Should Start-Ups Write Business Plans?
Reviewing Academic Perspectives on Business Planning
Entrepreneurs are often encouraged to write a business plan when starting a new venture. Indeed, entrepreneurship educators often claim that producing a business plan is a necessity. Nevertheless, academics are torn on whether or not business planning contributes to the success of a new venture, and a growing number of contemporary entrepreneurs and venture capitalists claim that successful entrepreneurship need not involve a business plan. In this piece, I’ll first look at what a business plan entails — as described by academics and entrepreneurship educators — before taking a critical view of recent literature and research which supports, and opposes, the view that the business plan is an important element of the venture creation process.
What is a Business Plan?
The business plan, in it’s simplest form, is described by Lange et al. (2007) as a “roadmap for the early year’s of a company’s life.” Timmons, Smollen, and Dingee (1985) take this further, describing the business plan as an opportunity for the entrepreneur to “examine the consequences of different strategies and tactics, and to determine the human and financial requirements for launching and building an idea into a viable venture.” Timmons, Smollen, and Dingee’s description of the business plan is, one might argue, a lot more comparable with the basic templates provided by many educators (e.g: Princes Trust, Virgin StartUp), — all of which require market analyses, discussion of strategy, financial predictions, etc — however, this does not mean that Lange et al. are any less informed. Indeed, Timmons, Smollen, and Dingee’s template lays out the roadmap they discuss. Honig & Karlsson (2004) take this view further, arguing that the business plan is not only an indicator of the organisation’s future, but also a statement of the present. Together, the present state of the organisation, and its future, as laid out within the business plan, are an indicator of the venture’s chances of survival, and future profitability.
The Importance of Writing a Business Plan
Literature and research have, over the years, set out a number of arguments in favour of writing a business plan, discussing how business planning offers routes to finance and partnerships, and allows for a more thorough analysis of venture feasibility. Others have argued that business planning can lead to greater performance and higher venture survival rates. Each of these arguments will be addressed in turn, before looking at the counter-argument posed by others.
Research in the 1990s pointed towards the business plan being an important tool for new ventures. Wyckham and Wedley’s (1990) study of entrepreneurs taking part in the New Enterprise Programme (NEP) found that business plans were often used to secure investment in their ventures, as well as to find business partners. Their findings were emphasised when, in 1996, Mason and Harrison found that, before investing in a business, three-quarters of business angels would require a business plan — although, as we will discuss, Mason’s more recent research may discredit this finding. Lange et al.’s (2007) research also supports Wyckham and Wedley’s findings regarding the business plan and its importance in securing funding. Wyckham and Wedley (1990) also found that business plans were used by new ventures as internal planning documents or marketing plans, with entrepreneurs often updating the documents as the business progressed.
Academics also argue that the business plan, and the process undertaken to produce it, is directly associated with business performance. Crawford-Lucas (1992), for example, found that, while the business plan was not a guarantee of business success, its existence reduced the chances of the business’ failure. Orser, Hogarth-Scott, and Riding (2000) agree, arguing that, “the presence of a business plan was highly correlated with performance.” Wyckham and Wedley’s (1990) description of the business plan as an extension of the venture feasibility process offers a reason for these findings, suggesting that successful businesses will have used the business planning process to ensure that their product or service offering met the needs of their target market before developing the idea further. Brinckmann, Grichnik, and Kapsa (2010) also offer their support to the view that business performance and business planning are correlated, however, they argue that there is a stronger correlation in the case of established small businesses. While this finding might suggest that a business plan is not essential when small businesses first set out, they counter this argument, noting that business planning is generally perceived as a value-generating activity, regardless of the point at which it is undertaken during the business lifecycle.
The proposed correlation between business performance and business planning was highlighted by at least two other studies, both exploring the reasons for small business success and failure. Noting that the barriers to entry vary dramatically from industry to industry, Lussier (1996) studied the implications of business planning, or a lack thereof, on small business failure in the retail sector. In developing a model to predict startup success and failure, he found that a failure to develop a specific business plan resulted in a greater chance of failure than those businesses who did. His discriminant analysis showed business planning to be the variable of greatest significance, with professional advisors, economic timing, age of the entrepreneur, record keeping, and product/service timing forming the basis for the remainder of his model. Delmar and Shane’s (2003) more general study of new venture development in Sweden, also found evidence to support Lussier’s (1996) model. They argued that, “founders will enhance the likelihood of their new venture’s survival and facilitate product development and venture organising efforts if they engage in business planning,” (Delmar and Shane, 2003) although they cautioned practitioners that business planning was not the only condition for venture success. Capital was, they found, a variable of greater significance than business planning in ensuring the success of new ventures — a potential by-product of a sound business plan if you heed the evidence presented by those in favour of business planning.
The ‘Just Do It’ Approach
Despite significant evidence to suggest that the business plan is an important aspect of the venture creation process, there are many academics who argue the opposite. Indeed, the ‘just do it’ approach described by Lange et al. (2007) has seen a surge of support since the millennium, both from academics and seasoned entrepreneurs alike. Some research suggests that business planning is not as influential in business success as previously thought, that business plans are unnecessary unless an entrepreneur is seeking investor finance, and that business plans are symbolic institutional tools which are often discarded shortly after their production. Again, we will review each of these arguments in turn, before reviewing the evidence in support of and against business plans to determine whether they continue to be key to the venture creation process.
While we previously discussed Lange et al.’s (2007) finding that business planning was key in securing investor financing, Lange et al. suggest that this is one of the only uses of a business plan, advocating a ‘just do it’ approach over a planning approach for new ventures without substantial capital needs. While their results showed marginal increases in the level of revenue, net income, employees and start-up capital in the case of those businesses with business plans, only the number of employees was statistically different, suggesting that business planning does not have a major effect on business performance. As a result, they advised entrepreneurs that, “unless you need to raise external start-up capital from institutional sources or business angels, you do not need to write a formal business plan. Instead, do some basic financial planning and launch your business.” Honnig & Karlson (2004) support Lange et al.’s (2007) argument in their study of the institutions who demand that entrepreneurs produce business plans. They found that business survival and profitability were unrelated to a business’ decision to engage in business planning, arguing that business plans were only produced as a means of securing the financial support of larger institutions. Both Lange et al. (2007), and Honing & Karlson’s (2004) findings contrast the arguments of Crawford-Lucas (1992), Orser, Hogarth-Scott, and Riding (2000) and Brinckmann, Grichnik, and Kapsa (2010) that business planning and performance are directly correlated, as discussed previously.
While Matherne (2004) does not disagree with the suggestion that business planning and performance are linked, he does agree with Lange et al. (2007) in the sense that there are other, more influential factors, which affect business success, product development being one example. Some examples of other, more influential variables which affect business success are offered in Jasra et al.’s (2011) study of Indonesian small business success. Sampling 520 small and medium-sized businesses, they found that, while financial resources, marketing strategy, technological resources, government support, information access, entrepreneurial skill and business plans were all factors of business success, a business plan was the least significant of these. Whether or not their findings are applicable to new venture success in the western world is, however, a matter for discussion and further research.
Two final arguments are made in the existing literature to oppose the value of the business plan for new ventures. The first, presented by Karlson & Honnig (2009) opposes Wyckham and Wedley’s (1990) finding that business plans were used as internal planning documents or marketing plans, and kept continuously updated. Nearly twenty year’s after Wyckham and Wedley’s finding, Karlson & Honnig (2009) suggested that many of the entrepreneurs who write business plans today never revisit them in the future. In this sense, the business plan is seen by entrepreneurs as a symbolic tool, to be completed as part of the package prescribed by entrepreneurship educators. The second argument, proposed by Brinckmann, Grichnik, and Kapsa (2010) suggests that business plans can be a hinderance, particularly when a business is formed in a culture with a tendency for high uncertainty avoidance. They write that “founders or small business leaders might stick more closely to their predetermined plans in countries where uncertainty avoidance is high. This post-planning behaviour could limit their strategic flexibility and openness to necessary changes to their business plans which in consequence limits performance.”
Changing Institutional Requirements
Given that many of the arguments in favour of writing a business plan centre around obtaining financial backing — and this is, as we have seen, widely acknowledged by those who oppose the need for a business plan as well — it seemed appropriate that we review any further evidence regarding this claim. As cautioned earlier, Mason & Stark’s more recent research, undertaken in 2004, indicates a decline in institutional expectations regarding business planning when it comes to offering startup capital. Indeed, their verbal protocol frequency counts, based on a small sample of interviews and case studies involving bankers, venture capitalists, and business angels, indicated that business plans were no longer key to their funding criteria, with much more emphasis given to the entrepreneur as an individual, their business strategy, current and expected market issues, and current and expected financial issues. This might suggest that institutions are gradually relaxing requirements that new ventures provide business plans, however, for now, Mason & Stark (2004) note that they continue to expect “a business plan containing such [financial] information, and will spend some time looking at the figures.” Nevertheless, one must ask whether institutions will continue to communicate with startup businesses in this way, given the growing evidence presented that business planning may not be associated with new venture survival rates and profitability after all.
Conclusion
Despite significant academic interest in the value of business plans, a review of existing literature fails to provide consensus on whether or not new ventures should produce business plans. While the majority of research points to the importance of a business plan where ventures require startup capital, growing evidence that business planning is not linked with business survival or profitability — as previously believed — suggests that institutional interest in the business plan may continue to decline. There are also a range of studies which show that business planning is not as influential in business success as educators may let on. Nevertheless, as Brinckmann, Grichnik, and Kapsa (2010) highlight, business planning continues to be seen as a value-generating activity for any business, so while there may be no harm in not producing a business plan, neither are there any negative effects should entrepreneurs choose to.
