Yes, you need a business plan

Every now and then someone who has an idea for a company or a product will ask me, “Do I really need a business plan?” I guess they read about seemingly ethereal companies raising huge equity rounds at mind-boggling valuations and believe the sizzle of “no business plan.”

If you don’t have a business plan that covers the main points (where your capital comes from over time, how you’ll employ that capital, how you’ll generate revenue, and how you’ll manage the other elements of your financial statements to create free cash flow), then you should stop right now and figure that out.

That’s the business plan you need: something that describes how your company interacts with the world financially. You can pay us $10k to discover the answers for you, which is why some people charge a “nominal fee” and others charge real money.

If you can’t talk through the points I raised, you either don’t have a real plan yet or you don’t know it well enough to convince an investor.

And,  your answers should come from within first, which is the best answer. Here’s a useful post that will also point you in the right direction:

http://sethgodin.typepad.com/seths_blog/2010/05/the-modern-business-plan.html

You shouldn’t need anyone to get you to those kinds of answers. (And as far as working for investors and startups and my Silicon Valley experience and the finance credentials of my team, well, they speak for themselves.)

You need to be able to tell investors about the assumptions and risks inherent in your business model, explain to them that the plan is reasonable, and show them that your team is capable of executing it. Those are investor-focused communications that you have to make, and they’re made to people who are (or should be) heavy-duty financial professionals who run individual companies as part of a portfolio, who make risk-based analyses, and who have to decide based on what you tell them.

If you can get those answers down, and they make sense for your business model, then you just have to find the investors with whom everything resonates (not simple, but doable); if you don’t have the answers, it doesn’t matter who you meet: what you have won’t be ready for them to buy.

 

Oh, and those Valley tech companies you read about? Usually, the answer is that everyone is talking in shorthand because the founders, team, and investors all know enough about the relevant market, competitors, business models, and valuations that they only need a handful of pointers (“compression algorithm” “ad personalization” “multichannel optical router”) and they can fill in all the gaps themselves. The other time that no business plan is required is when the founders and team have already had successful exits, to an extent that the investors can assume that the team knows that a plan is important and is capable of both coming up with something meaningful and making changes as needed. Knowing that they can solve the problem is, in this case, just as good as seeing the solution up front.

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