I feel like recently, as the Lean Startup movement gains more and more traction (I love the Lean Startup principles) and there are more incubators, accelerators, innovation centers, etc. helping startups get off the ground, that I’m hearing more and more this idea:
“you don’t need a business plan, you need a great pitch”
While I absolutely agree that a great pitch is critical for any high growth startup thinking of pitching Angel Investors or Venture Capital firms, I am puzzled by this idea that you need a pitch but not a plan. When I talk to people who run incubators and accelerators, they all give me the same song and dance. Full disclosure: as the CEO of Palo Alto Software, the developers behind LivePlan, a Software as a Service online planning solution, it is in my benefit to have every small business and every startup write a business plan.
But nonetheless, I run this business because I truly do believe in the tools that we produce and truly feel that planning will make startups and small businesses more successful. So, back to this idea of a plan vs. a pitch and what a startup really needs to be successful in today’s landscape. Let’s make the assumption that you don’t need a plan. That what you need is a fantastic pitch. A pitch where you presumably need to talk about:
- Your special sauce. Why your product or service is what this world needs.
- Your team. Why you are the ones to make this happen.
- The competitive landscape.
- The market, and how you will reach it.
- How much you will sell, (i.e. your forecast) over the next 12 months, and then the next few years.
- How much it will cost you to sell (i.e., your Expenses).
- Your implementation plan/timeline to implement.
- How you will use the investment you are asking for (most likely it will match a Profit & Loss you have done).
- What investors will get for giving you their money.
My question to all those people who say you don’t need a business plan, and Venture Capitalists don’t read business plans (believe me, if they invest, they will want you to do some planning), and plans are a waste of time, is how in the world can you pitch, and how in the world can you know what to pitch, if you don’t do all the research involved in a plan? Everything you need to include in a pitch deck comes from the research and financials you would do if you were writing a plan.
Now, does anyone need to write a 30-page plan? Absolutely NOT. No one will ever read that. But every startup needs to know the critical points I outlined above. And you can’t know that information without going through a business-planning exercise.
The cool thing about actually going through the steps to research and jot down the critical information required for your pitch is that, if you keep it in a place that you can go back to and review it, you can keep on top of changing assumptions. Anyone who has started a business understands that what you THINK is going to happen rarely ever plays out exactly in the same way. But being able to return to a plan, and a forecast and a budget, and compare the difference between what you said and what actually happened helps you understand critical metrics for your business. Some examples:
- You may think that you can get paid promptly, every 30 days. When you implement, it turns out that your payment terms as a new startup need to be every 45 days. Knowing this information, and comparing the actual to your planned, will highlight a potential cash flow issue before it becomes a crisis. Your “planning” (not your plan), has paid off.
- You may have estimated your cost of goods sold (COGS) to be $20. It turns out your volume is better than expected and you brought your COGS down to $18. Knowing this allows you to either understand why you are more profitable or allocate the extra money to marketing and sales to sell even more. Your “planning” (not your plan) has paid off.
- You may have estimated your vendors would accept payment from you in 30 days (your Accounts Receivable). But, because you are so new, your vendors end up negotiating 15 days, or even worse Cash On Delivery (COD). Knowing this information and comparing it to your plan will alert you to yet another potential cash flow crisis. You will need to make sure you can pay more quickly than you thought, which may mean getting more funding or using your funding faster than you had planned.
I could go on, but I think you get the picture. I completely agree that old fashioned 30-50 page business plans are relics of the past. But I think that sometimes, when people have this idea that they are only pitching and not planning, they are really just changing the vocabulary.
Planning should be nimble. Planning should focus on just the information you need to run your business, and planning should be an ongoing process to help you understand where you are doing well, and where you may be headed into trouble– before it happens. The more information you can gather and understand about your business and how it relates to your market, competition, pricing, bottom line, and cash, the more successful you are likely to be.
So go ahead, pitch. Don’t send a business plan to anyone. But you better have done your homework and have all the research somewhere, so that when that Venture Capitalist asks you a pointed question about why your forecast is realistic, you can launch into an intelligent response that covers your market, the size, the competition, and your pricing, which will show that Venture Capitalist you actually do know what you are talking about, and could potentially implement this business.
This post was previously published on the ForbesWoman blog.