Lets get rid of the businessplan!
40 to 60% of all start-up businesses face bankruptcy within the first 5 years. Shocking numbers if you ask me. This has been going on for decennia. But why hasn’t there been any change? In this article I look into the most common and important reasons for bankruptcy and I will discuss why I think the traditional business plan should be dismissed.
Research centre Statistic Brain publishes new numbers on the so-called ‘Startup Business Failure Rate’ on a regular basis. This ratio shows the percentage of start-up businesses that go out of business within the first 3 years, as well as the percentage of businesses in a specific sector that are still running after 4 years.
This graph tell us that 25% of the enterprises go out of business within the First year, 36% within two years, 44% within three years up to a staggering 63% within four years. The image below from Census Bureau even shows an increasing number of enterprises that go out of business in the first year.
The amount of enterprises that have been on the market for less than 10 years has continuously been decreasing for the past 20 years. The amount of enterprises that have been on the market for longer than 10 years has been continuously increasing the past 20 years. From this we can conclude that fewer and fewer enterprises survive longer than 10 years. We can also conclude that businesses that do pass the 10-year mark remain on the market for a longer period of time.
These numbers tell us that the starting of a new enterprise comes with a high risk of failure. The numbers from the Census Bureau are mainly focussed on the USA but are most certainly also representative for the Netherlands as well as other West-European countries. (For these bit less structured numbers consult the Eurobaromater).
Why do so many enterprises go out of business within 5 years?
For this question there is no short and unambiguous answer. Libraries have been filled with literature on this matter. However, I am able to provide my vision, based on a significant amount of literature and real world observations. In 2010 the business journal Controllers Magazine published an article about the 9 foremost reasons to bankruptcy, from the controllers point of view. The article clearly sets out the most important reasons for bankruptcy.
These 9 reasons are the following:
- Mismanagement, poor management or the lack of a vision;
- Insufficient funds;
- If you lack calculative skills, you go bankrupt;
- Defaulter or bankruptcy of the client;
- Poor economic climate;
- Drop in demand or a drop in revenue;
- Not getting credit fast enough;
- Changes in the consuming market or discontinuity;
- Accidents and illness.
Several of these points can be traced back to internal policies of an enterprise, the others find their origin in external factors. I will focus on the points that originated from the internal policies, since these are the points that can be influenced by the enterprise.
In addition to this list I would like to add two more reasons based on literature from: Steve Blank (2012), Eric Ries (2011), Ash Maurya (2012), Croll & Yoskovitz (2013) (and many more) as well as some personal experience:
- The enterprise does not have a clear image of their customer;
- The enterprise starts to upscale their business too fast.
Why dismiss the traditional business plan?
First let me define what I exactly mean with a traditional business plan. A traditional business plan focuses on the external environment (DESTEP, branch analysis, stakeholder analysis, consumer analysis, sector analysis, competitive analyses etc.) and the internal environment (7S model). In the business plan all the data from these analyses are confronted with each other in a SWOT-analysis. Based on this SWOT-analysis strategic decisions can be made and a plan of action accompanied with a financial plan can be set up.
Banks determine whether a starter is taken into consideration for funding based on the presented business- and the accompanying financial plan. For an investment in an already existing enterprise, banks also ask for a traditional business- and financial plans. Besides the fact that a business plan is required for funding, the tax authorities and the chamber of commerce both advise on setting up a business plan as well.
It has to be said that a traditional business plan does create a good overview of the enterprise’s business environment. It forces the entrepreneur to take a step back and have a careful look at the business environment and climate. Doing this will always prove useful for the entrepreneur however, I believe that there is something wrong with this traditional business plan. The traditional business plan is full of assumptions and is fairly subjective. Through the use of desk and market research the feasibility of the concept is determined. The writer of the business plan will do everything in his or her power to put their concept in the most positive perspective, even if they know that it would be wise to look in to the risk side of the concept as well. The entrepreneur is so eager to realise their concept that they fail to maintain a rational view (the IKEA effect. Norton, 2011).
The traditional business plan touches the subject of customers in the customer analyses. The customer analyses is often based on data from the internet. But…
Isn’t your costumer the most vital part of your business?!
No matter how big your marketing budget is, when you have designed a product nobody is interested in you will not make much revenue. It also very often occurs that a business designs an excellent product but lacks knowledge on who their customer really is and of what the added value of their product is to their consumers. Why don’t you focus on designing a product or service your customer really wants?
Writing a traditional business plan takes a tremendous amount of time, time that will only result in a strategy and financial plan based solely on assumptions and gut feelings. The business plan is usually realised with the least amount of deviation. Every entrepreneur knows however that new situations occur very soon and which make the entire business plan irrelevant within seconds. This results in gut feeling based decision making, which is very often irrational and unconstructed.
How to change?
The Lean Startup movement disrupts this process entirely. The first business plan can be written within 10 minutes on one piece of paper (the Lean Canvas). Afterwards, when the most important assumptions are made these assumptions are being put to the test.
Does the idea really solve a problem? Is the costumer willing to pay for this solution? Who is the constumer really (in which the standard demographic figures such as age, gender and education etc. are of no concern)? What are their issues? What issues do they want to have solved? What is the added value of your product or service to the consumer? In a short period of time you confirm or disprove your assumption through experiments. Based on the results from these experiments the idea is adjusted and the development of your idea advances. This process can be summarized in the build-measure-learn cycle.
After multiple cycles you determine whether your idea is feasible. The conducted experiments have provided you with solid data from your actual consumers, which assist in the development of a sound financial prognosis. This will again aid you in being taken into consideration for funding and will drastically lower the risks of failing, because:
- You mapped out clearly what your costumer wants;
- You can prove that there is a demand for your product/service/idea;
- You can show a sustainable and scalable business model;
- You can show how your idea has developed to a product which your consumers want;
- You reduce wasted time;
- You reduce risks.
And what do financiers and entrepreneurs want the most? An as low as possible risks with an as high as possible profit if I remember correctly…
Do you want to learn more about The Lean Startup methode? Let us know in the comments. This article is a translation of a dutch article. If this article is a succes, we will translate more of our original articles.