Last week one of the schools I teach at invited me to judge a business plan contest. I suggested that they first might want to read my post on why business plans are a poor planning and execution tool for startups. They called back laughing and the invitation disappeared.
At best I think business plan competitions are a waste of time. But until now I haven’t been able to articulate a framework of why or had a concrete suggestion of what to replace them with.
Now I do.
Business Plan Versus Business Models
Where did the idea that startups write business plans come from? A business plan is the execution document that large companies write when planning product-line extensions where customer, market and product features are known. The plan describes the execution strategy for addressing these “knowns.” In the early days of venture capital, investors and entrepreneurs were familiar with the format of business plans from large company and adopted it for startups. Without much thought it has been used ever since.
It turns out that’s a mistake. A startup is not executing a series of knowns. Most startups are facing unknown customer needs, an unknown product feature set and is an organization formed to search for a repeatable and scalable business model. That means that writing a static business plan adds no value to starting a company, as the plan does not represent the iterative nature of the search for the model. A simple way to think about it is that in a startup no business plan survives first contact with customers.
Business models are dynamic and reflect the iterative reality that startups face. Business models allow agile and opportunistic founders to keep score of the Pivots in their search for a repeatable business model.
Business Plan Competitions are Great for Schools and Bad For Students
Almost every university, region and car wash now has a business plan competition; the rules, who can participate, how large the prizes and who are the judges vary by school.
Business plan competitions perpetuate everything that is wrong about trying to make plans that were designed to be used in large companies fit startups. (One of my favorites: “Judging will include such factors as: Market opportunity, reward to risk, strategy, implementation plan, financing plan, etc.”) All of which may be true in large companies. But little of it is relevant to the chaos and uncertainty in the life of a startup.
Yet an ever increasing number of schools keep holding Business Plan competitions. Why?
- They’re a match for the “How to write a business plan” classes that are offered.
- It makes the school appear relevant to their constituencies; students, donors, faculty, VC’s.
- Business plans are easy to grade, score and judge.
- Schools can get Venture Firms to fund prizes for the best business plan.
- Venture Firms use the contests as another source of deal flow and talent.
- There is no alternative.
The irony is that business plan competitions ought to be held for plans from large companies not for startups.
The Alternative – Business Model Competitions
I’ll offer that to be useful for startups Business Plan competitions need to turn into Business Model competitions. A Business Model competition has a radically different goal than writing a business plan. The Business Model competition measures how well students learn how to Pivot by getting outside the building (not by writing a plan inside one.)
Each team would be judged by their business model presentation on these five steps.
- What did you initially think your initial business model was? (initial business model hypotheses)
- What did you build/do? (built first product, talked to users, etc.)
- What did you learn outside the building? (parts of our feature set/business model were wrong)
- Then what did you do? (iterated product, changed business model, etc.)
- Repeat steps 1-4
The business model would be scored and judged based on steps 3 and 4. And extra credit for multiple times through the loop.
For the first time we’d have a competition that closely resembled the reality that founders face, rather than a creative writing exercise.
There are now examples of business model presentations on the web. They were also at the heart of the Startup Lessons Learned conference.
I’ll be happy to hand out the prizes at the first competition. Lets call it the “Pivot Award for Excellence.”
- Business plans are the wrong tool to search for a startup business model
- They are best suited for large companies
- Yet we have startup business plan contests
- Experienced entrepreneurs know that business model iteration and validation occurs outside the building
- Some school will be first to hold a contest that rewards what matters