A business plan is a tool you use to persuade somebody to support you in some enterprise. So, it’s not only a sales brochure for what you’re hoping/aiming to do, but also an evangelical gospel for your unique way of seeing things, as well as many other kinds of things simultaneously. Out of all these parallel aspects emerges a “Virtual You” – the self-constructed profile of yourself and your company that you present to potential backers. Remember that to them, you are so inseparable from your plan that, to all intents and purposes, you are your plan.
Yet if you look a little closer at what’s going on, you’ll find that business plans sit awkwardly in a limbo zone between financially-general persuasion tools (such as elevator pitches and executive summaries) that tend to contain few actual figures, and financially-specific persuasion tools (such as financial models, cashflow analyses, and management accounts) that are usually built around more detailed figures. So, which of these are they? The confounding answer often seems to be: both of them and none of them. Yes, it’s a mess.
The fundamental problem with business plans, then, is that nobody really knows what they should aspire to – at heart, should they be general or specific? As a result of this confusion, what usually happens is that they end up being amorphous catch-all documents containing a rag-tag mix of both, and with insufficient genuine focus to satisfy either kind of audience.
Hence if you’re ever told “you need to write a business plan to do [whatever]“, be very wary of what you set out to do! Different kinds of potential backers look for different things at different times: for example, quite a few UK angels (typically accountants and cashed-out Finance Directors) only actually want to see an executive summary and a cashflow analysis, while many others (typically cashed-out financial service professionals) look for a pitch deck and slides from your financial model. But don’t get tied up in the generalizations – everyone is different, and you may well need to prepare a whole raft of documents and presentations to give you a reasonable chance of “hitting the spot” for more than just a handful of them.
Personally, I think that there’s something a bit more subtle going on here, and that we should look more to the psychology of investing for our clues into the kind of sales documents we produce.
Specifically, the more speculative kinds of presentations play to investors’ desire for success, their aspiration, probably even their greed. So if a pitch or exec summary doesn’t leave them downright salivating, it has failed in its job. Similarly, the more detailed, empirical kinds of document are there to overcome technical financial objections, to assuage potential investors’ primal fear of losing their shirt – basically, to dampen down their fear of failure. That leaves a big space in the middle between the two: but what should go in there?
Ultimately, I believe that though they don’t tend to talk (or even think) about it much, business angels tend to be ruled by Two Big Fears – not just fear of business failure, but fear of being led up a bizarre garden path by someone who has become so good at fooling themselves that they end up fooling you too. That’s the whole “delusion” thing that Dragons Den / Shark Tank producers take such delight in foregrounding – is “bone marrow scented shaving foam for dogs” an incredibly brilliant idea or an unbelievably stupid one? Do you really want to invest £50K to find out which?
So having been thinking about this for years, I’ve come to believe that what should primarily be in business plans is simply things to do with the market – both macro-marketing (genuine market research you’ve personally carried out, together with brief analysis) and micro-marketing (genuine opinions of customers within the sector you’re aiming at). Things that validate your claims about what is going on in the big wide world. Things that ground your high-concept presentations and pitches in reality. Things that mean you’ve probably taken a bet against the market that is going to pay off.
Really, whatever the merry band of semi-retired forensic accountants posing as UK business angels may think, few startups have genuinely enough historical data to genuinely produce workable financial models, cashflow analyses or indeed management accounts. (I suspect that most of the time angels use these as a way of getting entrepreneurs to commit to unreachable milestones under impossible conditions… you have been warned.)
Hence the best-case scenario at such an early point in a startup’s history is simply that (a) the principals aren’t spending money very fast, (b) they’ve taken the time and effort to listen to their market first so as not to get taken in by a whimsical delusion, and (c) they have the wit, common sense and practicality to communicate that research to you.
So that, for me, points to what a business plan really is: a means of communicating the genuine market research you’ve carried out to test your ideas about (i) how the world works in your particular corner of it that forms your marketplace; and (ii) how you plan to improve it. Don’t be too general (leave that for your pitch) nor too specific (unless you genuinely happen to have a load of data), but concentrate on the view from the other side of the table – your customers’ side.
Let me know how you get on!