Many entrepreneurs are wondering why they are struggling to raise funds, even though the have the perfect business plan – here are the reasons why you should trash your business plan.
A Business Plan is Fiction
Believe it or not, writing a business plan requires more imagination than factual elements. Putting a business plan together usually involves projections and a lot of assumptions. You would describe items like “marketing plans”, “customer analysis”, “competitor analysis” and my favourite “income projections”.
Income projections are in essence thumb-sucks of potential revenue to be generated. It does not matter how experienced one is, or how much data they have analysed in market research etc. Projections are still a calculated guess, some calculations are better than others.
This is why the majority of businesses fail, because reality is not like the plan.
Advocates for the business plan describe it as a GPS for your business, a guide through the stages of your business. This article even claims, a good business plan can help you get funding. However if you have been an entrepreneur for more than 10 minutes you would know that to be nonsense.
A business plan cannot help you get funding, in fact many investors, banks and funding institutions can gladly trash your business plan for you. In order to apply for funding, a business needs to demonstrate income and profit generation, not plans. Read our article on – A case for Risk Investing in South African Small Business Ecosystem.
Trash the Business Plan
Yes, take it and throw it away – let us now discuss what you should be doing instead.
Get started with your business
This is not as hard or impossible at it sounds. We were taught in business school to build elaborate plans, with perfect projections, future value, current future value etc. Forget about all those plans and think about your business, ask the following questions:
- What are you trying to achieve
- What problem are you solving
- Who are your clients
- How are you going to get them to pay you for your services
- How much are your clients willing to pay
Once you have answered these questions, you need to test your assumptions. I agree the answers to these questions are similar to writing the business plan. Once you have written down what you think is the truth – you need to test it.
You need to test it with real people, real clients and real products.
But you have no money for a start-up 😢
True, this is probably why you thought you needed a plan to solicit investors to give you money. However we have established investors are not going to give you money, so back to the testing.
You need to figure out how you can test your idea as cheaply as possible?
Enter MVP – Minimum Viable Product
This is where the term MVP comes in, you need to create the smallest version of your idea, with whatever resources you have, so you can test it.
You need to test:
- Is this solving the problem you wanted to solve initially (let clients give you feedback)
- How much are clients willing to pay for this (set a price point and see how many sales you get)
Example of an MVP
People reading this might think, this applies to tech companies or silicon valley, but this is a business wide principle. I will give an example of a real start-up. I came across a client who wanted to build a book-sharing app. She sat me down and wanted to know how much it would cost, I gave her a quote upwards of R 200k. That is just a start, once you finish the app, you will spend more on marketing, I told her.
She thought, she needed to go back write a business plan and start looking for investors. I said to her, try the following:
- Create a facebook group, a whatsapp group and start building a community of book lovers
- Then when you are big-ish, start introducing the idea of sharing books. Be the middle person, you get all the books – list them in the group. Charge on all the book exchanges facilitated – figure out the price point.
- It is a manual job, yes – but you have to figure out how your business works manually. Because you might learn something, you did not know. Perhaps people just prefer to read together, so change the group to a virtual book-club.
So the lady looked at me like “that is a lot of work” 😧
But that is what it takes to run a business, it is a lot of work. Many people think, they will build an app put it in the store and people will just use it, and they will make lots of money. It does not work like that, you need a community around your business.
The best way to get it, is during the testing phases.
Measure, evaluate, repeat
Trash the Business Plan – because you can test the business idea in its smallest form. Re-evaluate your assumptions and make adjustments if needed, then re-test.
This is a cycle, and a lot of work. You create – evaluate, measure and start-again revising your assumptions after every loop.
Yes you will make mistakes, and you will lose money. But it will be little money, and less time, because the process is designed to allow for minimum losses. Minimum Viable Product = Minimum Financial & Time Risk.
This is better than, getting that R200k approved, building the app, spending another R500k on marketing and realising: “oops, people actually want a book club, not a book exchange”. No one is willing to pay for old books and to courier the books countrywide costs more than the price of a new eBook.
The Lean Start-Up
I have basically described some elements of the lean start-up approach – Dr Hajira Mashego recently described her biggest lesson learned as – going in too deep, too early. She wished she had started small with her business.
Consider the lean approach and yes – trash that business plan.