The business plan is a necessity to raise funds for a start-up. In fact, preparation of a business plan is quintessence of any curriculum on entrepreneurship education, if not the only thing, in most of the academic institutes in the country. However is it really important or how important a business plan is for an entrepreneur? There are many instances where start-ups were funded without any business plan or plan for that matter.
To answer this question one has to understand why business plan is required. There are two fundamental purpose of a business plan.
One is for the entrepreneur’s own clarity. By writing and giving reasons for what he or she is intending to, the entrepreneurs gets more clarity about his idea and its execution plan. Also it helps the entrepreneur not miss any major elements of a business and make or repeat some common mistakes done by others.
The second purpose of a business plan is fundamentally for the fund rising. In fact this is the only commercial document for the external world which explains about the commercial potential of the idea or business based on which financing decisions are made. This document addresses all major aspect of the business in full. For instance the business plan includes the market potential and size, business strategy, about the product or service or both, risks of the business, the funding requirements, financial projections and team. For an angel or venture fund it comes handy and allows them understand and ask the right questions.
Despite these utilities of a business plan, there are some major deficiencies of a business plan. The business plan once submitted becomes a static document. In the context of super dynamic nature of start-ups, this plan is a serious misfit. The market conditions and strategies, financial projections and even the team keep on changing and changing is often and quick. In that sense it will be difficult to prepare a document which will remain relevant for even a month. This dynamic nature challenges the relevance of business plan for a start-up.
If that is the case then why so many institutions put so much emphasis on business plan. The reason could be lack of better alternatives to a business plan. It is important to note that generally institutional funding (Banks, Angels, and VCs) does not happen at the very initial stage of the idea development which is the most dynamic phase. The institutional funding happens at somewhat stable stage where such a plan remains relevant for a quarter at least. So for a funding prospective the business plan remains relevant till they become a partner of the development.