A written business plan does not get you venture capital
by Healy Jones
I was recently pointed at an interesting study by several professors at University of Maryland's Robert H. Smith School of Business. These professors' study analyzes the impact of written business plans on a startup's chance of successfully raising venture capital. Their conclusion (as summarized by PEhub): high quality written business plans do NOT increase the odds of raising venture capital.
The professors are correct.
Your written business plan is not the most important thing
Early in the venture funding process you, as a startup founder, have two simple goals:
- Get a meeting with the VC
- Convince the VC to begin diligence on your startup
That's it.
Far more important than your written business plan is HOW you are introduced to the VC, because this gets you past the first point above. Your best bet is to have been a successful CEO who was previously backed by that VC (yeah, I realize this is probably not you, but think about how much easier it will be the second time!) Your next best bet is to be introduced to the VC by an entrepreneur with whom they've worked before. Or, try to find someone on a board of directors with them who will introduce you.
I'm not trying to trivialize this. I realize you do not likely have these connections. But they can be made. I see first-time entrepreneurs who have gained the confidence of very successful CEOs/founders all the time. First-time entrepreneurs who pretty much had no business getting the attention of these big time CEO-types! Many of them didn't know these successful CEOs/had no connection to them prior to founding their startup, yet they have been able to convince these CEOs to act as advisers. People who are able to get these well-known entrepreneurs involved are also more likely to be the resourceful-type founders who create legitimate businesses.
Use a short investors' presentation
After you get this introduction you will want an investor's presentation. (Ok, so I maybe trivialized the introduction step a bit.) Your presentation should be short - long presentations do not get read by busy VCs. Sorry, but that is the truth. You will increase your luck with a shorter presentation vs. a 50 page business plan. I often point entrepreneurs to a template investors' presentation on the Common Angel's blog as a good starting template for their presentation. By all means write a great plan, one that will help you run and operate your business. Just don't expect that same plan to get you funding.
Your final business plan may be different than the one you started with
I think the professors' conclusions would be different if they had been able to look at the final presentation (and business plan behind it) given to the venture partnership just before funding was approved. My partners and I spend lot of time working with entrepreneurs prior to seeking approval from the fund's partnership for an investment. Beyond the traditional due diligence work is time we put in to refine the business plan and the investors' presentation seen by the funding approval group. We do this with both first time CEOs and entrepreneurs who have sold businesses for hundreds of millions. It is an important step, not only in planning for the business, but also in setting expectations on how we as a fund will work with the founders.
And, academically, I'd bet that these final plans are statistically significantly higher quality than the average plan submitted to VC funds.
