The evidence indicates that the vast majority of business plans raise no money. Of those ventures that are financed, many (if not most) will fail. What’s wrong with this picture?
At least three things are wrong.
The first thing is that most business plans are written for opportunities that are fundamentally flawed. Why write a business plan for a no hope opportunity? It’s a waste of entrepreneurial time and talent. What’s also wrong is that the inherently persuasive nature of business plans, a principal purpose of which is often to raise money, forces their proponent entrepreneurs into ‘everything about my opportunity is wonderful’ mode. Alas, the likelihood — for most opportunities, even the attractive ones — is that everything is not wonderful; but there may be one or two things that are sufficiently wonderful to outweigh those that are not.
In the same vein, the aspiring entrepreneur who prepares and pitches an ‘everything is wonderful’ business plan — like the ones many books and software packages describe — risks his or her credibility with investors, people of experience who know the real risks that entrepreneurial ventures entail. This naiveté makes it harder, not easier, to raise the money that’s needed. Worse, notwithstanding a risk section in which the typical plan papers over what might go wrong and explains why it won’t, such a positive slant risks blinding the entrepreneur to the very real risks that conspire to bring most entrepreneurial ventures to their knees.
The third thing that’s wrong is that most business plans are focused on the entrepreneur, his or her idea, and why it’s wonderful. They are ‘me-focused’ or ‘my idea-focused’ rather than customer-focused. People do matter, true, but investors don’t really care very much about you and your idea, at least not at the beginning. What investors care about is solving significant customer problems or needs that offer significant profit and growth potential. If you have a solution to such a problem, then their ears will perk up. If you’ve shown that you can deliver results in solving this kind of problem, you’ll have their undivided attention. Thus, the importance of people lies in the context in which they operate. Set the context first. Let the people story — of you and your entrepreneurial team — close your sale.
Is there a solution?
There is a solution. Instead of diving into business-planning mode, step back and ask yourself whether the opportunity you have in mind is genuinely attractive. That’s what an aspiring entrepreneur named Cassian Drew did before embarking on a plan to sell climbing-wall hardware and exercise programmes to fitness facilities. He spent a summer examining his opportunity and, in the process, learned exactly how fitness operators assess the economics of the gear they acquire. Alas, it quickly became clear that the economics underlying what he had thought to be a great idea just weren’t going to fly. While he and his partner were well-suited to the opportunity and the market was attractive — with booming interest in both fitness and climbing in the UK — there simply wasn’t a business model that would work. As Drew and countless numbers of entrepreneurs have learned, usually the hard way, opportunities are best understood in terms of three crucial elements: markets, industries and the one or more key people that make up the entrepreneurial team. What I call a ‘customer-driven feasibility study’ is something which entrepreneurs, whether in nascent start-ups or deep in the bowels of an established company, might use to guide their assessments before they invest precious time and effort in writing a business plan.
There is considerable overlap in the content of a customer-driven feasibility study and a business plan. And that’s actually a good thing. In fact, all of the analyses I advocate are essential, though not sufficient, for crafting a thoughtful, evidence-based business plan. So, what’s new here? What’s different from a business plan?
The feasibility study is focused on the customer. As Peter Drucker wrote many years ago, the purpose of any business is to win a customer. The feasibility study hones in on that purpose, one quite different than that of most business plans — to win an investor. Without the likelihood of there being customers, there will probably be no investors.
The feasibility study succinctly addresses the fundamental economics of the business, by identifying the key drivers of cash flow: revenue, customer acquisition and retention costs and timelines, gross margins, required capital investment and the working capital characteristics of the operating cash cycle. If these drivers are satisfactory, detailed strategies — for marketing, operations, and financing — can probably be developed to make the venture economically viable, provided the market, industry and team elements are sufficiently attractive. If they are not, there’s little point in wasting time developing such strategies.
The customer-driven feasibility study asks the critical questions necessary to satisfy the entrepreneurial team’s curiosity about the attractiveness of the opportunity itself and makes it possible to answer these questions before developing the detailed strategy necessary for the completion of a business plan. Thus, its mindset is to ask (and answer) questions, not to sell the venture’s merit. In contrast, the business plan organises the answers delivered by the feasibility study and goes on to develop marketing, operating and financing strategies in an effort to sell the opportunity, in a sharply focused way, to investors and other stakeholders.
“Are these differences worth the effort?” you might ask. Why shouldn’t you, as a would-be entrepreneur, simply skip the feasibility study and proceed directly to preparing a business plan?
First, researching and preparing a customer-driven feasibility study gives you a chance to opt out early in the process, before investing your precious time and energy in preparing a complete business plan. Thus, it can save weeks or months of time that might be wasted on a fundamentally flawed opportunity.
Second, for opportunities that do look promising, the feasibility study jump-starts the business planning process and provides a clear, customer focused vision about why your proposed venture makes sense — from market, industry and team perspectives, viewed independently and collectively. It identifies the customer pain, how you’ll resolve it, and the one or two domains that probably make the opportunity stand out. These factors become the drivers of your business plan.
Third, by ensuring that all aspects of the opportunity are examined, your analysis can better understand and thereby reduce your risk of entering a fatally flawed venture.
An open mindset is crucial
Asking and getting answers to the feasibility questions with an open mind — deliberately, objectively and comprehensively, based on realworld evidence, rather than hopes or dreams — is an important first step that entrepreneurs all too often ignore. No car buyer would buy a new car without a road test, and that’s a far less risky decision than the one you are about to make. A customer-driven feasibility study is the entrepreneur’s new business road test. Entrepreneurs who proceed without doing one ignore it at their peril.
This article was taken from Business Strategy Review, for the latest business thinking from all London Business School faculty