Are Business Plans and Financial Models for Startups Useless?

As an angel investor and co-founder of startups, I’ve faced the task of both creating and analyzing business plans and financial models that are supposed to explain the essence of a company that may not yet exist.

In business school many, many years ago, we learned how to create 2-inch thick documents that explained in great detail what a proposed company was going to do and included multi-year financial projections that described every revenue and expense line.  Today a slide deck and financial model is the standard but many entrepreneurs even push back on that.  Their reasoning is that since things are changing so quickly, isn’t it a waste of time to put so much effort into building and updating a business plan and multi-tab Excel model?

There is something to be said for that as 0% of the business plans I’ve reviewed have ever come true – no one can accurately predict the future. 

Further, it can be incredibly time consuming and onerous to keep these plans up-to-date – it’s only natural to ask if it’s worth it.  However, what entrepreneurs don’t understand is the second reason for preparing a plan and model.  The first of course is to explain what the company does and its vision but the second reason – from my perspective – is less about the content and more about understanding how the entrepreneur thinks and makes decisions.  

When reviewing a business plan, what I’m really looking for is a narrative that shows that he or she understands the fundamentals of their business, how their product will solve a problem worth solving, the dynamics of the market, how they will create value for their customers and ultimately make money for shareholders.

I’m also looking at how they have structured their financial model to see if it matches the business objectives in the plan narrative (Pro Tip: Compare a written business plan and financial model side-by-side – I have found most of the time they don’t line up very well – claims made in the plan don’t match the forecasted expenses and revenues are always overly optimistic.  Recently, I reviewed a business plan that beautifully articulated a multi-country inter-continental expansion strategy but the financial model had travel of budget of about $5K per month for multiple people to visit multiple countries – clearly not enough).

I know that as an early investor I can provide mentorship and advice to help with strategic decisions but I’m not always going to be around.  The question I then ask is: do I have the confidence that the entrepreneur – and their internal team - will make the right decisions and come up with a revised strategy when the inevitable pivot needs to happen? 

To figure this out, it involves getting to know the entrepreneur on a personal level and assessing the initial planning documents and models they have provided.  I ask them to walk me through them and if their early logic and thought process is strong, I have a lot more confidence they will make better decisions on the fly in the future.

If you are an entrepreneur, keep this in mind as you start your next venture.