8 October 2018
To plan or not to plan. It’s the argument the startup community has been having with itself for decades. In 2016, Christian Hopp and I decided to weigh in with our own study. We found it pays to plan; entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical founders who don’t.
This might tempt some to make writing a formal business plan their very first task. But our follow-up study shows it is much better to wait, not to devote too much time committing pen to paper and—crucially—to synchronise it with other key startup activities.
The real key to succeeding in business is being flexible and responsive to opportunities. Entrepreneurs often have to pivot their proposition once it becomes clear their original customer is not the right one, or when it turns out their product or service fits better in an alternate market.
Because of these realities, formal plans written at the start are almost fiction. Moreover, writing them takes time that could be spent evaluating opportunities. And they might just prevent a new business from seeing the actual opportunity, rather than the one they first imagined.
To provide startups with concrete and practical help, we looked at the Panel Study of Entrepreneurial Dynamics II’s data on 1,000 would-be U.S. company founders. We then charted their attempts to create viable new ventures over a six-year period (2005-2011).
The most successful entrepreneurs were those who wrote their business plan between six and 12 months after deciding to startup. This increased the probability of venture viability success by 8%.
The optimal time to spend planning was three months. This increased the chances of creating a viable venture by 12%. Spending any longer than this was futile, mostly because the information used to inform the plan loses its currency.
When the plan is sequenced also really matters. Doing it alongside early activities like defining the market or collecting information on competitors added nothing to the chances of creating a viable new venture. Equally pointless was writing one when a startup had already hired workers or gained external funding.
The sweet spot for writing a plan is around the time when a new business starts actually talking to its customers and getting its products ready for market. Planning at the same time as these activities increases a startup’s chance of venture viability by 27%.
None of this should detract from the vital importance of spending time writing a good plan. For a plan to be effective, it needs to detail what the opportunity is, who the customers are, why competitors should be fearful, and how the company operates and makes money.
Our advice to entrepreneurs is not to write a plan too early, don’t spend too long on it, and make sure it is done alongside other activities that actually propel the venture forward.