Investing in Tech : Who Needs A Business Plan ?
A recent group question on LinkedIn caught my eye – the argument over whether a business plan is really needed. Fuelled by dotcoms which have thrived on sizzle and presence alone – as opposed to revenue and/or margin – it is the constant barrage of high profile startups getting snaffled by the big TechCo’s for huge bucks which suggests the path to business riches is through luck rather than business-smarts. People get lazy, perhaps, and rely on daring and panache; avoiding the basics and letting their site talk for their idea. It is difficult to fault but for mere mortals, a plan remains a sensible approach. As well as a decent description of the proposal, a realistic prediction of how the business will ‘work’ over time is extremely useful. Working on technology startups, a business plan remains important for two reasons:
(1) Investors – however tech-savvy the interest in the business, it is the ‘bottom-line’ which drives the level of investment. ‘How much will this earn’ or ‘How much is this worth’ etc. For the originator of the idea, a plan provides the benchmark for negotiating the basis on which any investment in the business is made. True to say that many can be swayed by a good idea if sold well – a fool and his money can be easily parted, perhaps. Getting investment from a serious player and on good terms – i.e. to avoid giving away the business just to get it started – depends on a clear model of cashflow and risk. Mature investors will look for these variables, in my experience. In short, a plan promotes an understanding of when investment is needed and means owners can seek it out on their own terms. It can also form the basis for a valuation and as a comparator to similar ideas or businesses.
(2) Understanding Risk – aside from investment, just managing a good idea through to reality requires a plan. This enables (a) a sensible decision on go/no-go; and (b) a clear indication of which variables have the most impact on performance in the early days. For example, is the business driven by user numbers, subscriber conversions, advertising, technical performance, cashflow or even just SEO/market capture ? Modelling the business highlights the key numbers to watch.
However tempting it is to believe the adage “Build it and They Will Come”, some financial understanding on the part of founders remains important. Worth doing in all cases; a decent plan is essential to online/technology businesses in my opinion.