ISSUE 006
Business Plans Help — Until You Spend 3 Months On One
There are two camps on business plans and they have been arguing for twenty years. Lean startup says act and iterate; the plan dies on contact with a customer. Traditional advice says write it down. Both have research behind them, which usually means the question is framed wrong — and in this case there's a specific finding that resolves a good deal of it.
An idea worth thinking about
Writing the plan helps. Showing it to anyone doesn't.
An open-access study separated business planning into its component activities — writing the plan, gathering secondary data, sharing it for feedback, sharing it for financing — and tested each against venture success. Only one came back related to success: the act of writing it.
Gathering supporting data wasn't related. Circulating it for feedback wasn't related. Using it to raise money wasn't related. The authors' reading is that the planning process itself matters more than the uses the document gets put to, and they cite earlier work finding the effect holds even when the plan is never revised or revisited afterwards.
If that's right, a business plan is not primarily a communication device. It's a thinking device that happens to leave a document behind, and its value is spent at the moment you finish writing it. Which also explains why so many people describe the plan as useless six months later and still say the exercise was worth it. They are both correct.
A tool I disappeared into
A table of which planning findings apply at which stage
There's a free open-access review that organises the business planning literature into a table by business stage — pre-startup and post-startup — with the specific economic effect and the citation for each row. It is the opposite of a motivational article about planning, and far more useful.
Some of what it collects is reassuring: creating any type of plan improves survival rates regardless of environmental uncertainty, and pre-startup planning enhances sustainability independent of financial conditions, competitive conditions, team size or industry. Some of it is sharply limiting: a formal plan does not necessarily benefit a firm before an opportunity has emerged, or at the point of hiring a first employee.
The row I'd put on the wall is about execution. Feedback loops and simultaneous execution improve outcomes, while rigid adherence to the plan risks ignoring critical signals and reduces responsiveness. That is the lean startup objection, confirmed, sitting in the same table as the evidence that planning works — which is roughly where the honest answer lives.
Learn something
How researchers separate the plan from the kind of person who writes one
The obvious objection to any finding that planners do better is that planners are different people. Someone willing to sit down for three weeks with a spreadsheet is probably more disciplined, better capitalised and more serious to begin with. Measure the plan and you may just be measuring them.
Researchers writing in Harvard Business Review describe how they handled it: they matched would-be entrepreneurs who wrote a formal plan against statistical twins who didn't but resembled them on background and startup conditions, then compared which twin reached viability. That design isolates the planning from the planner.
It also quantified the selection effect rather than assuming it away. High-growth-oriented entrepreneurs were about 7 percent more likely to plan, and those with innovative or disruptive ideas about 4 percent more likely. Worth learning the move itself: any time you're told that businesses doing X perform better, the question is whether anyone checked what else is true of the businesses that do X.
What we’re seeing
Planning raised annual growth by 33 percentage points in one study and did nothing at all in another
Start with the strongest evidence for. A 2010 meta-analysis in the Journal of Business Venturing synthesised 46 studies covering 11,046 companies and found a positive overall relationship between business planning and performance, moderated by firm newness and cultural context. A study of 622 new ventures, after statistically separating the plan's effect from the selection effect described above, found that writing a plan on its own lifted average annual employment growth by 33.4 percentage points. Related work found ventures whose founders completed a plan were 57 percent less likely to disband, and that each step up in plan formality cut the odds of abandoning the startup by 81 percent.
Now the evidence against. A study of 117 new ventures started by Babson College alumni found no performance difference at all between those launched with a written pre-launch plan and those without. That is a null result on a real sample, and it has not gone away.
And now the finding that does the most work, from Hopp and Greene. Spending more than three months creating a formal business plan decreases survival rates. Completing it within about two months of the key events it concerns is associated with better outcomes.
Put those together and the twenty-year argument mostly dissolves. Planning helps. Planning at length hurts. The benefit arrives early, from the act of forcing your assumptions onto paper, and then it reverses — because month four of writing a plan is month four of not talking to a customer, and because a document you've spent a quarter on is a document you will defend rather than revise.
Practical version: give it a deadline measured in weeks, write it yourself rather than commissioning it, and expect its value to be mostly spent by the time it's finished. The most legible summary of this research is published by a company that sells business planning software, which is worth knowing; the underlying studies are independent and peer-reviewed, and the null results are in there too.
One question
How long did you spend on your business plan?
Weeks, months, or never wrote one. Reply with which — the research says past three months it starts working against you, and I want to know where people actually land.
More in this pillar as it's written.
— Shana
Sources link to the original publisher, never to a summary.