Burn the Business Plan

by Carl J Schramm

My skepticism about mentoring was prompted while studying career paths in large organizations. I’ve seen versions of the following story play out several times. A CEO I knew well spoke often of the talent and promise of a young subordinate, whom he referred to as his “mentee.” Eventually the CEO promoted the young man to vice president, setting him up to be his successor. Not long after the protégé was elevated to VP, he was unexpectedly recruited to be CEO of another company. Within a year, his new firm’s board fired him. The mentor blamed himself for having made the path to the top too easy for the protégé; because of his favored status, he had never learned the necessary skills, including how to detect shifting political coalitions on his company’s board.

  Of course, a mentor’s advice can be enormously valuable. A mentor might introduce you to a first customer, advise about an employment agreement, or suggest how to deal with an investor. Although some entrepreneurs believe a mentor shaped their success, such cases are the exception.

  Franck Nouyrigat, a co-founder of Startup Weekend, is an acute observer of the mentoring process, and believes that mentors can be dangerous for entrepreneurs.12 Nouyrigat argues that the mentor relationship in a startup setting always involves an asymmetric alignment of experience and interests, which can create four particular risks.

  The first is that the presence of a mentor encourages delegated decision making. Because of the mentor’s presumed wisdom, the entrepreneur tends to treat his mentor’s advice as more trustworthy than his own judgment, believing it is drawn from years of experience that now should be applied to his startup. The urge to turn to others when making decisions in high-risk situations is normal. We do it with doctors and lawyers, for example, but they, of course, apply rule-based knowledge to reach fact-based decisions. This is not the case for startup mentors.

  Mentors often step in, even when they are less equipped than their advisee, who likely has a better grasp of the dimensions, implications, and nuances surrounding the choices to be made for his new business. Psychologists know that once someone takes on an authority role, he feels obliged to answer questions to preserve his self-worth, even if he has no relevant experience. In short, the mentor may appear wise about things he knows little or nothing about.

  Second, many mentors’ advice is simply wrong. Like Mentor’s promise to Odysseus, the counsel may be provided with the best interests of the entrepreneur in mind, but it reflects an inherent lack of knowledge. Every mentor draws on experiences accumulated at a different time and often in a different industry, or in the same industry in which the fundamentals have changed significantly. The founders of, say, Ask Jeeves, now Ask.com, a forerunner of Google, could give only limited advice to someone starting a search engine today.

  Third, Nouyrigat says that some who assume the mentor role have ulterior economic motives that are not in the entrepreneur’s best interests, resulting in what he refers to as a “toxic relationship.” Many mentors attempt to leverage what they regard as their self-evidently valuable time and advice for an ownership interest in their mentee’s company. The asymmetry of experience, age, and personal wealth gives the mentor an unfair advantage when making such a demand, as the entrepreneur might feel that the mentor should be rewarded for his volunteered time and input.

  Once economically invested, however, the mentor may seek to maximize the startup’s potential by assuming the role of co-manager. Sharing ownership essentially invites a contest over how to manage the startup, which can put the entrepreneur’s vision in jeopardy. Some entrepreneurs have faced a draconian situation in which a mentor usurps the company.

  Nouyrigat’s fourth risk also is linked to satisfying the mentor’s psychological needs. Many mentors see advising a young entrepreneur as a way to make their own lives more interesting, perhaps even more meaningful, but this is the last responsibility an entrepreneur should shoulder. This mindset is particularly troublesome among mentors who conflate their own corporate experiences with that of starting a company, perhaps believing that, when they were active in their businesses, they were “entrepreneurial managers” and thus understand how entrepreneurs think.

  Confusing the situation yet more, mentors often are celebrated as altruistic, as giving back to the community. In fact, many mentors see advising a startup as an exciting way to spend their leisure time, one that can provide vicarious participation in the struggles of a startup, but without the risk they never took.

  Great Mentors Are Hard to Find

  In the final analysis, Nouyrigat believes that mentors who can add genuine value to a new enterprise are very hard to find. Generally, valuable mentors don’t see themselves as professional mentors or as members of a network centered around a local incubator. In fact, Nouyrigat suggests, the best mentors generally are reluctant to serve. Ewing Kauffman, who was an adviser to dozens of entrepreneurs, fit this model. He was happy to offer advice if asked.

  Kauffman, however, knew that the burden of making a company work rested solely on the entrepreneur. He believed the entrepreneur’s risk was personal and immediate and that those burdens could not and should not be shared by the mentor. Thus, he had a particularly useful view of how entrepreneurs ought to manage mentors: They should always operate on the premise that the nascent enterprise was their vision, that they held the information advantage, and that they were compiling information daily that would determine their company’s trajectory.

  In keeping with his view that your new company is your new company, Kauffman believed that an entrepreneur looking for advice should have more than one mentor, as hearing competing ways of thinking can widen the entrepreneur’s perspective. In his view, having more than one adviser allowed an entrepreneur to regularly test the value of the advice offered and confirm that his adviser’s knowledge and judgment remained relevant as the company evolved. Kauffman also believed that entrepreneurs should change mentors, and use different sources of advice at different points in the company’s development. Kauffman often “fired” himself when he felt he could no longer make a useful contribution, which forced the entrepreneurs who sought his advice to make their own decisions. Finally, Kauffman never took a share of ownership in a startup if he was advising the founder, as he believed he could not render neutral advice if he had an economic interest. When I interviewed his former mentees, they were certain that one reason Kauffman’s advice was so useful to them was that it was financially disinterested.

  Without Knowledge, Myth Reigns

  As we have seen, the mechanisms that have evolved to support entrepreneurs have proven to be largely ineffective in producing new companies. In 1980, when the U.S. started more businesses per capita than we do today, no aspiring entrepreneurs wrote business plans or studied the process in college or practiced pitching startups to venture funders. There were no incubators and few venture-capital firms, and the idea of a mentor as a partner had not yet been conceived. Our nation’s well-meaning but ill-conceived and expensive attempt to hothouse entrepreneurs has failed.

  How this happened is explained by Malcolm Gladwell, who argues that there are instances when an idea or practice suddenly takes over our thinking. “The tipping point is that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire.”13 The idea of formal efforts to induce more entrepreneurial activity was one such moment. As we saw, entrepreneurial ecosystems have become ubiquitous. Sometimes, however, the new idea that emerges on the other side of a tipping point is not always better. The cargo-cult-like belief in writing business plans, incubators, and mentors has made one of humankind’s most spontaneous and creative acts, starting a business, into something resembling an industrial process: The right ingredients, if assembled correctly, should result in a successful startup every time.

  This formulaic approach to starting companies rests on the fallacy that the imagined histories of a few highly successful technology businesses in Silicon Valley represent an optimal and universally reproducible model that any aspiring entrepreneur should f
ollow to achieve similar results. But there is a problem inherent in building models this way. If we don’t know which behaviors lead to which outcomes, entrepreneurs can end up looking as absurd as a tribesman trying to receive a radio signal through headphones made of coconuts.

  Most of what is taught to entrepreneurs just doesn’t hold water. The late Thomas Kuhn, a historian of science, might have said that a paradigm shift is beginning: We are starting to think about how new businesses really form.14 Aspiring entrepreneurs need to be guided by advice that reflects how businesses start out in the real world. We have to abandon the current model of relying on plans and ecosystems because it doesn’t work.

  The excitement that greeted Eric Ries’ book The Lean Startup, in which he advises aspiring entrepreneurs to skip writing a business plan, spending time in an incubator, and focusing on getting venture investors, suggests that others must be aware that the prevailing narrative is falling apart. Ries’ simple prescription is to get a “minimally viable” product in front of customers as soon as possible and let them co-develop it with you.15

  This is great advice for the software firms that Ries describes, but such firms count for perhaps two percent of all startups. For franchisees and merchant-entrepreneurs starting new stores—together more than eighty percent of all new companies—there is no such thing as starting lean. A building must be built, inventory purchased, and employees hired; thus, most startups are more properly characterized as “fat.” Elon Musk’s Tesla required billions of dollars of investment in engineering, a huge factory, and the parallel development of new battery technology before his first car took to the streets. Had he misjudged market acceptance, he would have choreographed one of the biggest business failures in history.

  The next chapter proposes a better way for would-be entrepreneurs to go about starting a business.

  CHAPTER 10

  Planning for Success

  How can you start a successful company? As we’ve now seen time and again, the secret lies not in writing formal plans. Planning, however, is a critical skill for every successful entrepreneur.

  Everyone plans. Anticipating tomorrow’s picnic, we buy beer, hot dogs, and charcoal today. Knowing that we have to pay college tuition for our kids, we start to save years ahead of time. An entrepreneur turns to planning in much the same way, anticipating needs and trying to have the resources necessary to shape the future of his startup.

  As every entrepreneur discovers, however, planning a new business is more complex than most future events that we attempt to coordinate. In a startup, unless it’s a franchise, very few of the factors that contribute to its ultimate success can be known up front. Every startup begins with an idea, a new product or service that must be developed and brought to the market. The new company can be thought of as a platform from which the entrepreneur searches for a scalable business opportunity, redesigning his product and constantly adjusting his resources to maximize opportunity and growth.

  In this regard, an entrepreneur’s planning is fundamentally different from how managers in large companies follow well-researched and formalized business strategies. Every big company has a history that defines what it makes, the industry in which it competes, its relationship with customers, and its historic growth rates. In big companies, planning is strategy. It is the formalized process, well understood by all involved, of how companies determine which paths to choose to achieve corporate goals. Thus, if the question is whether to build a more efficient factory, to invest in more innovation relating to a specific product, to jettison a line of business, or to acquire a competitor, such alternatives can be quantified and evaluated, one against the other, using financial and risk measures.

  For startups, this type of strategic planning is useless. A startup exists to search for its niche in the market; then, its founder’s initial idea, once tested and revised, will determine if the new company will even have a history.

  The planning process in a startup can be described more accurately as situational decision making, an imperfectly informed, just-in-time, default strategy. The rapid and likely erratic evolution of events in a startup is so unpredictable that any other type of planning just won’t work. Entrepreneurs must make decisions—often ones that prove, in retrospect, to have been of enormous strategic importance—on the spur of the moment, with little or no information, let alone algorithmic analyses of likely outcomes of one decision versus another.

  Before exploring planning in an entrepreneurial context, it is useful to recall why strategic planning itself seldom succeeds. As the research of Hirschman, Kahenman and Tversky, and Bruner demonstrates, Pareto’s Principle, also known as the “80/20” rule, is perpetually at work. Unwanted outcomes characterize eighty percent of plans both in corporate settings where, for example, acquisition synergies never materialize, and in planned public projects, where bridges and housing projects routinely cost more and take more time than forecast.

  Strategic decision-making in most large corporations generally is reactive. Every business faces an unpredictable and dynamic environment in which critical matters change daily, making most strategic plans of limited practical utility. Obviously, rigidly adhering to a set of planned objectives in the face of market conditions that are shifting all around you is folly.

  As we have seen, only about twenty percent of new firms survive for ten years, whether or not they had formal written plans at the beginning. Investing too much time and faith in the planning process is likely to make no difference for startups. As Billy Mann told me, “Planning is for big companies; they can afford to spend money on things that don’t pay off.”

  What Role Does Luck Play?

  If startup success can’t be planned, might it just be luck? Many entrepreneurs know that a single event made all the difference for their startup. The day an insurance executive told me that he had been waiting for my product to be invented, I knew that my first company could lead to a lucrative market. If I hadn’t been lucky enough to see this possibility, my company would not have survived.

  Andrew Smith had a similar moment when his company’s future seemed to have been made on one sales call. Trained as an engineer, he wanted to find a way to use technology to improve the environment. While pursuing his MBA, he had been thinking about how over-the-road trucks could use less fuel. Smith had an aha moment when a camping equipment company set up an inflatable tent on the Dartmouth campus. He wondered if an inflatable device affixed to the rear of a tractor-trailer might reduce drag, thus improving fuel efficiency for the army of trucks that deliver most of our consumer goods. A little research suggested that even the toughest inflatable would not withstand the wear and tear of trucking.

  But Smith wasn’t ready to drop the idea. He experimented with toy trucks and pieces of cardboard to fashion miniature wind foils for the back of a trailer that could be conveniently folded to the sides by the driver during the loading/unloading process. Next, he built plywood prototypes that he affixed to a junkyard trailer. When it looked as if his design would work, he patented his product, calling it the TrailerTail, and sought investors. After graduation, Smith turned down a secure job with a major consulting firm and started ATDynamics.

  But Smith’s company, which now makes folding aluminum panels for trailers that are used by more than 350 trucking companies, almost died along the way. Previous attempts by others at making what are called “air spoilers” for trailers had acquired a stubbornly negative reputation among truck drivers and fleet mechanics. They believed that any device added to the rear of a trailer unnecessarily delayed loading and unloading times, and their experience was that the devices were prone to break, causing expensive downtime. While Smith had designed around these problems—his products required only minutes to fold out of the way and were nearly indestructible—resistance lingered in an industry not known for its eager embrace of new technologies. The TrailerTail was selling poorly and ATDynamics was burning cash at a rate such that, within a few months, Smith would have to call
it quits.

  On a sales call to Mesilla Valley Trucking in New Mexico, instead of being turned down as usually happened after Smith completed his presentation, the company’s owner ordered 3,500 TrailerTails. At that moment, Smith knew that his company would be successful. He went back to San Francisco the next day to rebuild his factory and get going.

  For many entrepreneurs, there is one “lucky” moment in their history on which their company’s success hinged. For Art Ciocca, it was a bumper crop of grapes that save the day; Fred Valerino’s future turned on his “bet the ranch” deal with one hospital. Without Lechmere giving him a contract for vending machines in all its stores, Bob Carlucci might still be running a pool hall. Howard Head’s skis became ubiquitous once Killy was the first to cross the Olympic finish line. And, Billy Mann’s luck was Céline Dion making a smash hit of one of his songs.

  Some economists who have studied startups believe that luck is the most important determinant of entrepreneurial success.1 Seeing luck as a principal cause of success, however, makes no sense; such a conclusion makes entrepreneurs into no more than irrational risk takers who invest years of hard work, foregoing the rewards of other career choices, all the while knowing that their fate will be decided by serendipity. If that’s true, starting a business would require no more skill than playing the slots in Las Vegas—someone will eventually win. Yet, contrary to a commonly held view, studies show that entrepreneurs are more risk-averse than the population at large.2

  Lucky Planning or Planning for Luck

  While there is no disputing the apparent role of luck in the success of many startups, fate similarly seems to determine the outcome of other human events. In the case of entrepreneurs, Dane Stangler, the former research director of the Kauffman Foundation, drolly notes, “Luck can’t happen if you never start a business.”