Great Businesses Don't Start With a Plan

Great Businesses Don't Start With a Plan:
You want to start a business. So you need a plan, right? No. Not really.

As part of the research for a book I'm co-authoring — Heart, Smarts, Guts, and Luck, due out in August from HBR Press — my colleagues and I interviewed and surveyed hundreds of successful entrepreneurs around the globe to better understand what it takes to be an entrepreneur and build a really great business. One of our most striking findings was that of the entrepreneurs we surveyed who had a successful exit (that is, an IPO or sale to another firm), about 70% did NOT start with a business plan.

Instead, their business journeys originated in a different place, a place we call the Heart. They were conceived not with a document but with a feeling and doing for an authentic vision. Clarity of purpose and passion ruled the day with less time spent writing about an idea and more time spent just doing it.

It's not that all planning is bad. It's that efforts to write the "perfect" business plan usually lead to being precisely incorrect rather than approximately correct. One problem is that the content that most people focus on in business plans has little to do with the reality that will actually emerge. Many start-up plans emphasize some gigantic potential market and how getting just the smallest sliver of it will make them and investors rich. A colleague of mine offers the hypothetical example of selling a bar of soap for a dollar every month to just 0.5% percent of the people in China. It's nearly a $100M business! Good luck making it happen, though.

At a business's inception, resources are limited, and the best content for a business plan is real-world data based on testing aspects of the concept. These experiments need not be complex. You want simple, iterative tests that are easily measurable and let you know whether you are winning or not.

It's not just start-ups. The strategic architecture of any business should incorporate facts from real world testing to allow one to adjust course as necessary. This is what Henry Mintzberg, a seminal figure in competitive strategy theory, once described as "emergent" or "evolutionary" strategy. My business partner Mats Lederhausen (formerly global head of strategy for McDonald's as well as former Executive Chairman of Chipotle) has his own saying for it: think big, start small, then scale or fail fast.

So don't worry too much about a business plan. But to guide your thinking, improve a pitch to prospective investors, or better align your teams, consider these design points:

1. Identify and clearly articulate your Heart and purpose. Whether you want to call it vision, Heart, purpose or calling, be very clear on the why of a business — the bigger goal at hand.

2. The team is more important than any idea or plan. The top three priorities should be people, followed by people, and then people.

3. Think big, start small, then scale or fail fast. Per Lederhausen's advice, set the right first "start small" milestone; it will usually involve seeing people's willingness to buy or at least try your product.

4. Focus on a well-defined market sub-segment or niche. At least to start, think of where you can potentially be the best. This strategy is almost always more successful than being just another player in a massive market.

5. Understand your business model. How you will make money is more important than pages of Excel showing financials that are simply too hard to predict at this early stage anyway. Understand instead the basic way you will make money - is it through transactions, advertising, subscriptions, etc?

There appears to be a perennial market for how-to classes, books, and templates that promise almost "color by number" instructions for populating business plans. While aspects of those tools are helpful for a structured approach, they are more likely to mislead because of their emphasis on completing the plan of a business before uncovering its soul and demonstrating whether others connect with it. People feel a sense of accomplishment upon completing their plan, but what does that plan really get them? Filling worksheets can never replace zeroing in on the passion and purpose of your business. That Heart has to be there day one. The most researched business plan holds little value without a genuine Heart behind the idea and the Guts to just get it going.