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Driven by a Business Plan, but How Far Will It Get You?

Business plans can be useful tools. But a new study finds that they do little to help entrepreneurs get financing. Transcript of radio broadcast:

This is the VOA Special English Economics Report.

A business plan, in the words of the Small Business Administration in Washington, is a tool with three basic purposes. As a communication tool, it can show possible investors how well you have considered your ideas. As a management tool, it can list goals and ways to measure progress. And as a planning tool, it can help guide a business around problems.

For people starting a new business, the biggest problems commonly involve financing. Entrepreneurs often seek venture capital. This is money from wealthy individuals or investment companies for the purpose of building new businesses.

Each year, entrepreneurs with ideas for the "next big thing" flood venture capitalists with business plans. But John Mullins of the London Business School, writing in the Wall Street Journal, says most business plans are never even fully read.

A good business plan, he says, must define a problem that the new business will solve. Many plans fail to show how a product or service meets a need.

Also, business plans often assume it will be easy to gain a share of a large or fast-growing market. Professor Mullins advises entrepreneurs to do market tests so they have real numbers to support their claims.

And he says honesty about possible problems with the plan is important. Successful businesses often change plans as conditions change.

Business students spend hours and hours learning how to write a business plan. But even a good one has its limits.

A new study suggests that venture capitalists rarely consider the business plan when deciding whether to invest in a new company.

David Kirsch is an associate professor at the Robert H. Smith School of Business at the University of Maryland. He and others examined more than seven hundred requests made to an American venture capital firm. He says he was startled to find that planning documents have such little influence.

Professor Kirsch tells us that venture capitalists instead talk to people who know the entrepreneur. They talk to business experts, lawyers and other knowledgeable people. The study appeared in the May issue of Strategic Management Journal.

David Kirsch considers business plans a good way to organize an entrepreneur's ideas. But, in his words, "A smart entrepreneur should spend his time developing the business rather than the business plan."

And that's the VOA Special English Economics Report, written by Mario Ritter. Transcripts and archives are at I'm Steve Ember.