Study Finds Business Plans a Waste of Time

Entrepreneurs who slave to craft a perfectly-articulated business plan expect the effort will pay off with better odds of getting funded. But they’re probably fooling themselves.

That’s the finding of a study conducted by two professors and a doctoral student at the University of Maryland’s Robert H. Smith School of Business. Management and entrepreneurship professors David Kirsch and Brent Goldfarb, along with doctoral student Azi Gera, studied business plans and found quality had zero impact on the amount of VC funding raised.

According to the summary that hit my inbox this morning, the group studied business plans of more than 700 dotcom companies from the late-1990s to early-2000s. They compared characteristics of each business plan – including the contents, team make-up and business model – and whether the plan received venture capital funding.

Their conclusion is that the content of the business plans does not predict which businesses get funded. That doesn’t mean writing one is an entirely worthless process, as it may be useful for organizing thoughts and details of a venture. However, it’s not going to bring in the money.

I talked to Goldfarb this morning and asked if the findings came as a surprise. They did. “We kind of thought we’d find something,” he says. “We thought it would at least matter if you submitted a plan, or if the plan kind of looked right. The evidence is pretty strong that they don’t pay attention at all.”

So what does matter? Social connections trump business plans by a long shot, says Goldfarb Thus it is that people who already know VCs and angels have an easier time raising money. The irony, says Goldfarb, is that people who don’t have connections need to go out and make them, which may require that they have a business plan to discuss. But the plan is sort of like a business card, he says – just something that business protocol dictates you carry around.

Kirsch maintains a business plan archive that contains records from a number of startups from the dot-com bubble era. The research paper, “Form or Substance? The Role of Business Plans in Venture Capital Decision Making,” appears in the May 2009 issue of Strategic Management Journal.

Goldfarb says he believes conclusions drawn from a dataset of business plans from during and slightly after the dot-com implosion are relevant to current entrepreneurs because venture capitalists have not significantly changed the way they make funding decisions. (Though hopefully they have gotten pickier.)

Go here to see a video interview with Goldfarb.


  • I agree that business plans don’t get you funded. A carefully crafted business plan serves as your company’s roadmap. How you present your ideas to investors is what gets you funded.

    If you’re sending a 40 page business plan to an investor, you won’t get funded because it won’t get read. A business plan helps you gather your research and go-to-market plan. You should take your plan and distill it down to a 10 page summary or slide deck that will get the reader’s attention.

    Net net, write your business plan for your team and a brief yet captivating summary for your viewer. Investors invest in people, not business plans. You can have a great business plan, but if you don’t have a convincing team, you have nothing.

  • Lots of entrepreneurs ask if they need a business plan. I always give the same answer: No.

    I’ve raised and participated in dozens of fundraising rounds, and the only time a business plan was ever involved was my very first startup. I’ll bet the experienced investors saw my carefully crafted 50-page plan and thought, “Rookie!”

    I’m glad I can now now cite a real study from the University of Maryland’s Smith School of Business!

  • yes biz plans are a huge waste of time and effort. it also runs counter to a key attribute for entrepreneurs; adaptability.

    a vc’s most precious resource is time so it makes no sense for them to read business plans, when the key attributes of a company can be communicated in a 10 – 20 slide ppt

  • After being in the capital raising (debt and equity) business for many years in the emerging and established enterprise space for smaller and larger firms, I concluded that business plans are necessary but not sufficient to successfully secure funding. Having ample social capital and corresponding networks matter and so does the presence of an exceptional management team and a business idea that is clear and highly marketable that offers hyper growth potential. That’s old news but good to know that someone provided another view with credibility and evidence! What is important to the fund-raising is the use of the business planning process to comprehensively and systematically define well the proposed venture or its growth and the team that is going to take it to market and once there lead it to the next levels of growth.
    Our firm uses the collaborative approach to plan development with the client and incorporates in the business planning process scenario building not only in the financials but in the management, operations, contingency and growth sections of the plan. This is done to anticipate and generate risk management tactics and strategies which is an element that funders consider important. Business plans may not matter much in accessing capital but engaging in business planning does. Why? Because doing planning provides a vehicle to inculcate the entrepreneur and business owner with the culture of planning or viewing the future in an organized fashion while dealing with the immediate management and financing challenges that come with the owning and operating a business. Incidentally, there is a firm in O.C. that published a bold statement a few years ago that there is not need of a business plan to increase fundability. What is interesting is that they reviewed 500 or so business plans and proceeded to develop a 900-item application which contained all the information typically presented in a plan and with this information they created an extensive algorithm that produced a fundability index to predict the likelihood of the venture being financed. Bottom line: The firm collected the same information included in a business plan but organized it differently and outcome was precisely the same as the classical approach of reviewing ventures for potential funding.
    As for the University of Maryland Study, 1) this effort is limited to dot com’s which are an anomaly compared to more traditional industries. Most, if not all, of the business plans that I reviewed during that era consisted of young entrepreneurs that had business and revenue models that called for large amounts of capital for defining the product/service and market testing it and not necessarily reaching break even let alone being profitable and 2) the decision making process and culture of the venture capitalist is not the same as other sources of funding due to the nature of their business. In the 1990’ and early 2000’s, VC funded business ideas that promised 30% to 40% returns unlike Angels, private equity and other commercial funding sources that sought ventures that had the potential of generating lower, steady returns earlier and owned less of the business. In other words, I’m sure that the findings are statistically significant at the 95% confidence level but one cannot generalize from these results that business plans are of little use in funding all ventures at all stages of growth. An implicit and mixed message of the Study’s conclusion is that there is no need to develop a business plan but on the other hand is to craft one because is a serious “calling card.” Perhaps it would be useful to examine the correlation between the business planning process and fundability 1) across industries, 2) family vs. non-family ownership, 3) at different stages of business development or over time and 4) of different venture sizes. A longitudinal study of this nature would be highly informative and I’m sure would address many questions regarding the merit of entrepreneurs and others in the Team crafting a business plan for the operation and growth of firm. Food for thought!

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  • Sharp contrast to the ongoing, multi-year Kauffman academic study proving unequivocally that 96% of VC-backed companies achieving IPO exits were implementing their original seed/start-up business plan one year or later post-IPO.

    What this Maryland study proves is that VCs no longer read or value business plans. Hmm. Wonder if that might explain why VCs have been failing of late in producing $1 billion homeruns, especially by building companies that have the wherewithal to achieve freestanding, sustaining value via IPO exit instead of lesser concerns aimed at quick flip exits by and large to previous portfolio companies. Oh, and do not blame Sarbanes-Oxley. No public suitor is going to buy a non-SOX-compliant, VC-backed tech outfit. They can’t and remain SOX-compliant themselves.

    It is projected that 50% of today’s VC firms will not exist in two years due to non-performance (poor–to-negative returns to their LPs). There is good reason for that. Maybe VCs ought to start demanding and reading business plans once again.

  • I think this study shows why the situation of VC looks bad. Networking and social interactions are the determinant principles of VC funding. And the result… Poor returns…

  • I think there are 2 kinds of business plans. One that is written for a banks of VCs, these are mostly paper products, no one cares for them and uses them; and two – plan that you create for yourself to reach clarity of the path. It is more like map of the world. I am here now and this is where I am going. Good business plan is like a plan for today and a plan for a year in one. You want to switch between them to keep clarity and not to be stuck in the moment. I think being in the moment is overrated. A lot of people stuck in the moment, drown in the present and move nowhere. This is how I use my plan – to give me perspective, see the logic, and ability to move forward. It is all about energy.

    p.s. Study of business plans? Com-on. How long did it take them to study? How much money did they spend on this study? How about using common sense? This makes me laugh.

  • This is an interesting read for someone who has an idea in its infancy. I’ve heard both arguments from both sides and think that my efforts can be best spent meeting VC’s and angels. My pitch is easy to understand and will be profitable but they have to hear the vision for it. This is nothing a business plan can accomplish. It’s impossible to convey passion and conviction no a piece of paper. To me, face time is key. If they want the road map, I can provide it but I’d rather do the talking.

  • I have to site with Luminific – sounds like a pointless study by clueless scholars. I would love to know the criteria for their business plan quality assessment. It probably would be much more interesting study of relationship between quality of plans and success of execution, rather than success in being funded. In the hey days of the bubble, I’ve seen funded startups that could not articulate what they are selling, never mind how.

  • […] is this the case? It seem from what the study is saying that knowing the funders actually helps more with ultimately getting […]

  • […] | No Comments Tags: business plan Stephane Fermigier posted this link on facebook: Business plans a waste of time finds a […]

  • The Maryland study is very misleading, especially this article title. Studying VC trends through the .com era as a ‘useful indicator’ for developing business plans today? As the others have said above, this ignores cross industries, Angel investing and other sources of funding. To say business plans are a ‘waste of time’ sounds like a publicity stunt more than anything. Of course spending time developing the business and getting clients is more important than ‘tweeking page 17 of your business plan.’ D’uh.

  • I’ve read the professors’ paper, and overall I think it’s pretty thoughtful. While I believe that a written business plan can be helpful in making operational and strategy decisions for a startup, it is no longer the appropriate means of getting a meeting with a VC. These days a simple 12 to 15 page PPT is much more effective.

    More important than written documents in the VC process is getting an introduction to the VC by someone who that VC trusts. The involvement of a well known CEO-type who is willing to introduce an entrepreneur to a VC is a strong signaling factor. On the off chance that you are interested in more of a junior VC’s opinions on the professors’ conclusions you can visit my blog:

  • The plan guides the entrepreneur. The entrepreneur needs to be able to concisely & convincingly articulate the plan – to investors & staff. An entrepreneur who can fluently communicate a smart idea underpinned by a thoughtful plan are essential. It must be worrying to LP’s if VC’s truly disregard plans but the entrepreneurs ability to communicate probably does provide a very strong indicator of potential success – provided the idea makes sense.

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  • Ali makes a good point. The question shouldn’t be “does having a business plan make you more likely to raise VC,” the question should be “does having a business plan make you more likely to be profitable after having received VC.”

    Getting VC isn’t the goal, it’s a step, and often an optional one. Entrepreneurs would do well to remember that.

  • The idea that you can get investment without a plan that shows that you have a product, a market, operational capabilities and a path to a return for the investors is one of the truly stupid beliefs of our times.

    The studies that follow the companies show that success is higher with a plan that is adapted and followed by the company.

    There are many poseurs that say things like, don’t make your plan 50 pages, no one will read it. If you are asking for six figures or more from an individual and they won’t even take the time to read a 50 page plan then ask them for more, it shows an ignorance that deserves to be exploited.

  • Thanks for all your interest in our work. I’m happy that you all found it interesting.

    The study looks at the initial screening phase. If business plans are easy to produce, they don’t do much to distinguish resourceful and less resourceful entrepreneurs – anyone can produce them – so they become a form of cheap-talk. In contrast, actual business building results, or alternatively, the ability to get an endorsement from a prominent person, are much more difficult to produce, and therefore, likely to attract attention. Healy Jones at gets this in a big way, his comments are insightful.

    I fully agree with those that suggest that planning is often helpful. Our study is completely silent on this issue – as we don’t have the data to address this point. When we teach entrepreneurship here at the Smith School, we ask students to fully understand and write up their business model, or the logic of their business. This forces the student to think through their business carefully, and understand what they are and are not assuming about their market and environment. This is a helpful and highly iterative process. It also forces the entrepreneur to think about the business as opposed to the technology.

    I also wish to address Miller and Gregory Y. We were only ever talking about VCs. You are perfectly correct that it would be better to test our hypotheses using broader data – which we would have done if we had the data. That said, I am not so sure that VC processes are that different. I would be delighted to see evidence that they are. Finally, it is entirely possible that ignoring business plans is a poor way to make decisions. As far as I know, there is no evidence either way. Still, regardless of whether or not VCs are foolish to ignore business plans, they do. Thus, it might make sense for the venture-capital-seeking entrepreneur to spend time building their business, not writing the plan.

    Luminific: the money spent on this study is nothing compared to the money spent training MBAs to write business plans. If the study gets people thinking about the issue, and reorients some of their efforts towards building the business not the plan, then it may be well worth it.

  • […] “Study Finds Business Plans a Waste of Time“ […]

  • […] capital” seems to have waded into a world of controversy. Some of the comments left on PEhub (the publication that first brought my attention to the University of Maryland’s […]

  • […] While checking twitter this morning I came across a tweet from @BoagLinks which links to this post via peHUB. […]

  • […] Study Finds Business Plans a Waste of Time […]

  • […] Study Finds Business Plans a Waste of Time […]

  • […] A study found that “quality of business plans had zero impact on the amount of VC funding being raised.” […]

  • […] E aqui o artigo completo sobre este estudo […]

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