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A few years ago, at a launch event to promote my book Failing to Succeed, I was answering questions from the audience when someone asked me which was the best fiction I had ever read? Instinctively I replied, “Any start-up’s first business plan”. The room dissolved in laughter and we moved to the next question, but as I thought about it later I realised I wasn’t far from the truth.
Making the first business plan for a start-up based on merely a broad concept or idea is hard. There are many variables, imponderables, little market experience, no exposure to competitive realities, and almost always no hard data available. Thinking up scenarios from first principles, making assumptions on what products or services will be well received by customers, evaluating the pricing and margins that will attract buyers, or guessing how the competition may react might make for an intellectually stimulating exercise at best. I am reminded of the popular military saying that all plans go out the window the moment the first bullet is fired. Further, entrepreneurs by nature are optimistic folks (as they should be) but this also means a lot of this positivity can influence the business plan to render it quite impractical.
If you check online the first business plans created by the founders of several iconic technology companies, they will appear vastly different from what actually transpired. It just goes to prove that even for world-class entrepreneurs, envisioning a first business plan from scratch is challenging.
Business plans are also important in raising capital. Unfortunately, most Indian entrepreneurs believe that the ultimate goal of a start-up is to raise funding and hence they focus on making a plan that will primarily appeal to a potential investor, rather than creating something realistic. This is a blunder. Remember, it is called a ‘business plan’, not ‘investor plan’.
Business plans must also account for things going wrong. I have a simple formula I recommend to entrepreneurs that will cover a worst case scenario. I refer to this as the 2 X 2 X 2 rule. Once the optimistic plan spreadsheet is ready, simply halve the sales, halve the margins, and double the costs. This will now cover the other extreme when everything that can go wrong, does. Typically, reality will fall somewhere in between.
One last point. Several entrepreneurs task a finance head with making the business plan. I firmly believe that early-stage business plans can only be made by the founder(s). No one else will have the passion to create this.
(The writer is a serial entrepreneur and best-selling author of the book ‘Failing to Succeed’; he posts on X @vaitheek)
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