The Problem with Business-Plan Contests

Prizes are alluring and competition fierce, but as a means of impressing venture capitalists, they fall increasingly short of the mark

By David E. Gumpert

Several months ago, a couple of high-tech entrepreneurs approached my communications and consulting firm with what seemed, at first glance, to be a reasonable proposition. They were trying to attract financing to their sophisticated Web-based startup and, like most entrepreneurs these days, were having no success. They thought they had another path to the money, though: enter one or more of the many business-plan contests that have sprouted at colleges and universities around the country. Some allow nonstudents and/or alumni to enter, and the money up for grabs has become head-turning -- winners can walk away with more than $100,000 in cash and professional services.

At the University of Oregon, for example, $60,000 is being handed out this year, vs. $300 when the contest started in 1991. Duke and Brigham Young vie for the top honors, with Duke offering something in excess of $110,000 and Brigham Young's prize up to $120,000. (Direct comparisons are difficult because many colleges include the value of things like the legal and accounting services that are made available to the winners.)

SERIAL COMPETITORS.

  In any event, the entrepreneurs wanted my assistance in helping them craft a winning business plan. As I said, it seemed reasonable: The odds of winning any contest appeared better than the odds of trying to raise venture capital in today's bear-market climate, where the amount of available cash has shrunk drastically since the spendthrift days of the Internet bubble.

Not surprisingly, interest in these contests has grown sharply, with some entrepreneurs entering several of them. For example, the team that won the first prize of $60,000 in this year's Brigham Young contest in early April moved on, later in the month, to the University of Nevada, where a first prize of $40,000 was up for grabs. So hot and heavy has the competition become that Duke University two years ago banned "gamers" -- those who enter multiple contests -- by requiring that at least half the members of each entrepreneurial team be composed of Duke students.

Despite all the pizzazz surrounding the contests, I advised the two entrepreneurs who approached me to ignore them. I felt that they would do better if they devoted the 100 or more hours required to prepare a lengthy business plan to bootstrapping their business and generating real sales.

The problem, I explained, is that even if they were to beat the odds and win a contest, they would be likely to find that professional investors give business plans much less credence these days. Indeed, even as business-plan contests become more popular, business plans are declining in importance as vehicles for attracting investment.

RUNS ON THE BOARD.

  Ask private investors what they consider most important in evaluating a startup business, as I did when conducting a recent survey of 42 venture-capital firms, and they tend to list a number of factors before getting to the fabled business plan. Ranked much higher in importance are things like real sales, the size of the market, and the quality of the management team. "The bottom line," one investor commented, "is to understand that I invest in people, not in paper."

The shift away from business plans can be seen in investors' actions. Nearly half of the venture capitalists surveyed said they have invested in one or more companies within the last three years that hadn't submitted a written business plan at all. Only 36% said a business plan is very important in helping them decide whether or not to invest in a company. And while universities that sponsor the contests point out that some of the competing entrepreneurs attract venture-capital financing and go on to launch successful companies, not a single investor I surveyed rated business-plan contests as very important sources of investment candidates. In fact, a mere one-third regarded the contests as being even "somewhat important." Many more preferred evidence that a real business is generating real revenues.

Such trends are beginning to sour at least a few entrepreneurship educators on the whole business-plan contest scene. Take Karl Vesper, for example, a professor of entrepreneurship at the University of Washington in Seattle, who has conducted a number of surveys documenting the growing interesting in entrepreneurship education over the last thirty years. Vesper believes business-plan contests are not only of little help to student entrepreneurs in search of financing, he says they can also be educationally counterproductive. "The problem with business-plan contests is that they almost require that students be fraudulent," he explains. Not fraudulent as in intentionally dishonest, he adds, but in the effort they must devote to making a business idea with little real-world promise "look as good as it can" on paper.

MORE THAN ACADEMIC.

  Meanwhile, some of the nation's top entrepreneurship educators also have begun to deemphasize written business plans. At Bentley College in Waltham, Mass., Jeffrey Shuman, a professor who runs the entrepreneurship program and has conducted past business-plan contests, shifted the focus of this year's competition to oral presentations about the businesses that students are considering launching. Written plans are no longer required. For his part, Vesper is having his students do a "feasibility analysis," which sees them assess an idea's real-world prospects and move as far toward achieving real sales as possible.

Part of the problem with written business plans appears to be that many venture capitalists were badly burned during the Internet boom, when they invested in startup companies largely on the basis of business plans that many investors now sarcastically refer to as "fantasy plans." As appealing as business-plan contests may be to everyone who enjoys competition, those who want to see their startups get off the ground may need to adjust their focus to reflect real-world conditions.

David E. Gumpert is author of Burn Your Business Plan! What Investors Really Want from Entrepreneurs

and How to Really Start Your Own Business, both published by Lauson Publishing.