Startuppers – Repeat After .ME: Yes, I Do Need a Business Plan

In a startup, your initial plans are almost certain to be wrong in some way, and your first priority should be to figure out where.

Paul Graham

If you’re anything like a majority of creative aspiring startuppers, you love doing things on the go. Sometimes it might seem a bit risky and hectic, but it’s also exciting and it aligns perfectly with your usual workflow. It’s like your little adrenalin-entrepreneurial rush. Chaos is your best pal and it makes you believe the best things in life happen completely spontaneously.

You might have even participated in a quarrel or two, where you strongly advocated this theory: when one startupper has an amazing idea and a strong will to succeed – opportunities are practically thrown onto his feet as the world has no choice but to acknowledge his awesomeness.

In this case, he simply cannot fail, right?

While it is impossible to kick luck out of the equation as an unimportant factor to your business success, the famous “go with the flow” advice is more suitable for that new awkward dating situation you got yourself into – not your first significant business steps. There is a subtle difference between embracing the trial and error philosophy, and chaotically buzzing around while constantly failing until you finally get it right. Mind you, with the latter approach – success probably comes out of sheer coincidence (if it comes at all), and it’s definitely not the maximum you could have achieved.

Of course, just like there are dozens of different ways to raise a child, there isn’t a single right way to launch a startup. There are simply too many variables and factors involved to definitely label one method as the correct one. Heck, that would mean that we invented the final fail-proof formula for business success! Still, there are some ingredients that remain essential and you can learn to be better.

[su_box title=”While it is impossible to kick luck out of the equation as an unimportant factor to your business success, the famous “go with the flow” advice is more suitable for that new awkward dating situation you got yourself into – not your first significant business steps.” class=”trap small right”][/su_box]

If you do feed on chaos, it might not be a complete disaster. On the contrary, it shows you can handle the pressure, that you don’t have a problem with uncertainty or plot twists, that you enjoy the excitement and are courageous. In short, it is an indication of agility, which we already mentioned in one of the previous posts as one of the most important traits of startuppers.

However, chaos eats you up if you let it control all your battles. If you want to succeed with your startup, you need to plan things. And I mean writing an actual business plan; not those casual and loose plans you make in your head, like what you’re going to cook for lunch tomorrow.

Repeat after .me: Yes, I do need a business plan for my startup.

Shucks, Do I Really Have To?

You might be feeling resistance towards writing a business plan. And it’s completely understandable: it’s not the most exciting thing a person can do, especially with all the changing the world and other cool stuff you plan on doing.

But it’s a fairly logical step to make: how can you work towards a certain goal if you haven’t put an effort to define it? If you don’t have a plan, you rely on improvisation which leaves a lot more room for failure.

[su_quote cite=”Ingvar Kamprad, founder of Ikea” class=”left”]
Simplicity and common sense should characterize planning and strategic direction. [/su_quote]

From a psychological point of view, writing things down is wise as it creates commitment. It’s like signing a contract with yourself: research has shown people who choose to do so are more likely to achieve their goals because this helps them become more responsible, more organized, and productive.

In addition, if you’re hoping to get any financial support, investors will need to see where you plan on going with your idea and how well did you think everything through (i.e. can you make it happen). It’s their money at stake and your business plan is like a movie trailer based on which they can estimate whether or not they want a ticket in the front row.

Here are the main reasons why you really need a business plan:

• It will uncover any setbacks in your business idea
• It is a test for you and your team as it reveals whether or not the whole crew has an equal vision of the startup’s purpose
• It gives your business direction a more concrete and realistic feel (and makes progress measurable)
• It provides the potential investors with necessary info about your goals and allows them to assess your capability to achieve them
• It is a first step towards becoming more responsible and organized with leading your startup (i.e. it enables guided growth and proactivity)
• It can honestly help as the last evaluation filter of your idea (it helps you avoid the “it sounded better in my head” disaster)
• It is important for defining processes within your startup, dividing roles among team members, and having clear steps to follow

You know how your mom forced you to eat your veggies when you were little? Even though broccoli wasn’t the most fun thing to see in your plate, now you’re probably a healthy adult who is grateful for having a disciplined childhood. Today you understand the purpose of eating something you don’t really enjoy because it’s good for you: the same goes for writing a business plan, suck it up.

It’s Not as Difficult as You Probably Assume

Writing a business plan is a walk in the park compared to the actual work you have to do in order to make your startup come to life and afterwards – to keep it sustainable. There are a lot of misconceptions regarding what makes a good business plan and how do you actually write it.

[su_quote cite=”Steve Jurvetson, American businessman and venture capitalist” class=”right”]
Ultimately, we want to fund entrepreneurs who want to change the world, and to initiate those discussions, a half-page of five-year financial projections coupled with a thoughtful discussion of the key drivers should suffice. [/su_quote]

Although some technical knowledge is needed, you don’t have to be an expert. The reason the world has so many incredible startups is because they were initiated by people with very different backgrounds. So, we’re not talking about a group of chosen people holding MBA degrees who have an impeccable sixth sense for business.

Here’s what Paul Graham, a venture capitalist and a programmer who is a co-founder of the Y Combinator, had to say on the topic of business plans:

Usually you get seed money from individual rich people called “angels.” […] Our angels asked for one, and looking back, I’m amazed how much worry it caused me. “Business plan” has that word “business” in it, so I figured it had to be something I’d have to read a book about business plans to write. Well, it doesn’t. At this stage, all most investors expect is a brief description of what you plan to do and how you’re going to make money from it, and the resumes of the founders. If you just sit down and write out what you’ve been saying to one another, that should be fine. It shouldn’t take more than a couple hours, and you’ll probably find that writing it all down gives you more ideas about what to do.

See? It’s not that hard! Of course, you can focus on developing the detailed plan later, but baby steps first. There are three main things to make in mind here:

• Whether or not there is a market need for your product (do people really want and need your product/service)
• The costs + the how’s (how much money do you need for sustainable cash flow and how you plan on placing the product/service)
• The end goal (why are you doing this)

Logically, your business plan has to provide solid answers to the toughest questions: are there customers for your product/service and can you monetize them at a higher level than your acquisition costs?

Verbalize And Brainstorm First, Then Write

If there are any writers reading this, you must be familiar with the struggle of formulating your thoughts into meaningful sentences. The creative process is complex: it’s not like you can instantly start shooting words out of nowhere. You need some time to contemplate the idea and analyze it from various angles.

Same goes for writing a business plan: you need to let it sit for a while and brainstorm its frame with your team members.

Here’s a bit unusual, yet effective way to do this: have you heard about the PechaKucha presentation format? It has pretty clear and simple rules: you set 20 different slides to switch automatically on every 20 seconds, which leaves you with less than 7 minutes to tell your story.

Sit with your team and imagine you’re pitching your idea to investors in this format. Try your best to verbalize everything they need to know about your startup so you seal the deal. This little exercise is useful for several reasons:

• When you have so little time, you are forced to sum down your startup’s idea, goal, and plan to its core – which is a good thing (what you are doing has to be crystal clear and easily explainable, both to you and your team, and your future investors and customers)
• Actually discussing your startup’s plan out loud helps with noticing flaws, or it triggers new and better solutions
• Oral discussions mean the business plan is in progress: you don’t have to bother yourself with rewriting the actual text
• Come up with the final version for the presentation, deliver it to various audiences, and ask for their feedback – it will ensure your startup’s mission is clear enough and understandable, which will be a great starting point for writing your business plan

Ten Points to Build Your Business Plan On

Guy Kawasaki advocates the method of pitching before writing, too. He believes one should focus on making the core structure of the presentation and then afterwards get busy with writing a business plan. The framework should be set around ten points:

1. Title slide (the name of your startup and contact information)

2. Problem (the real need on the market you’re addressing)

3. Solution (how you plan on solving that problem; description of your product or service)

4. Business model (explaining planned partnerships, roles of anyone who participates, all the whys and hows)

5. Underlying magic (describe the technology behind your solution; while you might be dealing with a problem that’s already addressed by someone else, it’s the innovative how you do it that makes your startup a special snowflake like no other)

6. Marketing and sales (having a demo increases your chances of getting financial support and developing customers; it’s always good to show people exactly what your startup aims to do)

7. Competition (this shows you’ve done your research and know how to position your startup)

8. Management team (describe the roles of all those who are responsible for making your idea live)

9. Financial projections and key metrics (define your number of customers, locations, resellers, and explain how your assumptions fit the reality)

10. Current status, accomplishments to date, timeline, and use of funds (explain how you plan on spending the money, figure out your ROI, set milestones and deadlines, i.e. a time plan you’ll follow)

It’s always a plus if you manage to include testimonials and contact information of people who have tested your prototype or gave you valuable positive feedback. Graphics and other visuals are helpful to point out metrics and forecasts you have.

The most important part of your business plan should be the executive summary. Similar to the regular summary on your personal CV, executive summary provides an overview of your abilities and professional background and gives you credibility – like you and your team are the best guys out there for the job. It should also include a brief explanation of why you think your startup will be successful (e.g. what market gap does it aim to fill). Executive summary should be captivating and visually well-organized as it is the first encounter between your potential partners (or investors) with your startup.

The Lean Startup: What’s All the Fuss About?

You’ve certainly heard about it. The lean startup methodology was introduced nearly a decade ago and when Eric Ries published a book about it back in 2011, it spread across the business world rapidly.

Remember when we said there is not a unique right way to become successful in the startup world? Well, prepare for something totally different.

Ries stands by the methodology he developed: instead of wasting thousands of hours writing a business plan that might turn out to be complete fiction (as there are too many unknown variables in the equation), one should focus on embracing the “build-measure-learn” method. Shortly put, one should build a certain product and directly reach out to their customers in order to get feedback, then measure the success of it, learn from the test, and get back to perfecting the product.

[su_quote cite=”John Lasseter, CCO of Pixar and Walt Disney Animation Studios” class=”right”]
Quality is the best business plan. [/su_quote]

As we said, agility remains one of the most important things. It is also one of the greatest advantages of being the little guy on the market: startups should never try to imitate big companies. According to Ries, the main difference is that established companies have a business plan they execute while startups rely on the diametrically opposite process: they look for one by experimenting and testing their hypothesis, over and over again.

Lean startup includes three main principles:

• Building a business model canvas: Startuppers need to accept the fact they only have fair assumptions on which they aim to build their business plan. It is ok to sketch out your hypothesis as you cannot see in the future.
• The “get out of the building” approach: Instead of imagining the possible results, startuppers should go into the world and test their ideas for real. We’re talking about minimum viable products (MVPs) and learning from actual feedback.
• Embracing the agile development: The lean startup method implies shortening development cycles with iterative approach. It helps you understand if it’s perhaps the time to pivot.

As you probably realized by now, this business model underlines the importance of action over planning. However, for inexperienced entrepreneurs, it can be a slippery slope.

This doesn’t mean you shouldn’t have a plan at all. Many read through the book and see it as a justification of their “go with the flow” approach.

Keep in mind, the methodology does not suggest throwing things against the wall to see if they work and it doesn’t exclude the needed theory, research, and brainstorming.

It simply shows the importance of practice and going out there to test the value of your service and product. It raises the trial and error approach to a new level, showing that startuppers can actually benefit from a serie of small failures. It actually implies having greater control of the failure process when you remain careful with how much you invest and where and how you put your idea to the test.

What’s being criticized in the Ries’ book is the traditional, formal written business plan. The problem lies not in the planning process, but in the attempt to plan every single detail out. It takes too much of your time and it isn’t productive. Unless you’re a damn good fortune teller, you cannot predict where your business will be in five years. What you can do is set some goals and learn to adapt them to reality.

A little less conversation, a little more action (baby?) – that’s basically what Eric Ries is trying to communicate throughout the whole book.

Learning From the Fallen Comrade: Everything.me

According to the data provided by CBInsights, the lack of an effective business model holds a seventh place among the top twenty reasons startups fail: 17% of businesses have been shut down because of it.

The startup mindset is usually naturally hardwired to do good to the world: the practice of bringing back to the community includes postmortem startups stories where all the mistakes are shared and publicly analyzed so that everyone can learn from them (FYI, Domain.me is preparing an article in which we’ll introduce you to startups which have failed but were kind enough to selflessly share their paths with us!)

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Duet Media developed Everything.me and it was insanely successful: it was a launcher which enabled users to organize apps based on the context and previous behavior, predicting which apps you want to open next and finding new ones you might like.

The developers managed to gather around $40 million from various investors. The primary product (i.e. Android home screen) was ranked in the top ten apps of this type across forty countries. It was downloaded 15 million times (!) and gained incredible popularity.

Sadly, the team didn’t manage to find a viable business model and decided to shut down Everything.me as they couldn’t generate any revenue. They had a responsibility of doing so, not just towards themselves, but towards the investors, too. The team has explained:

EverythingMe’s revenue model assumptions were based on contextual discovery – you get app and content recommendations that are relevant for you at the right time and place. The #’s we’ve shown were breaking all industry benchmarks, but growing in emerging markets meant we couldn’t convert this value-added discovery to significant income for the company to keep pursuing its vision and build its product.

Important lesson to be learned here: depending on the type of your product or service, it can be incredibly challenging to find a business model that works. Taking a leap of faith doesn’t mean you won’t be successful (and there are many different ways of defining success). However, on the long run – it’s not a good solution and you might find yourself stuck in the middle or unfortunately pushed aside from the business scene due to the lack of profit.

[su_quote cite=”Herb Kelleher, co-founder of Southwest Airlines” class=”right”]
We have a ‘strategic’ plan. It’s called doing things. [/su_quote]

Now, we all know God laughs when you make plans. Your business plan is not set in stone. If reality offers you a gold opportunity that doesn’t really fit into your written plan – hell yeah you’re gonna take it! A business plan is simply something you can lean on, but you are allowed to deviate from it if it means reaching your goal via some other path (or even bettering the set goal). Changing directions might be the best decision you make, as you can learn from the most successful businesses of today.

Face it – even when you go grocery shopping, you have a piece of paper so you don’t forget anything. The same goes with your business plan: it helps you stay on track, more effectively alter your idea and its implementation (if needed), manage your team, and push your business forward.

Domain.me loves supporting the startup community! This article is a part of our startup serie. Next time, we’ll discuss in detail how to build an engaging website for your startup and make it stand out in cyberspace!

[To find out more about the pre-launch phase, check out our first article from the serie! Interested in how to differentiate your startup from the competition? We’ve got you covered!]