by William A. Sahlman
Harvard Business Review
Which information belongs – and which doesn’t – may surprise you.
How to Write a Great
by William A. Sahlman
Few areas of business attract as much attention as new ventures, and few aspects of new-venture creation attract as much attention as the business plan. Countless books andarticles in the popular press dissect the topic. A growing number of annual business-plan contests are springing up across the United States and, increasingly, in other countries. Both graduate and undergraduate schools devote entire courses to the subject. Indeed, judging by all the hoopla surrounding business plans, you would think that the only things standing between a would-be entrepreneur andspectacular success are glossy five-color charts, a bundle of meticulouslooking spreadsheets, and a decade of month-bymonth financial projections.
William A. Sahlman is Dimitri V. d’Arbeloff Professor of Business Administration at the Harvard Business School in Boston, Massachusetts. He has been closely connected with more than 50 entrepreneurial ventures as an adviser, investor, or director. Heteaches a secondyear course at the Harvard Business School called “Entrepreneurial Finance,” for which he has developed more than 100 cases and notes.
Nothing could be further from the truth. In my experience with hundreds of entrepreneurial startups, business plans rank no higher than 2–on a scale from 1 to 10 – as a predictor of a new venture’s success. And sometimes, in fact, the moreelaborately crafted the document, the more likely the venture is to, well, flop, for lack of a more euphemistic word. What’s wrong with most business plans? The answer is relatively straightforward. Most waste too much ink on numbers and devote too little to the information that really matters to intelligent investors. As every seasoned investor knows, financial projections for a new company – especiallydetailed, month-by-month projections that stretch out for more than a year – are an act of imagination. An entrepreneurial venture faces far too many unknowns to predict revenues, let alone profits. Moreover, few if any entrepreneurs correctly anticipate how much capital and time will be required to accomplish their objectives. Typically, they are wildly optimistic, padding their projections.Investors know about the padding effect and therefore discount the figures in business plans. These maHARVARD BUSINESS REVIEW July-August 1997
Copyright © 1997 by the President and Fellows of Harvard College. All rights reserved.
neuvers create a vicious circle of inaccuracy that benefits no one. Don’t misunderstand me: business plans should include some numbers. But thosenumbers should appear mainly in the form of a business model that shows the entrepreneurial team has thought through the key drivers of the venture’s success or failure. In manufacturing, such a driver might be the yield on a production process; in magazine publishing, the anticipated renewal rate; or in software, the impact of using various distribution channels. The model should also address thebreak-even issue: At what level of sales does the business begin to make a profit? And even more important, When does cash flow turn positive? Without a doubt, these questions deserve a few pages in any business plan. Near the back. What goes at the front? What information does a good business plan contain? If you want to speak the language of investors – and also make sure you have asked yourselfthe right questions before setting out on the most daunting journey of a businessperson’s career–I recHARVARD BUSINESS REVIEW July-August 1997
ommend basing your business plan on the framework that follows. It does not provide the kind of “winning” formula touted by some current how-to books and software programs for entrepreneurs. Nor is it a guide to brain surgery. Rather, the framework...