"Go ahead and write that 50-page business plan about your fledgling venture if it helps you to focus. Just do not bother showing it to venture capitalists, because it will do nothing to improve your chances of getting financing.
That, The New York Times’s Brent Bowers writes, is the surprising conclusion of a new study by researchers at the University of Maryland’s business school.
Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions “under conditions of high uncertainty,” venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business.
That means, the study said, that they pay little attention to the documentation from entrepreneurs about their academic credentials, work or start-up experience, previous success in raising equity capital, ability to form a top-notch management team or even how much money they want.
“In general, business plans don’t matter,” said Brent Goldfarb, an associate professor of management and entrepreneurship at the Robert H. Smith School of Business, who wrote the study with David A, Kirsch, also an associate professor at the school, and Azi Gera, a doctoral student. “Nobody is going to read them.”
That assertion flies in the face of the conventional wisdom that writing a business plan is one of the first and most essential tasks an entrepreneur should undertake, Mr. Goldfarb acknowledged. But, he says, the report’s conclusions jibe with the feedback he gets from venture capitalists.
Jeff Fagnan, general partner of Atlas Venture in Waltham, Mass., which provides seed money for young businesses, said he agreed with the study’s main premise. “I’ve never given funding to an entrepreneur who had a business plan with him when he walked into my office,” Mr. Fagnan told The Times. “Never. Most of the information you find there, five-year financial forecasts and so on, is not relevant.”
He says he looks for “market validation,” hard evidence that the entrepreneur has actually sold his product or at least lined up enthusiastic potential customers. Mr. Fagnan says that, rather than reading a report, he wants to hear the evidence in PowerPoint slides, white board presentations or “somebody just talking.”
But if he does not look at their business plans, how do entrepreneurs gain an audience with him? “The No. 1 way is referrals” by a respected figure in business or banking, Mr. Fagnan said. If he asked the people referred to him for a business plan, “they would probably say they don’t have one,” he told The Times.
Greg Herro, chief executive of LifeGem, a maker of specialty jewelry in Elk Grove Village, Ill., laughed when asked about the business plan he wrote to show to venture capitalists and other professional investors a few years ago.
“It was no use to us whatsoever,” Mr. Herro told The Times. “Investors might read a business plan’s executive summary, but they have no interest in the endless pages of nonsense that entrepreneurs like me put out. If you don’t have a track record or actual sales, they are leery.”"