"Gumpert successfully captures a significant shift in the way leading entrepreneurs are launching companies and attracting investors."
John R. Thorne, Morgenthaler Professor of Entrepreneurship, Carnegie Mellon University

What's New at Lauson?

Burn Your Business Plan

Investor Relations for Entrepreneurs
"The bottom line is to understand that I invest in people, not in paper."
-Venture capitalist participant in survey for this book

This book is intended as an investor relations guidebook for entrepreneurs.

What does investor relations have to do with entrepreneurs who may have neither investors, nor relations with investors? Whether you are seeking millions of dollars of financing from nationally known venture capital firms or whether you just want a few hundred dollars of credit from a supplier, you are engaged in investor relations. In either case, you must convince outsiders to take a chance on you, to invest in you.

Obviously, it's the financing type of investment that is of greatest concern for many entrepreneurs, simply because it is at once so important and so difficult to come by in our current "age of high anxiety." The United States and, indeed, much of the world, became enmeshed in an economic malaise after the blowoff of the dot-com era in early 2000, and it was only exacerbated by the terrorism events of September 11, 2001.

Historically, periods of layoffs and high unemployment have been fertile times for entrepreneurship. Individuals who lose their jobs and have trouble finding another often begin to entertain more seriously the common fantasy of going into business for themselves. When these individuals set up shop, and begin shopping for investment funds-often with remarkably creative and viable business concepts-they typically run smack into the harsh reality that investors aren't very forthcoming.

During the post-dot-com era, the climate for investment funds cooled considerably. As one indication, the amount of venture capital funds invested declined more than 50% in just one year, to $36.5 billion in 2001, after increasing more than eight times between 1996 and 2000 (from $9.6 billion to $85.5 billion), according to the MoneyTree Survey, sponsored by Price Waterhouse Coopers, Venture Economics, and the National Venture Capital Association. So many professional investors were so badly burned by the blowoff that they will be nursing their wounds for many years, and are thus much more nervous about making new investments than they were during the 1990s.

Still and all, there is and will continue to be money available for investment-many billions of dollars not only of venture capital, but of so-called "informal capital" that comes from relatives, friends, and "angels". The Ewing Marion Kauffman Foundation, which promotes entrepreneurship, reported that in 2001 angels invested nearly $130 billion in new and young enterprises. There is just too much innovation going on in our society, and resulting opportunities for investment. The tempo of innovation-in biotechnology, telecommunications, security, robotics, and other areas-is too well established to be shut down by cyclical economic cycles. Your job is not only to find the sources of money, but also to shake it loose.

Key to shaking the money loose is understanding the new investment landscape, and how you need to navigate in that landscape. This new landscape is best understood as contrasted to the investment landscape of the previous two decades. The investment process has evolved, influenced by a combination of factors-economic, technological, and cyclical. In the 1980s and into the early 1990s, prospective investors couldn't obtain background information about a company by simply calling up its Web site. Nor had investors previously been as badly burned as they were by the dot-com blowoff. Innovation and change weren't happening as quickly. In that more predictable environment, a written business plan was, as stated in my two previous books about business planning, the "ticket of admission" to the investment process. No business plan, no discussions or negotiations with venture capitalists.

How does all this play itself out in real life? Most fundamentally, the old rules-under which writing a business plan was considered by entrepreneurs to be nearly synonymous with raising money-are quickly giving way to a new approach in which the written business plan has much less prominence, having been replaced by other means of inspiring confidence in tentative investors.

In the traditional approach, entrepreneurs seeking to raise money invariably began the process by contacting prospective investors and then following up with copies of their business plans. Today, entrepreneurs increasingly begin the process by launching their ventures in some form, and then conducting formal presentations to explain their vision. Here is a summary comparison of the approaches:

Approaches to Investment
Old Approach
New Approach
(Post Internet Revolution)
Send business plan (BP) to potential investors "business plan" Get business going (bootstrap)
Await response Present to potential investors "Presentation"
Keep re-working BP Write synopsis letter
Seek enough for 2-4 yrs Always in financing mode
Pack it in if don't raise $$ in 3-4 months Show staying power
Lie low til all ducks lined up Get publicity "publicity" early on
Raise money and forget BP In regular contact with likely investors "investors"
Seek sales after raise $$ Show real sales early on
Work out business model after raise $$ Demo a workable business model
Show sales Complete BP "business model"

As you can see, the business plan hasn't disappeared from the landscape, but rather has assumed a much different role in the process of financing and building a business. Instead of being tackled at the start of the business development process, it is left to later stages, after more critical tasks have been dealt with and the business is up and running in some form. This new role for the business plan reflects the fact that professional investors will no longer assume technology and other significant risk; they demand sales or similar customer confirmation before committing.

So if you are focusing your startup efforts primarily on following the conventional wisdom and investing 100 or more hours in writing a business plan in the expectation it will help you raise investment funds, you may be making a big mistake. You may be better off disposing of your business plan, and pursuing a totally different approach. The goal of Burn Your Business Plan! is to help you shake off the old approach-which is still preached in many books and taught at many business schools-and make the transition to the new approach, which will save you time and money, and enable you to reach your business goals sooner than otherwise. It is a transition from reliance on a written business plan to other forms of planning-and doing.

This book is based on my many years of experience working with entrepreneurs, as well as the input of 42 venture capitalists who were surveyed about their approaches to evaluating and investing in growing companies. While I recognize that most entrepreneurs raise investment funds from "informal investors"-family and friends-I sought out the views of venture capitalists because they are indicative of the investor mindset, while having the advantages of being more readily identifiable and accessible. Moreover, venture capitalists tend to apply more formal evaluation methods than "angels" and other informal investors, so if venture capitalists are reducing emphasis on business plans, then it's a safe bet all investors are doing so.

Burn Your Business Plan! guides you in three separate sections that:

  1. Demonstrate why the old approach is no longer viable;
  2. Describe the tools of the new approach;
  3. Lead you through the process of obtaining financing.

The techniques described in this book are relevant whether or not you plan to obtain investment funds. To achieve the fullest potential of your business, you always need to be actively improving your investor relations, regardless of the exact nature of your investors and your relationships. ?

Chapter 1

Raising Money in an Age of High Anxiety Why Investors Have Business Plan Phobia
Chapter Summary

Investors are increasingly unsettled by all the economic, political, and other uncertainties that are now part of our lives. As a result, investors want ever more reassurance from entrepreneurs before handing out investment funds. A written business plan is no longer enough. Indeed, it has slipped in its importance to investors. They look first and foremost for tangible business success.

"If your business proposition is misguided, no amount of business plan technique will help your cause."
-Venture capitalist participant in survey for this book

If you're an entrepreneur seeking investment funds for a new business, here's a typical scenario: You inquire with a venture capitalist or "angel" (private investor) you've been referred to, and are told, "Send along a business plan. We'll let you know if we're interested."

What do you do? If you're like many entrepreneurs, you scour the Internet or buy a book for information on how to prepare a business plan, and rush headlong into a process that will ultimately consume 100 tedious hours or more to produce a 30-to-40-page written document. Eagerly, you send it along, and wait.

More than likely, you won't even hear back from the investor and, if you do, you'll receive a negative response-the investor isn't investing in your kind of business or isn't investing at all or you're seeking too much, or too little, in funding. The excuses go on and on as you send the business plan to prospective investor after prospective investor. As the weeks drag on, your business plan is becoming more and more out of date.

What's the problem here? Just because a prospective investor asks for a business plan doesn't mean that he or she really wants it. Nor does it mean that you have to send it.

Consider the response that many of us have when charities call us at home seeking contributions. "Send some information along and I'll consider it," you say. Then, when the information comes along, you quickly dispose of it.

Sometimes entrepreneurs forget that professional investors are people, too. And as people, what they say they want and what they really do want are often two different things. As economic, political, and other uncertainties have piled up around them, investors are increasingly demanding more tangible kinds of reassurance than a sheaf of papers containing rosy market, product, and financial projections can provide. Only they won't necessarily tell you that in so many words.

The Real World

Cheryl Marshall, a principal of Axxon Capital, a Boston-based venture capital firm that specializes in investing in businesses owned by women and minority entrepreneurs, speaks frequently to groups of entrepreneurs about obtaining financing. She invariably refers to the business plan as something that is important, advising entrepreneurs to explain in their plans such matters as "the real strategy."

But get her in private, as I did following a speech she gave to a group of early-stage entrepreneurs in mid-2001, and she communicates an entirely different viewpoint. "I don't read business plans," she told me. "I look at the entrepreneur." To back up her point, she said that of six investments her venture firm had made to that point, all the entrepreneurs had come to her via referrals from trusted sources rather than via business plans that had been sent to her. Business plans weren't part of what she wanted to examine. It wasn't that she was being dishonest in her speech to the entrepreneurs, it's just that, like so many professional investors, she tends to advise preparing a business plan as more of a knee-jerk reaction than anything else.

While most investors aren't as candid as Cheryl-for public consumption, at least-get them alone and in conversation, and many will tell you the same thing. Their exact words may be different-they don't take business plans very seriously, they don't get a lot of useful information out of business plans, they are too busy to read through all of them-but the bottom-line message is the same: The business plan as it is conceived and used by many entrepreneurs is passť. It has been corrupted to the point that it is over-emphasized by entrepreneurs, and under-utilized by investors.

This isn't to say that entrepreneurs should discontinue writing business plans, and that investors don't care at all about written plans. But in recent years, an important perception gap has grown between what entrepreneurs are worrying about, and spending time on, and what investors really care about, and consider in their investment decisions. Entrepreneurs have increasingly made the business plan an end in itself, and all the while investors have increasingly come to view the business plan as merely one part of a much larger process, and an ever-less-important one at that.

It is in their actions that investors make their real feelings known. Consider this tally assembled by Michael Gonnerman, a Boston-area financial adviser to growing technology companies and to angel investors. Of eight companies he has been involved with as an adviser and that raised investment funds or were acquired between 1999 and 2002, only one completed the investment/acquisition by virtue of having a complete written business plan. The other seven (one of which was a company I co-founded) succeeded via effective presentations, impressive sales, networking, and sheer grit and determination. One of those seven (not my company) started out with a written plan, and discarded it early in its fundraising process, determining that the document was more a hindrance than a help in the effort.

Venture capitalists are increasingly waiving their business plan requirements. In my survey of 42 venture capitalists, 43% said they had invested in one or more businesses within the previous three years "without the benefit of having reviewed a complete business plan" of 15 to 40 pages. (For full results of the survey, see Appendix I.) This was unheard of in the pre-Internet-boom days. It's safe to say that a significant percentage of the remainder only reviewed a business plan very late in the investment process-at the investors' request as a part of their "due diligence" to closing a financing-so they could have something in their files in case backers questioned them later on.

One private investor told me that he has come to view business plans as the equivalent of "intellectual pushups." Nice exercise, but not necessarily relevant to anything in the real world.

The Underlying Issues

For entrepreneurs, there are really five sorts of problems here:

1. We're in a new age of anxiety and uncertainty.

Buddhist philosophers have long warned us about the dangers associated with seeking permanence in a world where everything is fundamentally impermanent. You don't have to be an expert in Buddhist philosophy to realize that America changed its perspective virtually overnight beginning September 11, 2001 when we were caught totally off-guard by a cataclysmic terrorist attack. The nation, and indeed the whole world, came face to face with the notion that impermanence and uncertainty are a more integral part of our lives than we had fully understood. That revelation created a great deal of anxiety among the population at large, and among investors in particular. A written business plan suggests an ability to look into the future with a reasonable degree of certainty. Handing a written business plan painting an upbeat three-year scenario to a person skeptical about what is going to happen in the next hour, day, or week doesn't make as much sense as it once did.

2. The business of business has changed.

The events of September 11, 2001 merely put an exclamation point to the truism that business is moving and changing more quickly than ever before. Business experts have written reams about how quickly business is changing, driven in large measure by the Internet and related instant communication, but few have made any connection between this development and the business plan.

One recent book that begins to explain the process is Collaborative Communities: Partnering for Profit in the Networked Economy by Jeffrey Shuman and Janice Twombly. It focuses on the increasing importance of timing-"the ability to move at exactly the right strategic moment"-in determining business success, and notes, "In the absence of understanding how to tell when it's time to take a step, many people have resorted to using arbitrary measures of time. For example, they prepare three-year to five-year business plans, 12-month budgets, conduct quarterly reviews, and the like. The difficulty is that timing cannot be preplanned."

Jeffry Timmons, a Babson College professor and one of the deans of entrepreneurship in the U.S., made this observation in a new-course document, "Historically, from semiconductors and mini-computers, to PCs, cellular and the Internet, ... early 'bird-dog' bets by U.S. venture capitalists are precursors of new technologies and industries to come. Up until now, an industry's take-off has typically taken 15-20 years after the initial venture capital investments. In today's Web and IT world the... revolution is likely to happen in half that time."

3. Investor approaches have changed.

Business plans were originally conceived idealistically, in the Post-World-War II venture capital world that evolved, as something every entrepreneur should do. After all, everyone should plan, right? But entrepreneurs never took this "planning thing" seriously. They knew that the real purpose of a business plan was to obtain investment funds. So if writing a business plan was something that all these crazy investors really wanted, the entrepreneurs would fill the market demand.

The only problem is that the business plan routine is increasingly out of synch with how investors go about their business. Business plans are no longer what many investors necessarily examine first when evaluating a company. Over the last decade, while the business plan mantra has spread far and wide, other means of communicating with investors have sprung up. These include Web sites, PowerPoint presentations, online media, and trade shows. Venture capitalists and other private investors spend most of their time seeking out the next big thing, not waiting to review the business plans that pile up on their desks.

Because professional investors are sometimes in competition with other professional investors to get to the most promising companies first, the investors don't necessarily communicate their approaches to entrepreneurs. Instead, the investors often automatically tell entrepreneurs to "send your business plan along." All the while, the investors spend lots of time hunting for businesses that meet pre-determined criteria that are most important to them. Thus, if they've targeted restaurant chains, they spend time hanging out at restaurant industry conferences and courting entrepreneurs with success in the field. They network with bankers, accountants, and lawyers for leads on especially interesting businesses.

In other words, they're searching for the most compelling, attractive, interesting situations possible. The key word is "searching," as opposed to waiting. They want to find these situations, or at least feel they've found them.

When entrepreneurs do the searching and locate investors via the Internet or some source book, investors are suspicious, and back off. They delegate to interns and administrative assistants the chore of reviewing business plans that come in over the transom, much like book editors delegate to the most junior editors the chore of reviewing book manuscripts that come in over the transom.

As time has gone on, and professional investors have become ever more inundated with business plans, the investors have become ever less likely to read the plans. And they're looking at other things besides the business plan to make their investment decisions.

4. Jittery investors need more convincing than ever to part with funds.

For all their high-sounding talks about business models, return on equity, and growth curves, professional private investors are heavily influenced by emotional factors. They want to invest when the economy is strong and stock markets are setting new highs each week, and to back off when the opposite is true. During 2001 and 2002, for example, the latter was true.

What that means for entrepreneurs is that they have to go further than they might ever have thought possible to raise the money they need. That means waiting longer, persuading more, and keeping the business going without financing-until financial backers are finally persuaded by your persistence and staying power to provide backing.

5. The venture creation process has changed radically.

Perhaps most important, the actual process whereby the most successful new companies are created appears to be changing before our eyes. Venture creation is now a much more familiar activity to an ever-wider segment of the population, as increasing numbers of women have begun enterprises and more people of all types have worked in startup and early-stage businesses. Increasingly, individuals test the waters of prospective new businesses by selling items on Ebay or elsewhere on the Internet, or on a part-time basis. All this isn't to say that starting a business is a casual affair for many people, but more individuals appear willing to take the plunge and hang out a shingle.

Corrupted Process

Despite all the changes in the business world just described, one thing has remained unchanged: the belief by entrepreneurs and those who advise them in the importance of written business plans. In the world of business and investing, there's usually a problem when everyone begins doing the same thing. When too many toy makers turn out mini-scooters, you have an over supply, prices plummet, and no one is making money. When too many investors are buying stocks, as they were during the late 1990s, it's usually the prelude to a big fall. So it is with business plans.

Today's startup entrepreneurs have been browbeaten with the same mantra: Before you do anything else, you must write a business plan. There's some evidence, which I discuss later in this book, that as many as half of today's startup entrepreneurs are preparing business plans-a much higher percentage than for established businesses. There's also evidence, which I discuss later, that writing all those plans may actually be counterproductive to the companies' business prospects.

Just to compound the problem of quantity, there's a problem of quality as well. Among other things:

They all seem to look the same. For this we can thank the many business plan software programs, templates, and "libraries" of business plans. The problem is that while investors want businesses run by stars who perform spectacularly, these "tools" suggest a sameness that makes it difficult for investors to pick out the jewels. Many business plans are thus being produced in almost mass production form via software and templates that don't allow for the reflection and creative thinking that must be embodied in a business. It's comparable to food processing that inadvertently eliminates or destroys key ingredients from food.

They all seem to sound the same. Probably that's because they so often use the same grandiose Forrester and Gartner Group marketing studies and Excel spreadsheet projections showing sales tripling and quadrupling each year. In my survey of 42 venture capitalists, 90% said that to only a modest or poor extent do the business plans they see "provide a clear and accurate assessment of the company's current operations and likely prospects for the future"; only 10% said the business plans they review do the job to a great extent.

They have little relation to reality. That's because there is no business reality without an operating business. When entrepreneurs spend most of their time writing a business plan, they have less time to do the hard work necessary to actually build the business. The resulting plans are empty promises, just like many of the advertisements we see on television and hear on the radio each day.

No one uses them to run their businesses. It's practically a given among entrepreneurs and venture capitalists that once a business receives investment funding, the business plan gets put on a shelf, never to be heard from again. In other words, the business plan has been used to raise money, not to plan the business.

Some Examples

To give emphasis to the previous section, I have excerpted segments of plans from among 40 judged to be the best in a recent major business plan contest sponsored by a private events promoter and held on the campus of a major university. I haven't identified the sponsor, businesses, or entrepreneurs, and in some cases have changed names or industries so they can't be identified. But the language of each plan is preserved.

It's important to remember in reviewing these that they are just a very few of the total number of plans that inundate investors. No one knows exactly how many plans are written, and I'm not sure it's worth anyone's while to do a survey to find out. But it has to be a huge number. Consider this, from a 2001 study of entrepreneurship worldwide by the Kauffman Center for Entrepreneurial Leadership and Babson College: An estimated 150 million people out of 1.6 billion in 29 countries studied (including the U.S., Japan, Mexico, and France) are "creating or growing new businesses."

Now surely most of these individuals won't be preparing business plans, but if just 10% did, that's 15 million business plans being produced each year. Actually, the number could be much higher. A research project to investigate the impact of business planning undertaken by three University of Illinois business professors-G.T. Lumpkin, Rodney C. Shrader, and Gerald E. Hills-and presented at the annual Babson College Entrepreneurship Research Conference in 1998 (and discussed in detail in Chapter 3), found that half of the 54 startup businesses surveyed had prepared written business plans; this was a much higher percentage than for more established businesses. Whatever the actual number, lots of plans are being turned out each year.

The nub of the problem confronting many entrepreneurs is that they focus so early and fully on writing a business plan that they don't have all that much to report and assess in terms of what they've accomplished. As a result, they devote their plans to discussing what they expect will happen. In their attempts to build up interest in something that in reality is far from completion, the entrepreneurs often let their imaginations run wild. Thus, their plans are prone to all sorts of problems, including the following:

Hype: When the imagination takes over, the end result tends to be hype. Entrepreneurs in highly competitive markets string together a few marketing projections and hopes, pop in a few exclamation points, and, presto, they have a huge opportunity that they are poised to dominate. Two-thirds of the venture capitalists in my survey cited "too much... hype" as a "significant shortcoming" in the plans they see. For example:

SpecialGaming seeks to capture the largest share of the burgeoning one billion dollar gross revenue online gaming market! We will create the first Internet Web site dedicated to Internet tournament play for cash! Our most significant advantage is ownership of the only comprehensive collection of "dot com Tournament" names from the following categories-board games, card games, casino games, puzzles, trivia, and sports. This key advantage will make our business easy to remember without having to rely on a "burn cash" strategy for continued brand recognition.

Overly ambitious business models: The advent of the Internet and its futuristic technological implications seems to have encouraged many entrepreneurs to describe such complex entities that it's difficult to determine what the company's business will be. Here's an example, from a company in India:

Business Model: Action will set up 15 centers all over India for carrying out its activities. The cities selected are major towns having population in range of 2-10 million. The center at Indore is already in operation and shortly Delhi and Mumbai centers are starting. The major activities are IT-Education, IT-Enabled Services and Software.

In my survey of venture capitalists, "insufficient explanation of the business model" was cited as a serious problem in business plans by just over half the respondents. The business model refers to how a company structures its marketing approach to serve customers, and make money. Too often, there's an unclear notion of how the customer will benefit from the company's product or service.

Lingo: One of the main reasons investors tune out on business plans is because they contain lots of lingo-technical mumbo jumbo that is either difficult to non-techies to understand or else so overused it has lost its meaning. A classic example of the latter is the term "solution." Everyone, it seems, is producing a "solution" to some problem.

This is a problem similar to the previous one of not being able to understand a company's business. Put enough lingo in, and you can't be sure what a company does. Two-thirds of my venture capital respondents cited lingo overload as a significant problem in the business plans they review. Consider these business plan opening statements:

Business Model: Specialized Production Management information technology solution for the $30 billion-a-year filmed entertainment industry. Build a vertical portal for the global, fragmented elements that comprise this high-profile, niche vertical market.

BDE provides a collaborative software platform for business technology management (BTM). This software platform solves the traditional disconnect between business and technology professionals by providing a single, automated environment that simplifies and aligns decision-making. It comprises a suite of modeling applications, a profile-driven knowledgebase of codified business and technology information, and a vendor collaboration interchange for solution providers and user organizations. The users of this platform include a cross-functional team of business and technology representatives, while the beneficiaries are members of the corporate leadership team.

Crazy projections: Entrepreneurs know that professional investors like to latch onto fast-growing companies in fast-growing markets. What they may not fully appreciate is that "financial projections too far removed from reality (either optimistic or pessimistic)," is the most significant shortcoming venture capitalists identify in the business plans they see-by more than 80% of the respondents in my survey.

Connecting a young company to a fast-growing market is much more than a matter of words, such as in this plan:

The restaurant pager market is a new market growing rapidly. 2.5% of all eating establishments or 20,500 restaurant locations are potential customers. The market in 2001 was $300 million with a long term growth rate of 10% to 15% per year. In three years, ABC Paging plans to acquire 15% of the market or 3,000 restaurant locations to give us $20 million in revenues.

Inappropriate management team information: Most entrepreneurs know how closely investors examine the people involved in launching a young company. But how you go about communicating that you have top people is another matter. Here is an example of how not to communicate that you have the best people:

DEF's expert team is comprised of industry leaders and professionals that account for over 100 years of top management experience in the entertainment, media, telecommunications and technology industries, and well over 250 years of management experience within its technology development team.

They sound more like they should be in an old-age home than starting a new business. It's nice to have many years of experience, but investors also want to know how the entrepreneurs performed during all those earlier years on the job. Did their companies grow significantly? Were they acquired? Failure to elaborate suggests that the outcome was negative.

The Messages

Aside from the fact that there are too many questionable plans being churned out, what other messages should you glean from the preceding? For the purposes of your own fundraising efforts, I'd point to three:

  1. The business plan shouldn't be the first thing you do. I discuss in Section II of this book seven steps that should precede a business plan, and are likely to be more effective than a business plan in helping you raise money.
  2. When you begin preparing a plan, don't just review other plans to determine how your plan should read. There are so many bad plans out there that you risk falling into the old garbage-in-garbage-out syndrome.
  3. The key messages you want to communicate to prospective investors have to do with what you have accomplished or are about to accomplish, not your dreams for the future.

Costly Implications

There's a rule in business that goes something like this: The younger your business, the fewer mistakes it can afford.

What this rule suggests is that the smaller your business, the fewer resources it can afford to waste. Conversely, the bigger your business, the more mistakes you get. Thus, AT&T could bungle for years and years, and still stay in business. But even AT&T may be running out of bungling chances.

Here's the disconnect for entrepreneurs: They worry about writing plans when all investors care about is the business-whether entrepreneurs truly understand their markets, can grow quickly, be profitable, and have the leadership skills to negotiate all the many bumps in the road. Instead of spending their time writing plans, entrepreneurs need to do all these other things.?