Go Ahead, Write a Killer Business Plan. Just Be Willing to Tear It Up
It’s not the business plan itself that trips up entrepreneurs. It’s how those plans make entrepreneurs behave that causes trouble.
Here’s what happens: You have a killer idea. You do a ton of research — about the market, the competition, and your financial projections for, say, the next five years — that you organize into a work-of-genius plan that should make investors compete to throw money at you. That’s great. If you’re an unproven entrepreneur seeking funding, that formal plan is useful and even necessary.
Here’s the problem: To write your plan you made a lot of assumptions, and many of them may turn out to be flat-out wrong. “When you have a ‘brilliant vision,’ everything seems to confirm your theory,” says Eric Ries, who writes the blog StartupLessonsLearned.com and advises startups, big companies, and VC firms about the benefits of running a “lean startup.” “You’re looking for evidence that you’re right, not wrong.” Soon you start believing too firmly in your own numbers and assumptions, and before you know it, you’re treating the plan as if it were gospel.
This experience — the founder clinging to the plan — often turns into a make-or-break moment for an entrepreneur. Cling too long, and you’ll fail. Be willing, even eager, to part ways with your initial ideas and you’ll up your chances of success. In 2002, the magazine Inc. surveyed founders from its Inc. 500 list of fastest-growing private companies and found that only 40 percent had written formal business plans. Of those, nearly two-thirds said that they diverged significantly from their original plan. “Every pivot is important for a startup,” says Ries.
Caterina Fake knows this first hand. In 2002, she and her then-husband and co-founder Stewart Butterfield were toiling away with an online multiplayer social game called Game Neverending. It had a loyal fan base, but it lacked a solid revenue model and the company’s future prospects were bleak. Their small team was running out of cash and couldn’t attract VC funding. So Fake and Butterfield, both Web-design geeks, shelved the idea, raised $250,000 from family and friends, and started working on an instant messaging client that had game-like features and could handle photos. When that didn’t quite work, they dropped the instant messaging but kept working on the idea of a photo–sharing application. Flickr, which launched in 2004, “was a Hail Mary into the end zone,” says Fake.
Ultimately, Flickr didn’t take off until the concept of tagging, the product of another startup, came along later that year. Tagging gave Fickr an easy way to organize photos using keywords. Had Fake and Butterfied sat down to write a business plan, they never could have charted the path to Flickr. “We did no research because we weren’t planning on building a photo-sharing site,” Fake says. “If we had done our research, we would have said we shouldn’t bother because it’s all been sewn up” by competitors like ofoto, shutterfly, and snapfish. A year after Flickr’s launch, Yahoo bought it for $35 million, and today it’s one of the biggest photo sharing sites on the Web.
Now Fake is on to her next startup, an online recommendations engine called Hunch, and she’s practicing the same approach. “I think we picked a really good problem to solve” — that of helping people make decisions on everything from where to stay in Santa Fe to what kind of tennis racket to buy. “We could be a billion dollar company if we’re successful,” she says. “But we’re making it up as we go along. It’s not like we have this whole business plan and we’re going to execute on it.” This time, though, Fake took a big chunk of VC money ($12 million in the latest round of funding), which, admittedly, was easy to do because of her success with Flickr.
Her story might seem unique to the tech world, but it’s not. Plenty of successful companies have little resemblance to what the founder envisioned, whether that vision was spelled out in a formal business plan or on a cocktail napkin. The lesson: Be determined and confident, but not pigheaded. Understand that your plan, whether written in detail or not, is merely that — a plan — that you’ll have to tweak and adapt as the many factors beyond your control come into play. As Amar Bhide, a visiting scholar at Harvard University and author of 2000 book “The Origin and Evolution of New Businesses,” puts it: “The opportunity may be fleeting. That is why plans in many cases do more harm than good.”
by Lindsay Blakely
