Seat of the Pants

Everyone says that before you launch a company, you've got to write a business plan. So how come so many Inc 500 CEOs skipped that sober exercise?

From: Inc, Oct 2002 | By: Sarah Bartlett

One question in this year's survey of Inc 500 founders asked whether they had written formal business plans before they launched their companies. Only 40% said yes. Of those, 65% said they had strayed significantly from their original conception, adapting their plans as they went along. In a similar vein, only 12% of this year's Inc 500 group said they'd done formal market research before starting their companies.

Wait a minute -- aren't business plans and market research supposed to be Entrepreneurship 101? What about all those B-school courses and popular books telling you that you can't get to first base without a plan? To gain some perspective on this intriguing divergence between theory and practice, contributing editor Sarah Bartlett interviewed Amar Bhide, a Columbia Business School professor whose research on the subject is encapsulated in his book The Origin and Evolution of New Businesses (Oxford University Press, 1999).

What should we make of these data? Are they consistent with prior research, or is this group an anomaly?

The data are consistent with what I found in my survey of Inc 500 founders way back in 1989. According to that research, 41% of the founders had no business plan at all, 26% had a rudimentary plan, and only 28% had a formal business plan.

The current survey figures are consistent with other data as well. I had my students write papers on successful entrepreneurs, usually more celebrated entrepreneurs -- people like Bill Gates, Sam Walton, Jann Wenner -- and they found more or less the same pattern. In most of those cases, there was no detailed business plan written. I also did a study of Harvard B-school alums who had started businesses, and there again I found that, depending on the type of businesses they started, no more than a third had written detailed business plans. It's a pretty universal distribution.

Why would people who are starting up companies not bother with business plans?

There are several factors. Many, if not most, successful businesses get started in fields that are characterized by high turbulence or change, change that is not being generated by the entrepreneur. It's exogenous change. And in those kinds of fields, first off, there's very little information available with which to write a business plan. Take the classic case of Bill Gates and Paul Allen starting Microsoft in 1975. If they had tried to do a competitive analysis or a customer analysis, they wouldn't have known who their competitors were or been able to do the classic comparison of strengths and weaknesses vis-à-vis their competition. And they wouldn't have known who their customers were. When things are changing rapidly, there isn't data.

60 ^% of the Inc 500 CEOs surveyed did not create formal written business plans before launching their companies.

Secondly, when things are changing rapidly, the time you would spend on doing the analysis or the plan is incredibly costly because many of the opportunities are fleeting, and if you don't seize them immediately, they're gone. So in these highly turbulent markets, the costs of doing the analysis or writing a plan exceed the benefits.

Thirdly, because most of these businesses are started without capital and therefore without an irreversible commitment of resources into assets that can't be redeployed elsewhere, there's very little downside to being wrong. If X doesn't work, it's not as if you've invested in a $100-million chip-fabrication factory. You just modify it and try something else.

And that freedom to adapt can be a good thing?

If you divide into two groups those who write plans and those who don't, and then ask what percentage will stick to what they originally thought, the ones who don't write business plans will tend to deviate from their original concept to a greater degree than those who wrote plans.

"In these highly turbulent markets, the costs of doing the analysis or writing a plan exceed the benefits."

Precisely because there isn't a deep pocket there, folks without plans can be much more flexible. If they get into the game with the idea of a rug merchant -- "If you don't like this one, how about that one?" -- as opposed to that of an evangelist, it will help.

But there are some instances when it makes sense to create a business plan, right?

When you write a business plan, you're usually doing it because you're investing in assets, and in order to invest in those assets, you're raising money from other people. So the plan gives you more sustainable advantages [in the form of capital and assets], but it also means that you have to stick to what you started with.

If you are starting Southwest Airlines, you need a plan, you need capital. But if your concept doesn't involve raising significant amounts of capital, and if you have firsthand knowledge and experience of the profitability of the business, then there doesn't seem to be much of a point to a plan.

Given your findings, why is there so much emphasis on business-plan writing in entrepreneurship programs?

It seems as if people who are trying anything, whether it's playing tennis or starting a business, want -- and should want -- to collect as much knowledge as is available about what it is they're trying to do. And since we haven't collected much systematic knowledge about starting new businesses, instruction on how to write a plan becomes a crutch. And for sure, there's some 10% to 15% of plausible businesses for which writing a plan does make sense. But not for the great many. You're required to teach entrepreneurship, and there's a great student demand for instruction on how to write a business plan. You have to generate courses, and it's an easy course to generate.

NO PREREQUISITE: Amar Bhide, a Columbia Business School professor, thinks that instruction on writing business plans has become a crutch.

So are you on a crusade to persuade academics not to focus so heavily on business plans?

The crusade I'm on is this: I don't think that people deliberately set out to teach business-plan writing because they want to do harm to their students. It's really that they don't have an alternative set of educational materials that would fill up time and courses. My crusade is to try to figure out what the alternative should be.

At a very superficial level, it's the idea that adaptation rather than planning is critical. To some degree, it's a matter of socialization. I think you can sensitize people to the importance of adaptation. I think you can get people emotionally used to the idea that they will be wrong. Even successful people are wrong quite often.