Reading Don Dodge’s post titled, “Business plans, business models, who needs them?” this weekend made me rehash many of the discussions I’ve had with VCs and entrepreneurs about the need for business plans over the years.  In the post, Dodge makes the claim that investors don’t read business plans and, in fact, they “invest in people, not business plans.”  While I mostly agree with this – I actually believe that there is a confluence of people, time and place that drive most investments – I think the argument against business plans misses a key and fundamental point: business plans aren’t for the investor, they’re for the entrepreneur or team developing the idea into a business.

In my opinion, it’s the process of business planning (which generally involves writing stuff down thus, creating a business plan) which has all the value and it’s value is huge.  Understanding, researching and testing the product/service, market (customer), differentiation, channel and competition (see my post titled Business Planning – The Big 5), is critical and, shockingly, overlooked frequently.  People tend to fall in love with their ideas and don’t bother thinking through what problem they are really solving for their target customer.  Even when they do, they often don’t spend the time to test their hypothesis with potential customers prior to looking for funding.  To me, this is what business planning is all about.  How can a team even create a slide deck or answer questions from investors if they haven’t done this level of business planning?

In his post, Dodge uses the example of Twitter getting funding without a business plan or even a business model, for that matter, as an example.  While I don’t think Twitter is representative of most (any?) investment cases, it does offer up a reasonable counter-argument to my point above.  If you build something massive and pervasive on your own dime prior to seeking funding, you can do just about anything you want and still land investors.  Generally speaking, though, it’s a bad idea to plan on this route.  It doesn’t happen very often.

So, while I fully support the concept that business plans as written documents may not get you far with investors, the process of business planning, that yes, will likely include written material (documents, spreadsheets, drawings on backs of napkins), will.  A business is way more than an idea.  Successful businesses are about execution and you can’t execute effectively if you don’t know where you’re going.  The argument against business plans is more about with what and how you present your idea to investors than it is about how you develop your business in the first place.  A well thought through business is simply more likely to get funded than one which is not.  That takes business planning.

Make sure you read Paul Kedrosky’s post on this subject, The Twitter Lesson: No Business Plans Please, which Don Dodge references in his post.  He makes some very interesting points on the downside of sharing too much data with potential investors.  Very interesting.  He does not, however, make the point that you shouldn’t have the data, just that you might not want to expose it too early.