The Business Plan Is Alive And Well But It May Not Be What You Think

As many times I have written a “business plan”, it seems the flavor of it can vary quite substantially. I think the notion of this catches a good number of people by surprise. And why shouldn’t that be the case? Many textbooks and templates seem to cover business plan outlines with relatively similar structures. My suspicion is that the perspective that gets lost in the mix is intent. The intent of a business plan affects its format and content dramatically (more than outline). For this post, I thought it would be good to share some perspectives on why the process and plan should vary.

Business plan as a process – The process of vetting ideas, getting buy-in, and achieving alignment is most important in these situations. Example situations are new business launches in larger companies (e.g., intrapreneurship). Business plans can often take the form of workshop sessions and Powerpoint documents as opposed to a traditional textual Word document. See a popular post of mine, “In Consulting The Process Is An Essential Part Of The Deliverable“.

Business plan as a sales document – This situation is particularly appropriate for fund raising (e.g., angels, VCs). Key goals of the document are to establish trust with prospects, enable the investment idea to be shared via networks, and persuade people of the merits of an investment opportunity. Often need a mix of instruments here (Powerpoint & Word docs, napkin drawings, demo), depending on the team, industry, and phase of product development (e.g., technology feasibility, commercial feasibility, ramp-up).

Business plan as a hypothesis test or investigative framework – An entrepreneurial way of looking at a business plan is more as a framework or series of hypotheses tests. Questions may be: do customers really want product aspect A, do customers prefer this variation over that one, do customers perceive me as Y relative to my competitors, and will the dog eat the dog food? The business planning effort can be more organic than written and involve focus groups, customer prospect interviews, etc. But the framework process should be systematic in determining which hypotheses are true/false to prove out aspects the business over time.

Some other ways that come to mind are viewing the business plan as a communication tool, a dissertation (that must be closely inspected), debate tool, product development stage gate requirement, and RFP response requirement (e.g., for government grants).

How do you view you business planning efforts? To what extent could you benefit from new ways of thinking about them?

Musings And Dialogue On Entrepreneurs And Decision Making (Part 6)

The following backdrop and questions apply to this part of the series of musings and open discussion on entrepreneurs and decision-making (See Part 1, Part 2, Part 3, Part 4, Part 5):

Are entrepreneurs more willing to fail than other people? Does this relate to the exploration versus exploitation differences in the sense that entrepreneurs may simply continue exploring new opportunities until they find one that works? How should they trade off a willingness to walk away from a faltering opportunity against the need for persistence, on the chance that the opportunity can still be saved? Do you think this behavior explains serial entrepreneurs?

Here are my off-the-cuff thoughts on these exploratory research questions. Subconsciously and by choice of profession, entrepreneurs are generally more willing to fail than others, particularly when their entire livlihood and financial security are not at stake. This has been one of the most common perspectives that I had been ingrained with, particularly as it relates to debates on founder liquidity (and restricting it). That said, entrepreneurs (and particularly serial entrepreneurs) do not consciously believe that they will fail. They seem to generally have an attitude of "I will win".

To the decision-making question of "walking away" versus "persistence" for a faltering opportunity, I believe that entrepreneurs should consider leveraging mechanisms, such as:

  • having a good principal/partner as a founder that can complement the skillset of the CEO
  • seeking Board of Directors input
  • having an informal "godfather" (established in advance) that the principals or the CEO can turn to for important decision points and/or when disagreements arise in the management ranks.

As to what drives serial entrepreneurs, my thinking is that appetite for creation, personality type, need for independence, promise of financial gain, and ego tend to drive the serial-types more than decision-making tendencies of "walk away" versus "persistence". That said, often serial entrepreneurs have a personal investment philosophy that in the long-run, by starting and running ventures, eventually one of them will pan out very nicely, and they will have learned from their failures and flops. Failing is an important part of the process, and I even remember an executive recruiter for Sequoia Capital commenting to me during an interview for a position in the late 90s that the major downside to my resume at the time for being venture capital associate was that I had not "founded and flopped" a business.

What are your thoughts and experiences?

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Musings And Dialogue On Entrepreneurs And Decision Making (Part 5)

The following backdrop and questions apply to this part of the series of musings and open discussion on entrepreneurs and decision-making (See Part 1, Part 2, Part 3, Part 4. Note that there will likely be a total of six parts for this series with a recap summary of feedback at the end):

One difference between time and money is that money can be stored (inventoried) for future use, but time cannot – it’s use it or lose it. This allows money to be fungible; you can move it around as you need it. For large companies, time can become fungible by hiring or firing workers; entrepreneurs don’t usually have this luxury. How does the inability to store time affect entrepreneurs, especially in comparison to larger companies? What does this imply for time management?

Here are my off-the-cuff thoughts on these exploratory research questions. For permanent changes in capacity (e.g., related to building new capabilities or downsizing), my experience is that hiring and firing of workers is a more painful process in a large company. This has to due with all of the process, legal, HR, budget, management alignment, etc. that cuts across many groups. The larger company, however, has more resources and a greater margin for error. Larger companies may also benefit from having some supply-side agreements in place to readily outsource to consultants or contractors, although the complexity of these contracts sometimes makes it more difficult to source specific, single resources. The upshot, off-the-cuff, is I would hypothesize that larger companies would be somewhat slower in terms of making changes to capacity, that changes can be more efficient in batches, and that margin for error might be a bit larger (on average).

Entrepreneurial firms may be more cash constrained and have less margin for error. That said, they may be quicker in terms of hiring and firing if only because there may be fewer formal processes. What may be working against entrepreneurial firms are that since resources are constrained, they may not always use HR support (e.g., recruiters) in terms of sourcing candidates. To compensate for this fact, I have often found in entrepreneurial situations that one may rely on informal networks more for the hiring process. This may provide an improved screening process for entrepreneurs. The informal networking may also have auxiliary benefits for the entrepreneur (beyond the hiring process itself, such as getting sales leads or industry info) so entrepreneurs may be able to get multiple benefits more easily through the hiring process. All-in-all from a capacity model perspective, my experience is that large capacity changes are harder in entrepreneurial firms, and margins for error are smaller. Yet changes can be quicker, more customized, and dovetail with other efforts.

What are your thoughts and experiences?

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Musings And Dialogue On Entrepreneurs And Decision Making (Part 4)

The following backdrop and questions apply to this part of the series of musings and open discussion on entrepreneurs and decision-making (See Part 1, Part 2, Part 3. Note that there will likely be a total of six parts for this series with a recap summary of feedback at the end):

New research is uncovering differences in types of decisiveness – for example, someone who can’t decide which dessert they want after dinner may not be the same as someone who puts lots of research into buying a car. When does a lack of decisiveness come from the need to get more information, and when is it simply putting off a decision (procrastination)?

It is very hard to generalize. As context, my immediate gut thoughts are that, in general, there are both emotional (e.g., "in the moment") and rational factors (e.g., looking at data) that entrepreneurs need to balance in order to make good decisions. Successful entrepreneurs will tend to be those that either have good business instinct from prior experience in the industry or comparable market and have an ability to look at facts. Alternatively, successful entrepreneurs may be those that have exceptional, innate, outlier-type business instincts and abilities to judge and facilitate people which compensates for weaker abilities to in analyzing factual information systematically (alternatively they may partner with someone who has these skills). I think it would be the rarer exception for a successful entrepreneur to be someone who can only look at rational factors, but this could work in areas like the hard sciences where intellectual property and ability to appropriate profits is high.

With that as my frame, to the question "When does a lack of decisiveness come from the need to get more information, and when is it simply putting off a decision (procrastination)?" my thinking is:

  • If the entrepreneurial team has a balance of experienced emotional- and rational-based decision makers, then putting off a decision is procrastination when the team cannot articulate what additional information or context would be needed to make a decision.
  • Alternatively, if the entrepreneurial team is made up of primarily experienced, emotional-based decision makers, then putting off a decision is procrastination either when they have made similar judgment calls in the past with substantially less information and risk or when they do not identify what complementary resource they need to help with the decision (e.g., legal counsel).
  • Alternatively, if the entrepreneurial team is made up of primarily rational-based decision makers, then putting off a decision is procrastination (presuming context such as market timing is right) either when past experience and knowledge is needed (e.g., prior entrepreneur consultation or complementary resource such as sales VP) and not sought or when excessive analysis is performed.

The basic gist is that I feel that entrepreneurs procrastinate (presuming the market timing is right) to make a decision when neither can they articulate what additional information is needed to make a decision nor are they actively seeking the complementary resource (in terms of balancing functional and emotional/rational decision-making traits) that they need to make an informed decision.

What are your thoughts and experiences?

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Musings And Dialogue On Entrepreneurs And Decision Making (Part 3)

The following backdrop and questions apply to this part of the series of musings and open discussion on entrepreneurs and decision-making (Part 1 here and Part 2 here. Note that there will likely be a total of six parts for this series with a recap summary at the end.):

Some researchers talk about humans trading off exploration (testing the environment) against exploitation (using resources once they’re identified). For example, see link about small children’s learning behavior here. Do you think entrepreneurs are more focused on exploration or on exploitation? How does this compare to other jobs?

My off-the-cuff thinking on these questions are that entrepreneurs tend to be stronger than other workers in terms of exploration mainly because exploratory skills align with the creativity skills that entrepreneurs often have. Whether entrepreneurs focus on exploration versus exploitation, however, has to do more with what type of business is being pursued than something specific to the entrepreneur's disposition or decision-making style relative to non-entrepreneurs. For example, if the entrepreneurial business is something relatively unexplored (e.g., introducing a household device that can interface with your computer for printing paper that can be folded into edible food), then the entrepreneur needs to tap into exploration skills. On the other, an entrepreneurial business that is a copycat business (e.g., introducing a lowest-cost mobile phone provider in a new geography like Canada), well then the entrepreneur needs to focus more on exploitation (with potentially small customizations or market studies in the local market).

What are your thoughts and experiences?

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Musings And Dialogue On Entrepreneurs And Decision Making (Part 2)

The following backdrop and questions apply to this part of the series of musings and open discussion on entrepreneurs and decision-making (Part 1 was here):

In many corporate environments, employees are very aware that time is money. For example, consultants become very accustomed to thinking about an hour of their time having a very specific dollar value, and that becomes a salient opportunity cost when they decide whether to spend time working on a task. Do you think entrepreneurs are as aware of the dollar value of time? Is this a good thing or a bad thing? Do you think it could explain some of your observed differences in decisiveness?

My thinking on these questions are that consultants tend to be more aware of their opportunity cost of labor than others, if only because bill rates are usually widely known in terms of $/hr internally within the firm and often with the client. From this perspective, however, I don't really see much of distinction between entrepreneurs and those salaried within a traditional company. I think it is atypical for entrepreneurs and those working within a traditional, non-consulting company to think in terms of either hourly opportunity cost or activity-based cost. In my experience, these latter groups are more focused on goals. I think employing the hourly opportunity cost concept to entrepreneurs and those working in companies could potentially be beneficial, but I have not seen a lot of this outside a manufacturing context.

What are your thoughts and experiences?

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Musings And Dialogue On Entrepreneurs And Decision Making (Part 1)

A bit of a new angle on this blog, this post is related to the early-stages of a research effort by my wife (who is a professor of marketing at UCLA's business school) with respect to entrepreneurs and decision-making. Though I am no scholar in the area of entrepreneurial decision-making, I understand that the area of overconfidence in entrepreneurs is a well-studied and documented bias, but that there may be other biases and decision-making characteristics of entrepreneurs that could be better understood.

The basic idea is that if you can better understand biases and faults in decision-making processes of entrepreneurs that one can improve the decision-making of entrepreneurs through training.

With that as backdrop, I'd welcome perspectives on a series of questions that I'll be posting here.

The first questions are, "How much of being a (successful) entrepreneur is innate personal characteristics (things like risk taking or creativity), and how much is a learned ability to manage behaviors (like ability to be decisive or to manage time well)?"

Here's my off-the-cuff perspective (as a person that does not consider himself an entrepreneur but a person closely involved with entrepreneurial ventures and approaches):

  • Nature – There's some things that entrepreneurs are born with. These things include dispositional characteristics like being a risk-taker, having a need for independence, having drive for success, being creative, having strong intuition, having persistence, and having stamina.
  • Nuture – There's some things that entrepreneurs can learn. These things include learning how to better communicate, how to network effectively, how to make decisions, and how to recognize proxy markets and adapt learnings. Potentially nuturable areas are learning empathy, sales, and trade skills relevant to intellectual property development (e.g., engineering, software design).

What are your thoughts and experiences?

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What The Entrepreneur And The MBA Taught One Another

Two topics that I frequently see discussed in online forums, blogs, and articles are entrepreneurship and MBA degrees. In such venues, perspectives and responses are often very polarized, and it would not be unusual to see different camps characterizing the relationship of entrepreneurship to MBA training as either highly relevant or highly irrelevant to one another.

Rather than taking an argumentative approach to distill relevancy, one of my former colleagues (Paul Brown, an entrepreneur & founder, PhD degree) and I share a few things below that we specifically learned from one another (with Steve playing the role of non-entrepreneur, MBA degree). The context is during an enterprise software startup that went from Seed financing to Series A corporate venture capital to Deloitte Rising Star to sale/merger over a period of five or so years.

Some key things Paul got or learned from Steve (my notes taken from discussion and correspondence with Paul):

  • Level of professionalism added – Having an MBA-trained person on the team changed professionalism not so much in demeanor but in the total approach to business. The MBA perspectives complemented a very technical, software R&D organization that sold highly technical products.
  • Concrete methods and processes added – As opposed to piling receipts in the corner of the room and calling the pile "our accounting books", having an MBA on the team introduced discipline and methods in finance, sales, competitive intelligence & benchmarking, Board meetings, etc.
  • Business literacy added - Perhaps an understated item but by adding an MBA competency to the team it helped to make a difference in key company situations as to whether we were taken seriously or not by others (e.g., partners, investors, customers).

Key lessons that Steve learned from Paul:

  • Business experimentation is part of the entrepreneurial spirit and approach – Although I may have paid lip service to this in the past, I recalibrated myself away somewhat from business role models where managers are expected to "know the right answer" a priori. When you are paving new ground as in an entrepreneurial venture, there is tremendous value in conducting safe tests (such as floating an idea with another entrepreneur or an industry veteran, presenting a new pricing plan to a niche distributor).
  • There is value in tapering the need to make hasty decisions – Something that has always stuck with me for many years was something that I remember reading about the Harvard Business School training method. Students were pressed to make decisions and calls based on information (however limited) in a case study. In reality, this type of mentality is reinforced in many business school and business settings. The mentality is that one will always have incomplete information whether in a managerial, case study, etc. setting, and one needs to make decisions as a manager. Boom, boom, boom, done. Although I have not fully formulated my thoughts in this area, what I believe I learned from Paul was that the entrepreneur may benefit not from procrastination but by delaying critical decisions as long as there is time to either gather additional information, see activities play out, or let management team emotions clear. (I know – my idea is a bit convoluted in its current form, but I am onto something and will revisit).
  • If you want to appreciate entrepreneurship truly, you must witness someone with total willpower, drive, and endurance – I don't think I need to say more here, other than Paul has these characteristics.

Paul, thanks for the lessons!

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Watching Nickels And Dimes On Legal Costs In Start-Ups And Ventures

Venture capitalist Ed Sim had a good post recently that touched on a number of things ranging from principle-centered negotiation to matching the core DNA and chemistry of a team in a venture. He entitled his post, "Nickels and Dimes Don’t Add Up" to reflect his late-in-the-negotiation realization that perhaps the DNA of a prospective executive hire didn’t match up because some of the aspects of the negotiation got extended too long for little reason. Because negotiations for executive employment arrangements can be complicated and involve more layers of legal mechanics stretching into the Board-level, his post triggered some tangential thoughts I had on the costs of legal and bootstrapping these costs from garage-level operations through seed and some cases of Series A financing. I suppose I could have called this post, "Bootstrapping Legal So That Nickels and Dimes Don’t Add Up Too Much".

A core problem with bootstrapping legal costs (and following a variation of a "cash is king" strategy) is that a company may pay for things later by bootstrapping these things now. For example, if a company needs to perfect its intellectual property rights because of poor professional services agreements, this can be a sore spot to have to go back to every customer one has dealt with to perfect the agreements.

But lawyers can cost from $200/hr to $500/hr. To create additional pressure on ventures, post-bubble many legal firms
(not to mention employees and other partners) pushed down their
willingness to take stock options in lieu of portions of cash compensation. Some are willing to push off costs for a few months, but you need an in then.

Let’s face reality then. Not everyone can afford to have lawyers draft every legal document change, even if one tries to make sure that drafting is the last step after negotiating or planning business terms.

If find it useful early on to know what type of company is in the making. This way you can think about how complex the company may be in the reasonable future (e.g., 12 to 18 months). As examples of types of companies and some of the pertinent legal aspects:

  1. Services-only company – may need very basic things like NDAs, professional services agreements, and subcontracting agreements
  2. Software-only company – may need more advanced things like NDAs, MNDAs, licensing,
    maintenance, OEM inbound and/or outbound, distribution and partnership
    agreements
  3. Software and services company – may need all of the above, plus additional
    considerations for when they interrelate surrounding intellectual
    property rights and/or interstate tax, say

I’ve seen the stuff above range from $1,000 to $25,000ish. When one
talks about adding core infrastructure paperwork (e.g., equity, stock
option plan, executive employment docs) costing anywhere from $5,000 to
$25,000ish, and then adding stock purchase or recap docs (post Seed round)
costing anywhere from $25,000 to over $100,000, things add up over time. One really needs to breakdown the timing of company needs (and scope of work) to get narrower ranges on these costs (and thus to bootstrap the org along).

To weigh through some of this entrepreneurial & legal jungle, I find it useful to examine some pertinent operational considerations:

  1. Whether there will be a future for the venture  – Entrepreneurs are pioneering, experimenting, and there is high risk early on. Don’t expend too much on legal until you’ve figured out what you are doing and what works. Somewhat related to this, don’t make core foundation documents or organizational structures too complex and customized unless you really need to.
  2. How far out the next phase of the future is – Try to storyboard out the future of the firm in a rational way. Consider only structuring legal stuff to keep you rolling for 12 to 18 months. Things like getting perfect distribution, licensing, and maintenance agreements may not make sense until you’ve got more traction selling direct. Why? People may not be able to sell accounts for you until you’ve a critical or workable mass of reference accounts. Although one may pay $5K more or even $15K to fix the job in the future on a $10K job, weigh the costs systematically.
  3. What that future could look like – Will there be things like capital raises? On core infrastructure documents (primarily corporate finance documents), I would not mess around here too much. In my opinion, these problems are the most expensive to fix, and it is in part because the problems are more diffused through the legal documents. The key factor that one can control, however, is that looking for iron-clad documentation and customization can cause much $$ pain early on. Maybe some of this can be fixed if the venture makes it to the next round.

Yet another strategy is to look at each of these types of documents above and figure out where they are most likely to break. If you need lawyers to focus on just getting that piece of the document iron-clad, this is another strategy to minimize costs in a somewhat "layered way".

I also find it useful to note, at least based on my experiences, that so long as one is reasonably careful, there’s little that lawyers can’t fix. Delaying costs is a key principle to look at.

Aside from actively managing legal costs and mechanics, I have another good option. Consider having a lawyer in as one of your business partners. They can save you a ton and help put your mind at ease.

Note these are insights on legal topics within start-ups from a
non-lawyer but from a person that has worked with a number of lawyers
in corporate finance and infrastructure, intellectual property, and
employment and human resources within start-ups and growth firms. I have been spanked (lightly) by lawyers for drafting stuff.

Steve Shu

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Ross Mayfield On Finding A Home And Net-Enabled Bootstrapping

Ross Mayfield (CEO of Socialtext) has a great post that places his company’s recent venture capital financing (includes DFJ) and prospects of finding new company digs in the context of fourteen stages of a high-tech startup. To be frank, I find it interesting that launching a product is stage 12 and IPO is stage 14, but I digress …

What Ross calls "net-enabled bootstrapping" is really terrific. Ross writes, "I am convinced that being virtual is the best way to start a company."

This type of bootstrapping is really reflective of how today’s startups can be really creative to minimize costs of office space and to leverage resources around the globe. Some of the productivity technologies that Ross references are pretty much post-bubble technologies. Use ’em if you can.  Face it – space planning is one of these underestimated things in growing companies. Plan for too much expansion, and the CFO can easily be writing off expenses as underutilized capacity, finding sublease tenants and negotiating contracts, etc. Plan for too little space, and people can be too disrupted by noise due to close proximity, intra- and inter-office moves, and support issues like telcom or network access. While people like myself are used to working out of a carry-bag (I call my bag "the football" like the President’s football) and in the hallways of client sites when space considerations get tight, not every one can work productively when strapped from a ceiling or to the walls when the company is busting from the seams.

All said, in past companies I’ve worked for that implement virtual teams (and I’m working for some now on the reverse end of the stick outside of HQ), some amount of face-time is necessary regardless of technology. Instant messaging, conference calling, email, etc. are all great things, but I find that the multi-party discussions of complex matters are often the things that suffer the most. Having a meticulous person involved in key multi-party, virtual working sessions is a must in my book. One should also be sensitive to how technology use (such as IM) in a bootstrap may discriminate against extroverts, salespeople, unstructured thinkers, technology shy people, or even those with repetitive motion injuries.

Ross also makes a great point that it is hard to celebrate victories with a remote team. Ross relates a cool idea of ordering pizza for colleagues. In company headquarters, I have seen many companies ring a gong or bang a cowbell when sales come in. So in the spirit of the virtual world, I would reference SNL’s episode of "More Cowbell" (as referenced by VC and blogger, Fred Wilson of Union Square Ventures). Ring that baby in toast of Socialtext’s financing and search for a home!