It is fashionable in entrepreneurship circles these days to argue that it is better to act, improvise and pivot than to waste time on a 20-page plan that won’t survive first contact with the customer.
In stark contrast, the “purposive planning” approach advises that a business plan can help to map out, organise and direct a start-up.
For every study showing that planning pays off, another one comes along suggesting that start-ups should learn by doing. This has done little to help the would-be entrepreneur decide on a strategy.
The starting point for our research was that insufficient attention has been given to why entrepreneurs plan in the first place. There is a range of contextual factors that prompt this decision, including everything from past entrepreneurial experience to the need for external finance and the urge to grow the business or to innovate.
An entrepreneur’s background can also have a big impact on the chances of a business becoming viable. Better-financed start-ups are more likely to succeed. So are more experienced entrepreneurs.
We wanted to study entrepreneurial planning but with more context than previous efforts. To do so, we turned to the Panel Study of Entrepreneurial Dynamics II, which tracked a representative sample of more than 1,000 would-be entrepreneurs over a six-year period from 2005 to 2011. Along the way, the study gathered some of the most comprehensive data ever collected on the characteristics of start-ups and their founders.
For our study, we separated these would-be entrepreneurs into two groups – those who write a formal plan and those who don’t.
We found that it pays to plan. Entrepreneurs who write formal plans are 16 per cent more likely to achieve viability than otherwise identical non-planning entrepreneurs. More than that, we were also able to see what makes people write business plans in the first place.
Two findings stood out. First, high-growth oriented start-up entrepreneurs are 7 per cent more likely to plan, while those with innovative, disruptive ideas are also marginally more inclined (4 per cent) to plan than their peers.
The inference is that planning is of more benefit when the challenges are greatest.
Second, entrepreneurs seeking external finance are 19 per cent more likely to commit their vision to paper than those not seeking finance.
Writing a plan can make the difference when it comes to realising start-up success. Plans support the process of turning an entrepreneur’s vision into tangible actions by promoting the organisation and direction of start-up activities.
Plans also remain vital for external fundraising because they build legitimacy and confidence among investors.
Writing a plan is unlikely to be the best strategy for all entrepreneurs. But if you want to raise money and grow quickly, eventually you’ll need to write a plan. – Copyright Harvard Business Review 2017
Francis Greene holds the chair in entrepreneurship at the University of Edinburgh Business School. Christian Hopp holds the chair in technology entrepreneurship at RWTH Aachen University.