Opinion: I love it when a plan comes together

John Mullins and Randy Komisar, Getting to Plan B: Breaking Through To a Better Business Model, Harvard Business Press, 2009.

It’s an old military adage that no battle plan survives initial contact with the enemy. Similarly, in the world of entrepreneurial ventures, initial business plans seldom survive first contact with the market.

Nevertheless, business planning for startups has become a big business with numerous bestselling books, as well as websites, software packages, courses and thousands of consultants. Every entrepreneur seems to believe they require a business plan replete with graphics, Excel spreadsheets and hockey-stick projections for their venture to be credible.

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In Getting to Plan B, the authors offer an alternative approach to business planning. It’s based on their view that ventures are too often driven by poorly conceived business plans, and based on untested assumptions backed by little evidence. As most venture capitalists will tell you, the initial application of the product or service – “plan A” – is seldom where the real money is made. The plan that ultimately finds traction with the market is likely to be much further down the alphabet.

Indeed, many of today’s most successful companies are unrecognizable from their initial business plans. The authors note that if the founders of Google, PayPal and Amazon had stuck to their plans we may never have heard of them – Google’s founders, for instance, initially wanted nothing to do with advertising, considering it “evil.” Max Levchin, the founder of PayPal, started out making security software for hand-held devices. PayPal emerged as plan G. Amazon exhausted the planning alphabet and burned though hundreds of million of dollars before finding the right business model. Many social networking ventures are still looking.

In writing this book the authors, John Mullins and Randy Komisar, draw on extensive research and practical experience to help entrepreneurs identify and evolve a business model that works. Mr. Mullins teaches entrepreneurship and venture capital at the London Business School and Mr. Komisar is currently a partner at Kleiner Perkins Caulfield and Byers, a leading Silicon Valley venture firm.

Getting to Plan B does three things that make it essential reading for entrepreneurs. First, it provides an excellent tutorial on the economic fundamentals that make any business viable.

The core of the book provides a detailed discussion of the five key components underlying any venture’s business model, including the revenue model, gross margin model, operating model, working capital model and investment model.

There are very good chapters on each model along with a series of useful checklists to guide entrepreneurs. The authors also clearly demonstrate how these components need to align to be successful.

Second, it provides a structured approach to stress-testing assumptions and premises underlying a new venture’s initial plan. This approach involves the use of fast data-driven experiments to validate key elements of a business model.

There’s an excellent discussion of how entrepreneurs can use lessons of previous ventures, both successful and unsuccessful, to influence their business model, and sets out a process for using metrics and dashboards to guide these experiments, track results and identify the need for course corrections. Following this process also provides entrepreneurs with the opportunity to discover if their plan really works before spending too much of their time or their investors’ money.

Finally, the book also provides a badly needed lesson for budding entrepreneurs on the critical strategic importance of a good working capital model. Too often, company founders are fixated on spreadsheets and raising cash from investors to recognize the opportunities to fund the business by managing the timing of accounts payable and receivable, thus generating cash from customers and suppliers who don’t require equity.

The authors note that a good working capital model can reduce a company’s reliance on outside investors and allow founders to keep more of their company.

If you are considering launching a new venture or are in the process of writing a business plan for one, I would encourage you to read this book.

Micheal Kelly is dean of the Telfer School of Management at the University of Ottawa.

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