ACE Research Vignette 049: How Do Business Founders Use Business Plans?

This series of research vignettes is aimed at sharing current and interesting research findings from our team of international Entrepreneurship researchers. In this vignette Per Davidsson and Christophe Garonne examine the use of business planning among business start-ups.

A systematic approach to writing and rating entrepreneurial business plans

This investigation is part of a series of studies in the field of venture capital deal screening. At issue is the use of theory-based standards for the systematic creation and assessment of entrepreneurial business plans. A synthesis of research-based principles contained in the literature culminated in the formal articulation and operationalization of 10 principles in the form of a questionnaire, titled the Entrepreneurial Business Plan Assessment Regime (EBRAR). The EBRAR can serve as a guide for both writing and rating entrepreneurial business plans. Discussion focuses on the utility of assessment, as well as future research directions.

Is the quality of entrepreneurial business plans related to the outcome of a new venture?

The evaluation of new ventures often involves two key aspects of entrepreneurial business plans: how best to write them and how best to rate (evaluate) them. Ultimately the performance of the venture should be the definitive criterion of quality. Surprisingly, the writing, rating and performance effects of entrepreneurial business plans (EBPs) comprise three related but under researched areas. This paper empirically tested principles for writing and rating entrepreneurial business plans to draw inferences on how to improve the private equity investment evaluation process. A simplified perspective of General Systems Theory guided our empirical investigation of the input and outcome of the VC investment decision. Our empirical investigation reveals that entrepreneurial business plans that comport with the writing principles from the literature improve a new venture’s likelihood of success.

Toward the standardization of venture capital investment evaluation : decision criteria for rating investee business plans

This study examined the criteria used by venture capitalists to evaluate business plans in order to make investment decisions. A literature survey revealed two competing theories: “espoused criteria” where evaluation decisions are based on what venture capitalists say are the decisive factors; versus the use of “known attributes” that successful ventures actually possess. Brunswik’s Lens Model from Social Judgment Theory guided an empirical investigation of several different evaluation methods based on information contained in 129 business plans submitted for venture capital over a 3 year period. Data evaluation culminated in the comparison of the percentage of correct decisions (“hit-rate”) for each method. We found that decisions based on the known attributes of successful ventures have significantly better hit-rates than decisions made using espoused criteria. Discussion centred on the goal of achieving consistency in the conduct of venture analysis. Process standardization can aid in the achievement of consistency. Future research will both deepen and broaden insights.

A systematic approach to writing and rating entrepreneurial business plans

This investigation provides the predicate for an intended series of studies in the field of Venture Capital deal screening. At issue is the use of theory-based standards for systematic creation and assessment of entrepreneurial business plans. A systems based approach guided synthesis of research-based principles contained in the literature. Results culminated in the formal articulation and operationalization of 10 principles in the form of a questionnaire (entitled EBPAR, for ‘entrepreneurial business plan evaluation regime’). The instrument can serve dual duty as a guide for writing and a regime for rating Entrepreneurial Business Plans. Discussion focused on utility of the assessment regime and future research directions.

BSBMGT603A review and develop business plans

Study guide for TAFE course

Sviluppo di un business plans. Il caso fruit prodaction S.R.L

Esperienza di sviluppo di business plan aziendale

Business planning in emerging firms : do nascent and young firms use business planning differently

Previous research suggested that due to the uncertainties surrounding the venture creation process, planning activities may be more valuable for already operating firms than for emerging ventures (McGrath and MacMillan, 1995). Business planning may serve different purposes during the early stages of the venture development process. Early planning during the nascent stage may be used to marshal the resources toward the achievement of preliminary goals (Locke and Latham, 2000), to gain external legitimization and funding (Karlssson & Honig, 2009; Stinchcombe, 1965). Planning may reduce the risk of future failure by facilitating the decision making process of launching -or not- the venture (Chwolka & Raith, 2011) by analysing the opportunity and its market potential (Boyd, 1991; Delmar & Shane, 2003). In later stages, planning may have a more internal role and may act as a strategic implementation tool (Brews & Hunt, 1999). However, if the reasons why ventures should engage (Frese, 2009) –or not- (Honig, 2004) in business planning have been investigated quite extensively (Brinckmann et al., 2010), how business plans are actually used over time by new ventures at different stages of their development and how these uses impact the performance of the firms are still unclear.

Business planning, idea change, flexibility and performance: the best of both worlds?

The relationships between business planning and performance have divided the entrepreneurship research community for decades (Brinckmann et al, 2010). One side of this debate is the assumption that business plans may lock the firm in a specific direction early on, impede the firm to adapt to the changing market conditions (Dencker et al., 2009) and eventually, cause escalation of commitments by introducing rigidity (Vesper, 1993). Conversely, feedback received from the production and presentation of business plans may also lead the firm to take corrective actions. However, the mechanisms underlying the relationships between changes in business ideas, business plans and the performance of nascent firms are still largely unknown. While too many business idea changes may confuse stakeholders, exhaust the firm’s resources and hinder the undergoing legitimization process, some flexibility during the early stages of the venture may be beneficial to cope with the uncertainties surrounding new venture creation (Knight, 1921; March, 1982; Stinchcombe, 1965; Weick, 1979). Previous research has emphasized adaptability and flexibility as key success factors through effectual logic and interaction with the market (Sarasvathy, 2001; 2007) or improvisation and trial-and-error (Miner et al, 2001). However, those studies did not specifically investigate the role of business planning. Our objective is to reconcile those seemingly opposing views (flexibility versus rigidity) by undertaking a more fine-grained analysis at the relationships between business planning and changes in business ideas on a large longitudinal sample of nascent firms.

Business planning, innovation and performance in nascent firms

Debate about the relationships between business planning and performance has been active for decades (Bhidé, 2000; Mintzberg, 1994). While results have been inconclusive, this topic still strongly divides the research community (Brinckmann et al., 2010; Chwolka & Raith, 2011; Delmar & Shane, 2004; Frese, 2009; Gruber, 2007; Honig & Karlsson, 2004). Previous research explored the relationships between innovation and the venture creation process (Amason et al., 2006, Dewar & Dutton, 1986; Jennings et al., 2009). However, the relationships between business planning and innovation have mostly been invoked indirectly in the strategy and entrepreneurship literatures through the notion of uncertainty surrounding the development of innovation. Some posited that planning may be irrelevant due to the iterative process, the numerous changes innovation development entails and the need to be flexible (Brews & Hunt, 1999). Others suggested that planning may facilitate the achievement of goals and overcoming of obstacles (Locke and Latham, 2000), guide the venture in its allocation of resources (Delmar and Shane, 2003) and help to foster the communication about the innovation being developed (Liao & Welsh, 2008). However, the nature and extents of the relationships between business planning, innovation and performance are still largely unknown. Moreover, if the reasons why ventures should engage (Frese, 2009) –or not- (Honig, 2004) in business planning have been investigated quite extensively (Brinckmann et al., 2010), the specific value of business planning for nascent firms developing innovation is still unclear. The objective of this paper is to shed some light on these important aspects by investigating the two following questions on a large sample of random nascent firms: 1) how is business planning use over time by new ventures developing different types and degrees of innovation? 2) how do business planning and innovation impact the performance of the nascent firms? Methods & Key propositions This PSED-type study draws its data from the first three waves of the CAUSEE project where 30,105 Australian households were randomly contacted by phone using a methodology to capture emerging firms (Davidsson, Steffens, Gordon, Reynolds, 2008). This screening led to the identification of 594 nascent ventures (i.e., firms that were not operating yet at the time of the identification) that were willing to participate in the study. Comprehensive phone interviews were conducted with these 594 ventures. Likewise, two comprehensive follow-ups were organised 12 months and 24 months later where 80% of the eligible cases of the previous wave completed the interview. The questionnaire contains specific sections investigating business plans such as: presence or absence, degree of formality and updates of the plan. Four types of innovation are measured along three degrees of intensity to produce a comprehensive continuous measure ranging from 0 to 12 (Dahlqvist & Wiklund, 2011). Other sections informing on the gestation activities, industry and different types of experiences will be used as controls to measure the relationships and the impacts of business planning and innovation on the performance of nascent firms overtime. Results from two rounds of pre-testing informed the design of the instrument included in the main survey. The three waves of data are used to first test and compare the use of planning amongst nascent firms by their degrees of innovation and then to examine their impact on performance overtime through regression analyses. Results and Implications Three waves of data collection have been completed. Preliminary results show that on average, innovative firms are more likely to have a business plans than their low innovative counterpart. They are also most likely to update their plan suggesting a more continuous use of the plan over time than previously thought. Further analyses regarding the relationships between business planning, innovation and performance are undergoing. This paper is expected to contribute to the literature on business planning and innovation by measuring quantitatively their impact on nascent firms activities and performance at different stages of their development. In addition, this study will shed a new light on the business planning-performance relationship by disentangling plans, types of nascent firms regarding their innovation degres and their performance over time. Finally, we expect to increase the understanding of the venture creation process by analysing those questions on nascent firms from a large longitudinal sample of randomly selected ventures. We acknowledge the results from this study will be preliminary and will have to be interpreted with caution as the business planning-performance is not a straightforward relationship (Brinckmann et al., 2010). Meanwhile, we believe that this study is important to the field of entrepreneurship as it provides some much needed insights on the processes used by nascent firms during their creation and early operating stages.

Moving beyond the business plan in enterprise education

Purpose The purpose of this paper is to approach the debate surrounding the role of business plans in enterprise/entrepreneurship education from a different perspective; that of the student. The paper argues that much of the consternation within this stubborn debate derives from a lack of appreciation of the context actually occurring in the lives of our students. The paper aims to explore several arguments directly related to these contexts. Design/methodology/approach The approach is to build around a combining of cycles of reflective practice via the authors' iterative consultation with each other. The paper seeks to explore the world of the student via an enfolding of the literature, but ultimately we do not claim to have hidden our personal biases. Findings It is important to separate enterprise education (EE) from entrepreneurship education when discussing the role of the business plan. While the business plan has a place in the latter, it makes little sense for it to be a focal learning activity in the former. In addition, we see this outcome as a positive outcome for our field with little point in continuing on with what has become a fairly pointless debate. Practical implications: The paper concludes that once EE is viewed as being distinctly different from entrepreneurship education it is free to be considered with more precision what learning needs exist. Focusing on learning needs changes the direction of the discussion, with the business plan only up for discussion if it contributes a learning activity related to pre-determined learning outcomes. Originality/value The paper offers a constructive way forward from a debate that has been beset with extreme vested interests for too long.

The student business plan: Useful or not?

This article offers a critical discussion of the role of the business plan in current enterprise educational practice. In addition to reviewing recent work that considers the ‘for’ and ‘against’ arguments about the use of business plans in higher education, the authors suggest that the context of student learning is largely omitted from these discussions. As such, they contextualize the debate so that the purpose of the business plan can be better appreciated. They build on recent work that offers alternatives to the business plan – approaches directly focused on customer discovery and explicit testing of assumptions. In doing so, recent concerns about the value of business plans and, conversely, the views of those who argue in favour of the role of business plans in enterprise education, are noted. The article provides insights into emerging alternative practices in the field of enterprise education, practices based on students’ use of such education as a vehicle for skills and knowledge development and/or wealth creation. It is acknowledged that various biases are present in the current debate, including those of the present authors: whilst it is accepted that these biases are unlikely to disappear, the article contextualizes their origins.

Sense and sensibility: The role of business incubator client advisors in assisting high-technology entrepreneurs to make sense of investment readiness status

For high-technology entrepreneurs, attaining an appropriate level of investment to support new ventures is challenging as substantial investment is usually required prior to revenue generation. Consequently, entrepreneurs must present their firms as investment ready in the context of an uncertain market response and an absence of any trading history. Gaining tenancy within a business incubator can be advantageous to this process given that placement enhances entrepreneurial contact with potential investors whilst professional client advisors (CAs) use their expertise to assist in the development of a credible business plan. However, for the investment proposal to be successful, it must make sense to fund managers despite their lack of technological expertise and product knowledge. Thus, this article explores how incubator CAs and entrepreneurs act in concert to mould innovative ideas into plausible business plans that make sense to venture fund investors. To illustrate this process, we draw upon empirical evidence which suggests that CAs act as sense makers between venture fund managers (VFMs) and high-technology entrepreneurs, yet their role and influence appears undervalued. These findings have implications for entrepreneurial access to much needed funding and also for the identification of investment opportunities for VFMs. © 2011 Taylor & Francis.

The benefit : a well-written entrepreneurial business plan is to an entrepreneur what a midwife is to an expecting mother

The evaluation of new ventures often involves two key aspects of entrepreneurial business plans: how best to write them and how best to rate (evaluate) them. Ultimately the performance of the venture should be the definitive criterion of quality. Surprisingly, the writing, rating and performance effects of entrepreneurial business plans (EBPs) comprise three related but under researched areas. This article empirically tested principles for writing and rating entrepreneurial business plans to draw inferences on how to improve the private equity investment evaluation process. A simplified perspective of General Systems Theory guided our empirical investigation of the input and outcome of the VC investment decision. Our empirical investigation reveals that entrepreneurial business plans that comport with the writing principles from the literature improve a new venture's likelihood of success.