Amazing Breaking News: Investors Don't Read Business Plans!

by Peter Ireland

According to the New York Times, a study by a team at the University of Maryland's Business School has revealed that investors don't read your business plan. Unbelievable! And I quote:

Go ahead and write that 50-page business plan about your fledgling venture if it helps you to focus. Just do not bother showing it to venture capitalists, because it will do nothing to improve your chances of getting financing.

That is the surprising conclusion of a new study by researchers at the University of Maryland's business school. [italics mine]

Surprising conclusion? Where have these people been until now? Let's continue:

Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions "under conditions of high uncertainty," venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business.

That means, the study said, that they pay little attention to the documentation from entrepreneurs about their academic credentials, work or start-up experience, previous success in raising equity capital, ability to form a top-notch management team or even how much money they want.

This really does sound like an Onion parody, folks.

I discovered this reality about business plans the hard way within a year of completing my undergraduate degree back in the 1980s. No one ever reads them. Not venture capitalists. Not Angel investors. Not even your momma.

Why not?

Because everyone with an IQ over room temperature understands that they are as accurate and objective as a personal ad on a dating site. In other words, they bear little, if any resemblance, to reality.

So, how do you raise money? Well, think of it this way. You have probably heard the old joke about bankers only being willing to lend you money when you don't need it. Investors aremuch the same. They only want to invest after you have proven the concept and need some safe money for expansion. They don't do companies which consist of nothing more than a business plan.

Let me share a quick story with you that illustrates this point wonderfully. A few years ago a doctor I knew was running a highly successful clinic with a very narrow specialty but huge national market potential. He wrote a business plan and approached a local Seattle venture capital firm. The VC  listened to the short presentation, then leaned back and clasped his hands behind his head, before offering this sage piece of advice. "Look, the way to get money from us is to open up about 12 clinics first and then come back to us."

The doctor looked at him in amazement and blurted out, "If I had 12 clinics open why the %$#^& would I need you?!" He then got up and left.

And that's the way the money raising game is. No one wants to give you capital when you need it most. It's too risky. But everybody wants to give you capital when the risk is gone.