. And Fangan wants to hear this in a PowerPoint or white-board presentation, or from “somebody just talking.”
So how, then, does the entrepreneur gain an audience with Fangan?
“The No. 1 way is referrals (by a respected figure in business or banking),” responded Fagnan. If he asked such people for a business plan, he added, “they would probably say they don’t have one.”
But the study authors and most people interviewed for the Times piece hedged their bets, adding that it’s still useful to create a business plan.
It helps entrepreneurs sort through growth strategies, competitive threats and so on, they said.
For the record, Fagnan is a judge on MIT’s annual business plan competition. And Goldfarb’s school requires its students to take a business planning course.
“Our (study) got some press just before this requirement was due,” Goldfarb told the Times.“Some (students) questioned the assignment.”