Back in 1995, when I co-founded an Internet marketing company, NetMarquee Inc., one of the first tasks my partner and I took on was to write a thorough business plan in order to raise money for our new venture. After all, isn’t that the first lesson you learn in any course having to do with starting a business? Isn’t that what the business media recommend in hundreds of articles and books?
My partner and I sent our plan around to venture capitalists and met with several to make presentations. No money came of this effort, and at several points during 1995 we contemplated giving up on the venture. But we had recruited a board of advisors with broad experience in growth-company strategy, finance, and marketing, and the members advised us to spend less time massaging our business plan and more time making sales. The financing will come later, they suggested.
So we made a few sales, enough to stay afloat through 1996. In 1997, when we made a major change in our strategy and product offerings, and sales failed to grow as quickly as we expected, we decided to try the financing route again. This time, we figured, financing should be easier to obtain, since we were fairly well established.
Once again, our advisory board told us not to bother. Professional investors don’t want to back a company that actually needs money. They’re like bankers in that they like to support companies that don’t necessarily need the funds. Get out there and promote yourselves and make more sales, they advised us, in what was becoming a regular refrain.
Banking on the Plan
But we were stubborn. We dusted off our old business plan from a couple years back and spent many hours rewriting and updating the document. We went off seeking financing and, once again, it was thumbs down. Down certainly described our feeling, since it seemed that every new Internet-related venture in the world was obtaining financing. The numbers would suggest that, as the amount of venture capital – a seemingly substantial $7.7 billion in 1995 — had grown to $16.4 billion by 1997, according to the MoneyTree Survey, sponsored by Price Waterhouse Coopers, Venture Economics, and the National Venture Capital Association.
Our choice at this stage was stark: Find ways to grow the business without financing or fold up the tent. We took the first choice, and lo and behold, the business began to gain traction. We engaged public-relations professionals, and they succeeded in getting several of our most successful corporate clients written up in business and industry trade publications – with mention of our agency as the key force behind these clients’ online success. Those write-ups got the phones ringing with new prospects, several of which turned into clients that generated additional sales.
Even as the business grew, though, we were vigilant about monitoring our expenses and aggressively collecting receivables. We got a kick out of the stories of venture-backed Internet startups purchasing fancy $1,200 conference room chairs. Our conference room chairs were mostly desk chairs we wheeled in from vacant workstations for meetings, and then wheeled back out when meetings ended. At one point, we partnered with another agency, with venture backing, which confided that many of its receivables were six months or more past due. Once again we had to chuckle, because we had become obsessive about phoning clients on day 31 if invoices weren’t paid, and thereby maintaining a healthy cash flow.
By 1999, we were operating profitably at $2 million annual revenues, with nearly 20 employees. The amount of venture capital being invested nationally had soared to an astounding $55.5 billion, but we paid little attention, as our interest in outside financing had dropped significantly. (Venture capital availability would soar even further in 2000, to a peak of $85.5 billion.)
Rethinking the Plan
My point in recounting our financing experience is twofold. First, the venture capital route is closed to the vast majority of businesses that seek it out – even during good times. While it might have seemed back then that nearly every business that wanted it was receiving venture capital, the reality is that most entrepreneurs have the same experience my partner and I had: their carefully crafted business plans are rejected out of hand by venture capitalists. Second, it’s often amazing what you can accomplish without the financing you are convinced is essential to stave off failure.
As for the rest of the story: our success in 1998 and 1999 attracted the attention of a publicly held company that was seeking the expertise we offered in developing and managing online content, and in December 1999 this company acquired NetMarquee. Even though an acquisition is really an investment situation, the acquirer never asked to see our business plan; it only wanted to see financial projections under several different scenarios.
I came to realize then that in three potentially significant financing-related events for our company, namely seeking financing in 1995 and 1997, and then selling the company in 1999, a written business plan had been of absolutely no use to us. You might say, “Well, just having gone through the process of writing a plan probably helped you grow the business.” I wish I could say that, but I have doubts about that as well. The written plans we put together assumed faster growth based on having received funding. The plan we actually followed was a slow-growth plan that wasn’t part of our write-up.
The realization about planning was especially important to me, since prior to launching NetMarquee, I had authored two widely read books about how to write a business plan: Business Plans That Win $$$: Lessons from the MIT Enterprise Forum (with Stanley Rich) and How to Really Create a Successful Business Plan. After we sold NetMarquee, I decided to revisit the whole subject of business planning. I spoke with entrepreneurs who had obtained financing, and I surveyed venture capitalists to learn the real role of business plans in raising money. I confirmed my experience as an entrepreneur. A lot of potentially deserving entrepreneurs never get their plans funded, and many others that do obtain funding actually do so without ever writing a business plan.
Act, Don’t Plan
I decided to write a book challenging the preeminence of the written business plan, with the same title as this article: Burn Your Business Plan! What Investors Really Want from Entrepreneurs. It argues that entrepreneurs should focus their company-building efforts on such tasks as creating a Web site that communicates their business model, obtaining publicity, keeping the finances under control, and making sales before thinking seriously about writing a business plan.
According to the conventional wisdom, we’re now in the third year of tough economic times. Business is quite difficult in many industries, and financing seems to be unavailable to young companies. Yet it’s interesting to note that during the first three quarters of 2002, venture capitalists have invested nearly $17 billion, more than all of 1997, which at the time seemed like a great year.
Increasingly, though, I am convinced that the key to the success of most young businesses is to ignore all the venture capital statistics and admonitions to write business plans, and instead use all the creativity and diligence you can muster to tend to your business. Put another way, you should be doing, rather than writing about what you will do.