Fail Fast or Win Big: The Start-Up Plan for Starting Now (2015)
The End of Business Plans
If you want to sell a product, just make it. If you want to sell a service, just deliver it. If you want to create a company, just create one. There has never been a time like the one we are living in right now.
“Move fast and break things. Unless you are breaking stuff, you are not moving fast enough.”
New products and services are appearing so rapidly that we cannot even see new industries forming until they are already of significant size. The evolution of digital music led to the development of MP3 players, which quickly became just a feature of this new thing called a smartphone, which spawned its own multi-billion-dollar case and accessory industry. And that does not even begin to touch the size and opportunity of the mobile applications industry.
Look anywhere around you. Organic foods, health-care services, GPS-based technologies and products, renting cars by the hour (Zipcar, Car2Go), and the like. Companies are launching and trialrunning services and products faster than ever before. As an entrepreneur, you need to accept that speed to market is the new normal, and that fast just means faster to take advantage of the opportunities that are seemingly nowhere and then everywhere. Fail Fast or Win Big will help you understand how you can move faster, how you can learn if you actually have something worthy of being a company, or perhaps how you can evolve, pivot, or abandon the idea.
How do you start, though? Do you write a business plan? Build a prototype? Seek investor capital? And which do you do first? To understand the start-up ecosystem and the need for speed, let’s look at how things used to be done and why they no longer work as well anymore.
WHAT’S A BUSINESS PLAN?
A business plan is a formal statement of a set of business goals, the reasons they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals. The business plan is formally written; most detailed business plans average between 25 and 40 written pages. The core sections of a business plan may include the following:
• Executive Summary. The first section is a concise overview of your business plan. While the summary should be short, it must be well written. Your objective is to draw readers in so they want to learn more about your company. Though this section appears first, consider writing it last, after you’ve worked out the details of your plan and can summarize your thoughts clearly.
• Company Description and Mission. This high-level view of your company should explain who you are, how you plan to operate, and what your goals are.
• Products or Services. This section clearly describes what you are selling, focusing on the customer benefits. It incorporates details about suppliers, product or service costs, and the revenue expected from the sale of that product or service.
• Marketplace and Competitive Analysis. Here’s where you show your industry and marketplace knowledge, information on the competition, key trends, key insights about your potential customers, and where you make your recommendations.
• Strategy and Implementation. This section defines your sales and marketing strategy and detailed tactics; in addition, it indicates key elements of your business operations.
• Organization and Management Team. In this section, you outline your company’s organizational structure and identify the company owners, management team, and board of directors.
• Financial Plan and Projections. This last section of your business plan should be developed with someone who can help you with financial projections, revenue statements, and other financial documentation you may need based on your business model.
I have written quite a few business plans and I have reviewed hundreds of other business plans. However long you think it will take you to write a solid business plan, you have to double or triple that time and effort to include the myriad details and the research data you need to provide.
As much as you think you are writing the business plan for yourself, you are not. The writing of the plan is helpful to you in terms of planning and understanding your potential business, but the plan itself is written for others, who may become partners, employees, and perhaps investors.
WHO NEEDS A BUSINESS PLAN?
We have had entrepreneurs creating and running new companies for centuries. To start and grow initially, they turned to friends and family for funds. If they had collateral, they could apply for a bank loan, which the entrepreneur paid off over time with interest. Then, in the 1960s, venture capitalists created a new way of building an enterprise expressed by this formula:
Entrepreneur opportunity + business plan + venture capital = new company.
Why was this so? Because the corporate managers, scientists, researchers, and engineers who were creating the first tech companies in what would become known as Silicon Valley couldn’t get bank loans.
The venture capitalists took equity instead of interest, but like the banks of an earlier time, they also wanted to see a detailed business plan in order to understand the opportunity better and to hedge their risk against potential failure. Slowly, at least in Silicon Valley, potential entrepreneurs became “trained” in the critical elements of creating a start-up company: the formula was to come up with a great idea that had a big market, write a detailed business plan, and then go pitch it to venture capitalists so as to get the money needed to launch the company.
What’s really amazing is what occurred next. Universities in the United States in the 1980s, especially MBA programs, began to embrace this same model of how companies should be created and funded, and they began teaching the development of business plans and venture financing in both their undergraduate and graduate programs. At the same time, entrepreneurship education began accelerating on university campuses. So it was for a few generations of students that the novel concept started in the 1960s has become the conventional wisdom.
Is it still wise, though? Do you really need to write a detailed business plan? Does a business plan still have value? Let’s look at the pros and cons.
The Pros of a Traditional Business Plan
1. Valuable Market Research. The best way to determine whether your start-up idea will work is to see what it looks like on paper. Business plans follow a fairly standard format for a reason: to spot any missing pieces or potential threats and to have a plan to address the opportunity. You really do need to understand the industry, the marketplace, your potential customers, and the competition.
2. Key Achievements. As your day-to-day activity list grows longer, a business plan reminds you of the key milestones that may be critical for determining whether your business start-up succeeds or fails. The constant planning process also tries to ensure that you’re still tracking along your plan.
3. Borrowing Money and Investors. If your business opportunity needs to borrow money or attract an investment to move on to the next level, you will probably need some sort of written document or presentation. Banks and investors get nervous when you can’t show them how you are going to spend the investment money and when you might actually drive some revenue. A business plan somehow makes everyone feel good.
4. Budgeting and Cash Flow. Before most entrepreneurs start a company, they may or may not have had experience in managing a decreasing amount of investor or friends and family money. Going through the budgeting process provides some level of reality, although no one is ever quite prepared. The creation of budgets helps expose some hidden costs and highlights some areas that will need to be managed very well to maintain cash flow.
5. Employees and Goals. Partners and employees need a good understanding of the business and the future goals if they’re going to help you grow the business. Business plans may help employees understand the company’s progress, while providing assurances to investors that the project they bought into is still on schedule and on plan.
The Cons of a Traditional Business Plan
1. You are not selling anything. Business plans can be projects unto themselves that require a great deal of time, effort, and expertise to complete. Rather than wasting time writing a 30- or 40-page business plan, why not just start selling the product, making deals with key distributors, and getting critical feedback from customers?
2. Waste of time and “perfect” money. How many business plans have we read where the written opportunity seems amazing, the research seems flawless, and the budgets and projections just seem perfect? The reality is we know the instant the planning is done that the plan itself is in trouble. Markets, competitors, and customers don’t stand still and play nice. How many spreadsheets can you create that will actually lead to a sale?
3. Flexibility and change is required. You may have planned for every conceivable outcome in minute detail, but you can’t see into the future. It is often the entrepreneurs who are quickest to react who determine which companies succeed and which ones fail. Sticking rigidly to your business plan could actually lead to your company’s failure.
4. The temperature of the water. Quite simply, you don’t know whether your potential idea will succeed or fail until you move into the marketplace. Business plans can give you a great deal of confidence, but only when you start doing business will you know whether your idea is a success.
In summary, you cannot afford to waste time or risk your idea on a perfect set of assumptions. You need to sell something and get customer feedback, so you can make your course corrections and keep running forward. As an entrepreneur, you are not in the business of writing business plans.
WHAT’S WRONG WITH THIS MODEL TODAY?
While this model has worked well during the past 50 years, it now has several problems.
First, the opportunities for entrepreneurs in the world have increased, so there are many more opportunities than there are traditional investors. Also, more individual investors want to invest in start-up companies in all areas, not just technology. Would a traditional venture capital investor invest in a burrito stand? Probably not, but that did not stop Chipotle from becoming a successful company. And some of the new start-ups are moving fast and generating revenue almost immediately. Do they need investor capital? Perhaps not.
The traditional entrepreneur’s model of finding
an opportunity, writing a business plan, and
pitching to venture capital investors is broken.
Second, because marketplaces are appearing almost overnight, should you risk a marketplace window’s closing because you have to spend four to six months writing a detailed business plan and looking for investors? No.
Third, a business plan is out of date the minute it is finished. While writing a business plan is incredibly useful for really doing the research and planning that’s necessary to start a new business, the business environment will have changed during those months it took to write the plan. The industry, the marketplace, the target customer, new innovations, your competition, your team, costs associated with your product or service, what investors are investing in, and so on— all these will have changed.
Fourth, and most important, the business plan’s greatest failing is that it takes so much time trying to predict success that it also takes too long for you to fail.
On that note, failure isn’t bad. The baseball team with the most wins in a season, the 1998 New Yankees, still lost nearly a third of their games. The ballplayer with the highest career batting average, Ty Cobb, had a failure average of .633. The pitcher with the most wins, Cy Young, also had the most losses, 316, which is more losses than the total wins of all but fifteen other pitchers. How are they failures?
“25% of new businesses fail in the first year …
71% by year ten. So, Fail Fast.”
—Kaufmann 2012 Study
Maybe we need to “celebrate” failure so that people don’t feel a stigma associated with it. In truth, there is no stigma. It’s all in your mind. Show me a serial entrepreneur, and chances are he or she has failed quite a few times. What’s the difference between that entrepreneur and you? He or she doesn’t care. Rather, the individual would passionately pursue something to the point of failure than work a 9-to-5 job doing something that’s not exciting or rewarding to that person.
It’s a fact that 25 percent of businesses fail in their first year. And 75 percent succeed. Focus on that.
The traditional model of writing a detailed business plan, pitching to investors, and obtaining financing will probably never completely go away. Investors have their role in the entrepreneurship ecosystem for some companies. But for most start-up opportunities in the future, the LeanModel Framework will provide a great hedge for success. Starting quickly with lean resources, developing a business model, rapidly prototyping a product or service, crowdfunding to raise capital (when necessary), and then using customer feedback will get you moving to fail fast or win big. In the next chapter, you’ll see how it works.
About two years ago, I was working with Andrew, a young entrepreneur who was trying to build an online marketing consultancy specializing in improving small businesses’ search engine optimization (SEO) to drive revenue. After almost a year, Andrew was still struggling as sales were low and so he redesigned his website to potentially increase sales. He custom-coded and created several software tools to automate some tasks on his website. He started getting emails not from potential clients but from developers wanting to buy his tools. That week, he figured out how to package and sell the software tools. He redesigned his website again on the next weekend to focus on selling just the software solutions. He had 50 sales the first week. Then 100 sales the next week. Andrew now does more than seven figures in annual revenue per year. Moving fast. Listening to customers.
Create a minimum viable product, using a LeanModel Framework, and be prepared to iterate, evolve, or pivot the product or service based on customer feedback. Listen and move fast.