Within a few years, the company that my students and I had created for one type of customer was sold to another type of customer, an insurer, and I found myself a part of an industry that I didn’t know existed when I left the university to launch a business.
Dancing, Not Planning
Anyone who has started a business can appreciate these stories. Businesses never evolve according to the pre-set plan. Just as in war, of which Von Moltke said, “No plan survives first contact with the enemy,” it is rare to find an entrepreneur who reports that his business plan was of much use. Business is simply too fluid; unpredictable markets set the direction of companies for established giants and small startups alike, not the other way around. Entrepreneurs must learn to dance to the market’s ever-changing tempo and rhythm. Planning doesn’t help and is mostly a waste of time.
Nevertheless, anyone thinking about starting a business will encounter one universal piece of advice—write a business plan. If a would-be entrepreneur wants to get a Small Business Administration (SBA) loan, the government requires a written business plan, one that conforms to the specific model explored below. Similarly, banks now are required by federal regulators to have business plans on file for any new companies to which they lend money. It is impossible for someone without connections to get a meeting with a venture capital firm without a written plan. Every angel investor and mentor will insist on a written plan from anyone wanting their attention. Within a remarkably short period—fewer than thirty years—business plan writing has emerged as the entrepreneur’s Rosetta Stone. It is, as Levin says, “something of a religious ritual.”
So powerful is the idea that business planning will lead to a successful startup that at least three million plans are written every year. Why? Tens of millions of people dream of emulating the entrepreneurs of Silicon Valley. Kauffman Foundation studies show that over half of all adults, and more than seventy percent of all college students, want to become entrepreneurs.
It is hard not to be fascinated by people who turn an idea into a company and become wealthy within a few years. Every year there are movies about entrepreneurs; there are four feature-length films about Steve Jobs alone. Monthly magazines, including Entrepreneur, Inc., Wired, and Fast Company, tell the stories of startups like the Dollar Shave Club, created in 2011 to sell better razors on the Internet, that are bought by giant companies, in that case Unilever, four years later for $1 billion. Shark Tank, a popular cable show, glamorizes investors who want to make money by betting on the business plans of entrepreneurs. Successful entrepreneurs are larger-than-life figures, hobnobbing with movie stars and politicians. It is no wonder that Syracuse Professor Robert Thompson, who studies pop culture, says that creating a startup “is taking up a larger and larger role in our aspirational lives.”
Everyman and the Princes
This book is for those who think that they might want to start a business someday. It is for Everyman, a medieval term describing regular people. Most people who start companies are like you: They’ve never come close to meeting a venture-capital investor; never studied entrepreneurship in college; have never heard of a business incubator; and never wrote a business plan.
Ninety-five percent of Everyman entrepreneurs are very different from the “rock star” princes of Silicon Valley. The princes rightly are regarded as geniuses, not only for giving us wondrous new technology, but also for their abilities to grow their ideas into enormous businesses. Perhaps even more important, but as a side effect, they have rekindled America’s interest in how businesses are born.
Most of the companies started by these princes can trace their roots back to the discovery of the semiconductor in 1947. This extraordinary device allowed solid-state electronics to emerge, which, twenty years later, enabled the computer and accompanying software revolutions. By an accident of fate—or maybe the beautiful weather?—the semiconductor revolution started in Northern California’s Silicon Valley. It was there that some of America’s most extraordinary firms were created in the late 1960s and the following decades, including Adobe, Apple, Cisco, Fairchild Semiconductor, Intel, Intuit, Oracle, and Sun Microsystems. (Bill Gates and Paul Allen started Microsoft in Albuquerque.)
For most of the previous century, opening a new store or starting a manufacturing company wasn’t much remarked upon. Starting a business wasn’t very noteworthy, mostly because there were many more individual stand-alone businesses, and many more being started. For example, nearly half the veterans returning from World War II eventually started companies. “Business owners”—not then known as entrepreneurs—were more common; your neighbor was much more likely to work for himself than he is today.
When I was in high school in the 1960s, America’s business heroes were men like Alexander Graham Bell who had invented many of the things that we use every day. Also among these heroes were Willis Carrier, George Eastman, Thomas Edison, and the Wright brothers, who gave us, respectively, air conditioning, cameras, light bulbs, and airplanes. They were the inventor saints—inspirational and dead—and were studied and remembered more for what they had invented, not for the companies that they had started: AT&T, Carrier, Kodak, General Electric, and Curtiss-Wright (which once made many of the world’s airplanes).
The great inventors started companies before there was a professional cadre of advisers to new businesses. Indeed, as recently as 1980, there were fewer than ten professors in all of the nation’s business schools who paid any attention to how new businesses began. The subject never seemed of much interest to academics. Back then, no one went to college to learn how to start a business, nor was there any particular interest in how that happened. Then, nearly all students in business schools planned, upon graduation, to take a job in an established giant corporation, hoping to climb the corporate ladder to an executive position.
This all changed during the 1980s when business students became interested in emulating Gates and Jobs. Seeing their students ready to forego careers as managers in big companies to start their own companies, business professors responded with courses like “New Venture Creation” and “Cases in New Business,” names that today sound clunky and naive. There were no courses on “entrepreneurship.” The word “entrepreneur” was not even in common use until well into the 1980s.
Birth of the Business Plan
Today, a small army of academics, about six thousand professors and instructors, teach entrepreneurship. Nearly all their courses embrace what has become a convention, a two-part doctrine believed critical to producing successful new businesses. The first is that every new company should start with a written description of the firm, designed to appeal to venture investors. Second is the belief that the chance of success for any new business is improved if it incubates in a supportive entrepreneurial ecosystem.
Understanding how these two touchstones evolved is important to illuminating a critically important contradiction: The more widely these precepts are followed, the fewer new companies result.
* * *
Business plan writing was invented in response to the explosion of entrepreneurial activity in the 1980s. The idea of planning was borrowed from the study of business strategy, which historically was one of the original and core disciplines of business school training. Strategic planning traditionally focused on guiding giant corporations through complex decisions such as whether to build a new plant, globalize the supply chain, or acquire another firm. The methodology involved detailed analysis of such ideas and their implications for the company’s finances and its long-term well-being. Historically, strategic planning tools were not applied to the process of starting a business from scratch, and for good reason.
None of America’s great companies, those for which business professors were preparing the next generation of managers in bygone days, had started with written plans. Nearly all of Fortune magazine’s legacy 100 companies, including American Airlines, Disney, DuPont, General Electric, General Motors, Exxon (begun as Standard Oil), Ford, IBM, Johnson & J
ohnson, Procter & Gamble, McKesson, and Xerox, started without plans. If any of those founders did any writing, it was likely on the back of envelopes or, as was the genesis of Southwest Airlines, on a napkin. Southwest’s route map, including cities to which it plans to fly in the future, continues to appear on its in-flight cocktail napkins, paying homage to the map first drawn by Herb Kelleher, the line’s founder.
As we will see again and again, the methodology imported from strategic planning makes no sense in the context of entrepreneurial startups. Nonetheless, with little else to draw upon, early instructors restyled the corporate-planning template, identifying the eleven elements that they believed should be known and described before starting a new company.2
This approach to planning suggests that entrepreneurs can achieve success by pursuing a linear, rational, critical path model, one completely unrelated to the spontaneous trial-and-error process that characterizes the inevitably messy early years of every startup. Planning is nothing more than an attempt to bring order to a process that is chaotic by nature, and plan writing a technique that provides structure to the academic exercise.
In promoting the planning model, the first generation of entrepreuneurship instructors overlooked another salient reality. None of the newly forming high-tech startups, which were the spark that had ignited the demand for courses on how to start a business—and many of which had ascended to the Fortune 100 list—had begun with written business plans. Wozniak and Jobs never wrote a plan for Apple. Like their predecessors a century before, the founders of Cisco, Hewlett-Packard, Google, Nike, Oracle, and Walmart started companies without plans. Today, Microsoft sells software to support business-plan writing, but Bill Gates and Paul Allen never wrote one to start Microsoft. Intel’s plan, preserved at the company’s museum, famously barely fills one poorly typewritten page. It’s really a mission statement that has no forecasts, discussions about competing products, descriptors of barriers to entry, and not a word about how the company will make money, each important parts of the prevailing business planning model.
Four decades after business planning became the established centerpiece of the textbook entrepreneurial experience, many of today’s fastest-growing startups, including Facebook, Gilt Groupe, and Twitter, began without written plans.
Plans Are for Investors
One reason that the formalized business plan took root so quickly, apart from the fact that there was no other instructional format on offer, was that venture investors embraced the idea with a vengeance. Venture investing was itself invented in the early 1970s to help many of the exciting computer and software firms in Silicon Valley get started. Formed as new financial entities known as venture capital funds, VCs provided capital for technology startups that commercial banks and conventional lenders couldn’t understand and considered too risky. These new funds, which were banklike businesses themselves, were willing to embrace more risk because the money that they were investing came from investors, including university and foundation endowments, that were willing to withstand short-term losses in anticipation of larger returns in the future. These were uncertainties that the investment guidelines of pension funds and life insurance companies, the other major sources of capital, couldn’t tolerate.
Early venture investments in companies like Intel and Apple paid out enormous multiples on the initially invested capital when those companies sold shares to the public. So extraordinary were these early returns, often achieving thirty percent annually on invested capital, that dozens of new venture funds crowded into Silicon Valley. This was a natural symbiosis; more entrepreneurs starting more new firms produced more opportunities for more investors. And, the employees of many startups often moved on to start their own companies.
As the number of venture funds grew, the business plan became a kind of handy model, much like the Common App, a form now used by high-school students that allows them to simultaneously apply to multiple colleges. The uniform business plan made the job of comparing proposed startup ideas much easier for investors; it became a kind of shorthand. Of course, the primary interest of venture investors, who by definition had short-term returns in mind, was the plan’s description of how soon the company could get to a “liquidity event,” that is, the moment at which another company would buy the startup or the startup would sell shares to the public in an “initial public offering” (IPO). Being acquired, or “going public,” was the last step, the “exit strategy” required in every business plan.
Business planning, with its emphasis on the exit, has changed the very nature of what many people see as the reason for creating new businesses in the first place. Every plan now begins with a description of the new idea that it will bring to the market. The necessary intermediate steps are geared toward getting the startup ready for the exit. The use of formal plans has changed the essential purpose of many startups, a motivation that is new to the age-old process of starting companies. Now, in many cases, the formal plan transforms the startup into a vehicle for getting to an ASAP payday for entrepreneurs and investors. One author argues that, “ ‘Built to flip’ should not be a dirty phrase or unnatural act. I believe that to succeed today, entrepreneurs must not only aspire to early exits, but design that objective into their corporate structures and corporate DNA”—and argues that, from start to finish, a new business should occupy its founder for no more than four years.3
Not one of the entrepreneurs who started Fortune 100 firms ever treated their companies like house flippers, inventing a business in order to get out with a profit as quickly as possible. Great companies in the past were not created to be transactional properties; they were built to last for decades to come. The credo of Johnson & Johnson, carved on a stone plinth in the lobby of the company’s headquarters, tells of J&J’s purpose to indefinitely serve the needs of its customers, provide good jobs to its employees, and earn a fair return for its shareholders.4
It Takes a Village
Inspired by a mistaken reading of the garage-band-all-nighter litany that made Silicon Valley the cradle of so many high-tech companies, academic experts began to argue that, in addition to the value of writing formal business plans, entrepreneurs would be more likely to succeed if they were supported by a local “ecosystem.” This idea was embraced by community leaders, particularly in urban areas that were experiencing manufacturing decline and flight, as a means of revitalizing local economies. As a result, every major city now boasts an integrated set of resources, assembled in incubators, created to support and encourage local entrepreneurs. This “ecosystem” formula requires a locally focused, often publicly financed and professionally managed venture fund; organized groups of amateur or angel investors; a network of business people who have experience starting companies and are ready to serve as mentors; and physical spaces where new firms can locate—often at low or no rent—to be “incubated” during their development.
In addition to these resources, many communities have restored or rebuilt entire neighborhoods designed to be congenial to the “creative class,” loosely defined as young urban dwellers thought to include entrepreneurs.5 To visit some of these districts is to believe that entrepreneurs must live in lofts and be surrounded by art galleries and craft breweries. So widespread is the vision that entrepreneurship and hip neighborhoods go together that we see universities teaching students of urban planning and architecture to study the lifestyles of small groups of “urban entrepreneurs,” including leather-goods artisans and herbal compounders, in order to envision a physical environment that will produce more of them.
Taken together, the two touchstones of entrepreneurial success—writing a business plan and finding your way into a startup ecosystem for support and inspiration—form the prevailing narrative of today’s so-called startup process. A small industry exists that is dedicated to advancing this narrative to increase the number of new firms and enhance the probability of their success. The federal government provides at least $2 billion annually—the exact number being to
o murky to actually quantify beyond that likely low estimate—to support these efforts, including grants to universities to teach entrepreneurship and to support local ecosystems.
Unfortunately, however, there is now solid, quantitative evidence to suggest that this prevailing narrative, and the activities of institutions receiving substantial amounts of federal, state, and local funds, doesn’t work.
In fact, following the narrative’s prescriptions seems to produce the opposite of the intended result: As more business plans are written, and as more local ecosystems are created, the number of startup businesses continues to fall.
Data reaching back to 1980 shows that about 700,000 new firms were started every year in the United States. That number began to decline just as the prevailing narrative, which was developed explicitly to increase the number of entrepreneurs and to improve their chances of success, took hold. The evidence shows an indisputable inverse relationship. As more professors teach new-business planning, as more venture capital is available, and as more local ecosystems, revolving around incubators, came to exist, the number of new firms has steadily declined.
In 2016, fewer than 500,000 new companies were born.
In addition, new business failure rates remain unchanged since 1992, the first year for which there are reliable data. Today, just as in 1992, one-quarter of startups do not survive their first year; more than half are out of business at five years; and fewer than twenty percent exist in ten. The boomerang effect of targeting more resources to attempt to encourage and support more entrepreneurs, yet seeing fewer and fewer businesses start, leads to the unavoidable conclusion that what we are doing is not merely misguided but likely harmful.
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