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How much do venture capitalists care about business plans?

Tim Berry of Palo Alto Software takes issue with a post at the WSJ’s Independent Street about research that says VCs don’t make funding decisions based on business plans. (Press release here, no link for the study — why is academic research of all things so often locked up?)

I spoke with one of the study’s author’s, University of Maryland professor David Kirsch, last year for a story we called The Truth About Venture Capital. Here’s the relevant part:

Without a referral from a mutual acquaintance, your chance of getting venture funding drops dramatically, according to David Kirsch, director of the Business Plan Archive at the University of Maryland. “It’s almost impossible to get funding for a business plan that comes in over the transom,” he says. Kirsch and UMD professor Brent Goldfarb analyzed hundreds of dot-com era business plans submitted to an unnamed East Coast venture firm. They found that companies were far more likely to get funded if their plans were referred to VCs than if they were sent cold. Their conclusion: “At the margins, an entrepreneur should focus less on perfecting the plan and more on expanding the network,” Kirsch says.

Headlines are not known for their nuance, and the one that announced this study last week (“New Research Finds Business Plans Are Virtually Useless”) understandably rankled Berry (whose company, after all, makes business planning software). The gist of the research is that the “the content of the business plans does not predict which businesses get funded. [The authors] don’t suggest companies should totally forgo a business plan. They say the document may be useful for organizing thoughts and details of a venture, but they found no evidence that either the content or presentation of the plan influences venture capital funding decisions.”

Let’s be clear: the paper says the business plan document doesn’t matter to VCs’ funding decisions. Berry makes the point that solid business planning is essential to demonstrate how a company will take advantage of a real market opportunity — which is what VCs want to see. He writes:

Seriously, do you think for even a minute that venture capitalists don’t care about companies having strategy, and metrics, and tracking, and tasks and responsibilities, and forecasts, and budgets? Are you kidding me? They may or may not read the business plan, but the entrepreneurs they fund can’t possibly do a decent presentation without knowing their plan. What happens when they get to the first question about how much they need, and why, and what they’re going to spend it on?

The important thing here for entrepreneurs to realize is that investors care much more about the traction your business has than how it looks on paper. That shouldn’t be news to anyone, especially in this funding environment. It’s partly because so many business plans are full of Guy Kawasaki’s classic lies entrepreneurs tell. No surprise VCs would rather see companies with real products, real revenue, and even real positive cash flow than business plans filled with charts of hockey-stick curves, etc. As Berry notes, few companies can get there without serious planning.

What struck me from my conversation with Kirsch last year is how VC firms project the aura of a meritocracy — anyone can submit a business plan — but really work through networks and referrals. This makes sense: think about what the inbox looks like for “” looks like. (My inbox is a mess, and I don’t give millions of dollars to anyone.) My view from the sidelines, not being an investor or an entrepreneur: even a stellar business plan, on its own, won’t get you funding, or even a meeting most of the time. But can you imagine talking to investors without one?

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