Want VC Funding? Throw Out Your Business Plan - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Mobile // Mobile Applications
05:09 PM
Michael Singer
Michael Singer

Want VC Funding? Throw Out Your Business Plan

It sounds counterintuitive, but you're better off investing in your idea, building your social network, and attracting potential customers than spending hours refining how a plan looks on paper.

It sounds counterintuitive, but you're better off investing in your idea, building your social network, and attracting potential customers than spending hours refining how a plan looks on paper.

That's the finding from a research study released this week out of the University of Maryland's Robert H. Smith School of Business.

"Spending time and energy tweaking your business plan is a waste of resources," said researcher David Kirsch, associate professor of management and entrepreneurship. "It's a limited-use document that will in no way substitute for the hard work of actually building a business.

Kirsch, along with co-authors Brent Goldfarb and Azi Gera, reviewed the business plans of more than 700 dot-com companies from the late-1990s to early-2000s boom era. They compared records from a broad sample of dot-coms Kirsch maintains in his Business Plan Archive, a historical research and preservation project supported by the Library of Congress' National Digital Information Infrastructure Preservation Program.

The researchers compared objective characteristics of each business plan -- including the contents, team make-up, and business model -- and whether the plan received venture capital funding. Their research, "Form or Substance? The Role of Business Plans in Venture Capital Decision Making," will appear in the May 2009 issue of Strategic Management Journal.

Basically, Kirsch, Goldfarb, and Gera found that the content of the business plans does not predict which businesses get funded.

That's not to suggest that companies should totally forgo a business plan. But their research found no link between venture capital funding decisions and how well-crafted a business plan was.

So why do venture capitalists even want business plans if they don't use them to make funding decisions?

"I think VCs like the plans because they skim them to see what people are doing -- to get a sense of what entrepreneurial activity is happening," Goldfarb said. But an interested VC will learn the details of a business whether it is in the plan or not.

In additional VC deal news, Cell Biosciences on Thursday said it has raised $10 million in a third round of funding. The Palo Alto-based life sciences firm makes hardware, software, and analytical products designed to reveal information about cellular control pathways. Cell Biosciences president and CEO Tim Harkness called the combination proteomics technology and was excited that he could bring his technology to the broad life sciences market.

Primary funding came from Wellcome Trust, the company's largest shareholder along with money from previous investors Domain Associates, Latterell Venture Partners, Novo A/S, Mitsui Ventures, Royal Bank of Canada, and The Vertical Group.

Is your company getting venture funding? Is your VC one of the first to grab a rising star? Drop me a line and let me know.

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
Top 10 Data and Analytics Trends for 2021
Jessica Davis, Senior Editor, Enterprise Apps,  11/13/2020
Where Cloud Spending Might Grow in 2021 and Post-Pandemic
Joao-Pierre S. Ruth, Senior Writer,  11/19/2020
The Ever-Expanding List of C-Level Technology Positions
Cynthia Harvey, Freelance Journalist, InformationWeek,  11/10/2020
White Papers
Register for InformationWeek Newsletters
Current Issue
Why Chatbots Are So Popular Right Now
In this IT Trend Report, you will learn more about why chatbots are gaining traction within businesses, particularly while a pandemic is impacting the world.
Flash Poll