ranting, VC

In Praise of the Business Plan

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I’m all lean startup, just like you. I love being efficient and building things and MVPing them and getting out of the building. I love setting up analytics and iterating and learning and experimenting. All of that stuff is awesome. I recommend it to the founders I work with, I teach it in the class I teach, I love it.

But I think this idea that all you need to pitch a VC is a product demo has gone a bit far. It was great when we ditched the inch thick prospectus for the 30-page business plan. It was okay when we ditched the 30-page business plan for the 15-page deck. But when we ditched the deck for the demo we lost something extremely valuable.

I understand that showing a product best demonstrates to a bunch of addled VCs what your product is. I have sat in that seat and listened uncomprehendingly to a founder carefully explain their business, then seen the screenshots and said “oh, that’s what you’re doing.” All that proves is that I’m occasionally as dumb as the next guy. If what VCs want is a demo–the path of least resistance for everyone, really–then the worst that can be said about the founders is that they’re enabling bad VC behavior. I’m putting the blame here at the feet of the VCs, though both VCs and founders suffer from it.

Startups don’t fail because they can’t build their product. I read that in one of those books about Lean, Ries probably. Let me paraphrase what I remember reading: “startups don’t fail because they can’t build their product.” In my experience, close to 20 years of investing in, starting, and advising startups–some 60+ companies–none of them has failed because they couldn’t build their product. They failed because they didn’t understand their customer, because they didn’t understand their competition, because they didn’t understand their market. Technical risk is a big risk, sure, but it’s also the easiest risk to evaluate before investing. Whether the thing the team is building can be built and whether the team that plans to build it can really build it are straightforward questions and the answers can be determined straightforwardly. Whether people will use it, pay for it, cry tears of joy and relief because of it, those are hard questions. Figuring out whether those are true takes some real work.

Why do some VCs only want to see demos**, which prove only that the team can overcome the technical risk, instead of hearing about all the customer and market research the founders have done? Mainly it’s laziness: why do the work of understanding the market, just watch the demo and  make a gut decision. Partly it’s pandering to the natural product-orientation of technical founders: who wouldn’t rather show the product than talk about whether dogs will eat the dogfood and if in fact dogs actually exist. Here’s the thing: VCs’ gut instincts suck* and pandering is pandering. It’s not only bad for VCs, but it’s bad for founders. It’s like going to a parenting class where the class leaders do nothing but ooh and aah over your baby. Of course you love it, but it’s a frickin waste of your time.

VCs should do founders a favor and make them write a business plan that talks about the customer and the market and how they hope their company will salve pain and endlessly scale. It will not only force the founders to think it through personally and think it through jointly with their co-founders, it will allow the VC to give something back to the founders during the pitch–not product feedback, VCs aren’t good for product feedback, they’re not your customer–but market and business model feedback. I love product demos, they’re easy on the eye and on the brain, but maybe talking about why your product is a business is due for a comeback.

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* And so do yours, by the way; research shows that “gut instinct” sucks in general and is really just an excuse for slackers.
** Post-publish edit to add “some” before VCs to address Mr. Wilson’s concerns.

12 Comments

  1. i agree that you need more than a demo. you need a deck that explains why you built what you built and how you intend to make it into a business.

    but showing the product to a VC is not about addressing the technical risk. it is about showing that you have the ability to build a product that is useful, easy to use, and does in fact address the problem in a way that will be successful.

    calling VCs lazy is bullshit. i am a VC and i know a lot of VCs who work their asses off and are very good at what they do.

    1. I don’t think VCs are lazy, I think that looking at demos instead of evaluating a full plan is lazy. If you are already asking them to do a deck “that explains why you built what you built and how you intend to make it into a business” then you’re already doing what I think all VCs should do.

      But, then, I’m not really trying to give you advice, Fred, I’m trying to convince the founders who pitch me that they should be asking for more from their other early-stage investors. It’s becoming increasingly hard for me to make reasonable suggestions that will improve their chances of success post-round to some founders when other investors are willing to write a check as soon as they see a well-designed UI. Not for nothing, Fred, but some of us are still at ground-level trying to help founders get the business traction that will allow them to get the attention of people like you.

      1. I can not award you enough +1 karma on this. I think you are spot on again (you seem to have a habit of that).

        In the ‘age of the hacker’, it’s def. *much* harder to build and execute on a plan for business traction than it is to throw up a prototype (and btw, it’s not as easy as you make it sound for prototypes to raise money either).

        The good news is that, if you are losing out on deals because of this…then you are really only losing out on the ones with lazy founders who are less likely to push through the dip (assuming they can even get to the dip)…so really, long term, it’s to your advantage as is…

        1. The problem is, I see great products that don’t yet know who their customer is. I’d love to be able to have the founders iterate on customer development a while, instead of raising and continuing to build to an unknown user. I think the funders of a product like that are doing a disservice to the founder.

  2. I think the demo is a starting point. But there are some questions that need to be answered, whether they are in a deck or business plan may not be important.

    The proverbial “planning” is more important than the plan itself. I’d like to know what they have thought about, and how they will put it into action. That said, the most under-planned aspect is the Go-To-Market plan. How will they acquire customers/users?

  3. 8 Months ago when I came up with my start up the first thing I did was draw it on photoshop and make my business plan. After I completed my business plan, I went ahead and started my prototype which I am about to finish this week. I’m looking to go in for funding soon but I’m not expecting anybody to hand me money based on my UI, everything I have read and learned so far has thought me that Investors are investing 10% in my product and 90% on me, my vision, and business plan. Wish me luck!

    1. Luck! Find some beta customers and start getting feedback from them, figure out what it would take to get them to either write a check or stick around and invite all of their friends.

  4. I disagree on this: ” They failed because they didn’t understand their customer, because they didn’t understand their competition, because they didn’t understand their market.” They failed in all that because they didn’t have a product that didn’t need to do all that. Probably they were under pressure to forget their product. When importance is not in the product but in accomodating to people needs I call it socialism, something that has been proved to fail.

  5. Regardless of whether VC’s are lazy — I don’t think they are any lazier as a class than other white collar classes of workers — the shining object of the visual demo is a real distraction and often a false positive.

    Nowhere was/is this more true than the rush of investors into visual product markets like 3D or gesture-based related markets. My warning to entrepreneurs, and to myself, is that if your potential customers or investors say “this is really cool”, then you have eye candy not meat. Asking would be customers the harder question of spending a $1 or more to use the product usually deflates the cool response very quickly and brings the real product value into focus very quickly. We all can dream up amazing products, but as often as startups fail, these products are typically solutions in search of problems.

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