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.)