It pays to plan. Entrepreneurs who write business plans are more likely to succeed, according to our research, described in an earlier piece for Harvard Business Review. But while this might tempt some entrepreneurs to make writing a plan their very first task, our subsequent study shows that writing a plan first is a really bad idea. It is much better to wait, not to devote too much time to writing the plan, and, crucially, to synchronize the plan with other key startup activities.
A startup business plan seems a good idea at the very start because it answers basic questions like “Where are we now?”, “Where do we want to get to?”, and “How are we going to get there?”. By detailing out how to orchestrate complex interdependencies such as customers, competitors, operations, logistics, marketing, and sales, writing a plan first appears to schedule out actions and strengthen the link between actions and performance for the new venture. And, as we mentioned, planning does have value. In our previous work, we looked at more than 1,000 start-ups, separated them into planners and non-planners, and found that entrepreneurs who plan are more likely to create a viable new venture.
But the real key to succeeding in business is being flexible and responsive to opportunities. Entrepreneurs often have to pivot their business once it becomes clear that their original customer is not the right customer, or when it turns out that their product or service fits better in an alternate market. Because of these realities, business plans written at the start end up nothing more than a fable. And writing a plan takes time – time that could be spent evaluating opportunities. Another danger lurks. A plan might just lock the entrepreneur into a false sense of security that prevents them from seeing the actual opportunity — rather than an imagined one.
To provide startups with concrete and practical help, we went back to the Panel Study of Entrepreneurial Dynamics II’s data on 1,000 would-be U.S. entrepreneurs. Using these representative data, we then charted the entrepreneurs’ attempt to create a viable new venture over a six-year period (2005-2011). In tracking these entrepreneurs over time, we were careful in our analysis to control for an entrepreneur’s background and for startup conditions like a founder’s education and previous experience, which we knew from our earlier research affect the chances of success.
To control for these influences, we used a well-known statistical technique to separate out the would-be entrepreneurs into two groups: planners and non-planners. This allowed us to create “statistical twins” – pairs of startups similar along a number of dimensions, except that one is a planner and the other is not. As a result, we were able to robustly identify what impact business plan timing has on achieving venture viability.
We found that on average, the most successful entrepreneurs were those that wrote their business plan between six and 12 months after deciding to start a business. Writing a plan in this timeframe increased the probability of venture viability success by 8%. But writing one earlier or later proved to have no distinguishable impact on future success.
Next, we examined how long founders should devote to writing a plan. We found that the optimal time to spend on the plan was three months. This increased the chances of creating a viable venture by 12%. Spending any longer than this was futile, mostly because the information used to inform the plan loses its currency. Spending just a month or two on the plan was just as bad. If the choice was between quickly writing a plan or not writing a plan, the entrepreneur was better off not writing a plan at all.
These findings need to be understood in the context of what else the entrepreneur needs to do to make their start-up happen. The reality is that founders are juggling multiple activities and writing a plan is just one of these.
We found that when the plan is sequenced really does matter. Writing a plan alongside early activities like defining the market or collecting information on competitors added nothing to the chances of creating a viable new venture. Equally pointless was writing a plan when the entrepreneur had already hired workers or gotten external funding. In fact, if a plan is written while doing these activities, entrepreneurs have less chance of reaching venture viability than those that did not write a plan.
We found that the sweet spot for writing a plan was around the time when the entrepreneur was actually talking to customers, getting their product ready for market, and thinking through their promotional and marketing activities. Committing a plan to paper alongside these activities increases a start-up’s chance of venture viability by 27%.
But this should detract from the vital importance of spending time writing a good plan. For a plan to be effective, it needs to detail out what the opportunity is, who the customers are, why competitors should be fearful, and how the company operates and makes money.
What is novel about our research, though, is we show that timing really does matter. Our advice to entrepreneurs is not to write a plan too early, don’t spend too long on it, and make sure it is done alongside other activities that actually propel the venture forward.
Good advice not only for entrepreneurs, but also for managers in larger growing organizations who need to plan in contexts – like start-ups – where information is missing or the environment is highly uncertain.