The irrelevance of business plans

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.But they will read a one-page elevator pitch-style executive summary, and if it stimulates interest, go on to read a five-page executive summary.

But if an investor does not look at their business plans, how do entrepreneurs gain an audience with him? The No. 1 way is referrals by a respected figure in business or banking. Investors look for market validation, hard evidence that the entrepreneur has actually sold his product or at least lined up enthusiastic potential customers.

Venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, 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 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.

Writing a business plan is not pointless, far from it. Entrepreneurs say it enables them to think through the logistics, possibilities, and pitfalls of their operations and to clarify their goals.