A colleague recently told me that one of his clients, a Stanford MBA, told him that “nobody does business plans anymore.” Don’t investors and VCs want to see a business plan? I think VCs are tired of seeing business plans because they rarely provide value to the company, or the investors. That’s because they almost never include any description of the company’s strategy. Any new company must, by definition, overcome obstacles to market entry. This requires a detailed “diagnosis”* and understanding of these obstacles, problems, and opportunities the company is going to face. Most business plans don’t include this. Instead they gloss over the details of these problems in favor of “hockey stick” projections of 5 year revenues and profits. Experienced investors know these projections are almost always fluffy B.S. – and they routinely discount them.
Second, the typical business plan does not include the second component of a good strategy, a “guiding policy” that sets forth the method the company will pursue to overcome the obstacles. This guiding policy defines the approach your firm will take, and importantly also helps to define what approaches will not be used. The guiding policy also outlines the sources of advantage that will be employed in the approach. This is of great interest to potential investors because they want to know what advantage (often called competitive advantage) you have over others in the market that would allow you to secure business. The guiding policy creates a framework for the third component of a good strategy, the coherent actions.
Crafting a coherent action plan is critical to startup companies. ”Coherent actions” flow from the guiding policy, and are the detailed actions, methods, resources, and plans you put in place to traverse the obstacles. Coherent actions should be designed to work together. Notice the term resources above. That is your required investment. A good strategic document will provide investors with your resource requirements and the use of funds. If you don’t know this, you’re wasting your time.
Let’s take a step back and look at this from the investor’s perspective. I’m your potential investor and you want my money. I want to know if you will be able to do something with my money that will ultimately generate more value than I can generate by putting it somewhere else. If you present me with a thin projection of future returns based on nothing substantial, I will not be impressed. If, however, you present an honest strategy that considers the real risks and a clear headed policy and set of actions to overcome these obstacles, at least you will have gained my respect and trust. If your investors don’t trust you, they will never let you put their capital at risk.
For more details on what a good strategy is, download our white paper: What is Good Strategy, Really?
* The terms “diagnosis,” “guiding policy,” and “coherent actions” were coined Richard Rumelt and described in his book Good Strategy/Bad Strategy: The Difference and Why it Matters. You can get the book here.