Your Business Plan is Wrong

In my last article on “Lessons From the VC Industry” I included some thoughts suggested by a VC friend of mine, Josh Kopelman of First Round Capital.  In his thoughts he shared with me he had another insight that I didn’t include because I thought it was so important and fundamental that I wanted to dedicate an article to this topic.
Here’s Josh in his own words:

“Most venture capitalists see several thousand business plans a year – and the one thing they all have in common is that they all are wrong.  The moment an entrepreneur hits save, print or send, the plan is out of date.  Competition, Technology, and Market Dynamics all effect the plan.  Most successful entrepreneurs understand that they need to “pivot” as they get additional data and learning.  Many successful venture-backed businesses are “pivots” – PayPal started as a technology to send money from PDA’s, and YouTube started as a dating site.”

Josh went on to emphasize how VC’s understand this dynamic and encourage it, yet product companies seem to fight or deny this reality.

Consider how much weight a typical product company puts on the business plan for their proposed projects.  It’s not unusual for product companies to require detailed projected ROI or ECV analysis, market projections, and/or granular cost estimates.   And senior management makes investment decisions based on these plans and estimates.

While good VC’s assume these plans are wrong, product companies not only assume they are reasonably accurate and base decisions on them, but  then they make the process of change painful and expensive.  A pivot is generally not something that is encouraged or even welcomed.

It’s no surprise to me that so many product companies complain of lack of innovation.  In large part, the innovations and big insights result from these pivots.

This is why I focus on the broad concept of “Product Discovery” rather than the very narrow “Requirements Specification” that most people associate with product definition.  Discovery by its nature must be open to these pivots and course corrections.

(By the way, have you noticed that with every additional word of specification documentation you put down, you become less open to new ideas and different approaches?  This is why it’s so important to hold off on writing anything up until after you’ve discovered something worth describing in a spec.)

I do think there are two important flavors of discovery, and I’ve written earlier about the distinction between market discovery and product discovery.

For many product companies, especially startups, the real objective is just to find some product that resonates with a market.  Marc Andressen calls this “product/market fit”.   This might mean discovering a new market, but most of the time it means discovering a product solution that does the job better for existing markets.

Once a company is more established, very often the company has a specific need, and the purpose of product discovery is to try to find a product that meets the specific need.  For example, maybe your company depends on a mobile payment solution, but you don’t yet know what that mobile payment solution looks like.  Product discovery is meant to figure that out by coming up with a solution that is valuable, usable and feasible.

So when Josh says that all business plans are wrong, this has big implications for both product portfolio planning, and for product discovery.

For product portfolio planning, we need to pay much less attention to the specific numbers in the business plan, which are very likely wrong, and more attention to the team, the opportunity and the process of discovery.

Sometimes when I explain this to people they think I just don’t like the models or the spreadsheets.  But the models are typically fine; the issue is that at the very early stage that most companies create these models, there’s just no way to know the idea’s potential in terms of real customer demand, whether the team can discover a solution that meets the needs, and the eventual cost to build and deliver this solution.  So it’s garbage in, garbage out.

A critical part of good product portfolio planning is acknowledging what you can know, and what you can’t, and managing risk intelligently.

For product discovery, we need to realize that it’s not only okay to seek out these pivots, this is what product discovery is all about.

By the way, you can read more of Josh’s thoughts on his blog at www.redeyevc.com.