Posts in Books

Seat of the Pants

Everyone says that before you launch a company, you’ve got to write a business plan. So how come so many Inc 500 CEOs skipped that sober exercise?

One question in this year’s survey of Inc 500 founders asked whether they had written formal business plans before they launched their companies. Only 40% said yes. Of those, 65% said they had strayed significantly from their original conception, adapting their plans as they went along. In a similar vein, only 12% of this year’s Inc 500 group said they’d done formal market research before starting their companies.

Wait a minute — aren’t business plans and market research supposed to be Entrepreneurship 101? What about all those B-school courses and popular books telling you that you can’t get to first base without a plan? To gain some perspective on this intriguing divergence between theory and practice, contributing editor Sarah Bartlett interviewed Amar Bhidé, a Columbia Business School professor whose research on the subject is encapsulated in his book The Origin and Evolution of New Businesses (Oxford University Press, 1999).

What should we make of these data? Are they consistent with prior research, or is this group an anomaly?

The data are consistent with what I found in my survey of Inc 500 founders way back in 1989. According to that research, 41% of the founders had no business plan at all, 26% had a rudimentary plan, and only 28% had a formal business plan.

The current survey figures are consistent with other data as well. I had my students write papers on successful entrepreneurs, usually more celebrated entrepreneurs — people like Bill Gates, Sam Walton, Jann Wenner — and they found more or less the same pattern. In most of those cases, there was no detailed business plan written. I also did a study of Harvard B-school alums who had started businesses, and there again I found that, depending on the type of businesses they started, no more than a third had written detailed business plans. It’s a pretty universal distribution.

Why would people who are starting up companies not bother with business plans?

There are several factors. Many, if not most, successful businesses get started in fields that are characterized by high turbulence or change, change that is not being generated by the entrepreneur. It’s exogenous change. And in those kinds of fields, first off, there’s very little information available with which to write a business plan. Take the classic case of Bill Gates and Paul Allen starting Microsoft in 1975. If they had tried to do a competitive analysis or a customer analysis, they wouldn’t have known who their competitors were or been able to do the classic comparison of strengths and weaknesses vis-à-vis their competition. And they wouldn’t have known who their customers were. When things are changing rapidly, there isn’t data.

60 % of the Inc 500 CEOs surveyed did not create formal written business plans before launching their companies.

Secondly, when things are changing rapidly, the time you would spend on doing the analysis or the plan is incredibly costly because many of the opportunities are fleeting, and if you don’t seize them immediately, they’re gone. So in these highly turbulent markets, the costs of doing the analysis or writing a plan exceed the benefits.

Thirdly, because most of these businesses are started without capital and therefore without an irreversible commitment of resources into assets that can’t be redeployed elsewhere, there’s very little downside to being wrong. If X doesn’t work, it’s not as if you’ve invested in a $100-million chip-fabrication factory. You just modify it and try something else.

And that freedom to adapt can be a good thing?

If you divide into two groups those who write plans and those who don’t, and then ask what percentage will stick to what they originally thought, the ones who don’t write business plans will tend to deviate from their original concept to a greater degree than those who wrote plans.

“In these highly turbulent markets, the costs of doing the analysis or writing a plan exceed the benefits.”

Precisely because there isn’t a deep pocket there, folks without plans can be much more flexible. If they get into the game with the idea of a rug merchant — “If you don’t like this one, how about that one?” — as opposed to that of an evangelist, it will help.

But there are some instances when it makes sense to create a business plan, right?

When you write a business plan, you’re usually doing it because you’re investing in assets, and in order to invest in those assets, you’re raising money from other people. So the plan gives you more sustainable advantages [in the form of capital and assets], but it also means that you have to stick to what you started with.

If you are starting Southwest Airlines, you need a plan, you need capital. But if your concept doesn’t involve raising significant amounts of capital, and if you have firsthand knowledge and experience of the profitability of the business, then there doesn’t seem to be much of a point to a plan.

Given your findings, why is there so much emphasis on business-plan writing in entrepreneurship programs?

It seems as if people who are trying anything, whether it’s playing tennis or starting a business, want — and should want — to collect as much knowledge as is available about what it is they’re trying to do. And since we haven’t collected much systematic knowledge about starting new businesses, instruction on how to write a plan becomes a crutch. And for sure, there’s some 10% to 15% of plausible businesses for which writing a plan does make sense. But not for the great many. You’re required to teach entrepreneurship, and there’s a great student demand for instruction on how to write a business plan. You have to generate courses, and it’s an easy course to generate.

NO PREREQUISITE: Amar Bhidé, a Columbia Business School professor, thinks that instruction on writing business plans has become a crutch.

So are you on a crusade to persuade academics not to focus so heavily on business plans?

The crusade I’m on is this: I don’t think that people deliberately set out to teach business-plan writing because they want to do harm to their students. It’s really that they don’t have an alternative set of educational materials that would fill up time and courses. My crusade is to try to figure out what the alternative should be.

At a very superficial level, it’s the idea that adaptation rather than planning is critical. To some degree, it’s a matter of socialization. I think you can sensitize people to the importance of adaptation. I think you can get people emotionally used to the idea that they will be wrong. Even successful people are wrong quite often.

How to talk to realtors about short sales

Let us begin by saying that the format of this book is great! You get approximately 430 words per page (in word) which means that he didn’t blow his font up to reach 166 pages in his book. Which means his book isn’t full of air.

First off his book begins with an interesting story about Nick and where he comes from. This is an inspirational material that no matter who you are or where you come from this can work for you too. When you read where Nick came from and the hurdles he had to jump in his journey you will see that anyone that truly has the desire to better themselves, their family and there future can and will.

Ok, so basically chapter 1 talks about what subject 2 is and what it is not. No surprise there. If you have no idea what subject 2 is then it is great information if you’ve subject to’d before then you will not need this section. It does give a really good rebuttal to homeowners, when they ask you if this is even legal, though.

Chapter 2 talks about having a business plan. He personally recommends software, to you, that he has used to create his own business plan. Actually I think that all the affiliates he recommends to you throughout the book he personally uses in his own success day in and day out. The 3 most important parts of the business plan are, business summary, economic model and your marketing plan, don’t know what those are?

Now… Chapter 3 and 4 are where you really started to get excited. Why? Because this is where you get to see Nick’s “Marketing Genius” come out! Ch.3 is all about finding buyers!!! Yesssssssssss… those are the people that give us our checks to CASH! He addresses finding them in some fantastic ways. Ways that, unless you’ve talked with him personally, you’ve probably never even thought of! We know that we hadn’t. Get this… he talks about having lists! Not just a buyer’s list but lists! That’s Plural! we didn’t even think about what we was reading until he put the ideas in my head. We can’t even keep the light bulbs lit up in my head because there are so many going off at once! It’s amazing! So not only does he give you ideas but he stimulates you to discover your own ideas. At least we felt like we were a kid in a candy store.

Ch. 5 is about marketing your business. He talks about various inexpensive, yet very effective, ways to market your business.

Without touching on actually doing any subject to deals or talking to sellers we would say that if you’re a newb like, no doubt you’ve figured out by now, the first 5 chapters alone are worth the price of the book. If you are a vet but just aren’t having the success with marketing either your properties or finding enough solid buyer’s then this book is for you and if you are a savvy investor who knows his stuff… well… we all know that you can’t ever “know it all” and this book would make a great addition to your knowledge and you might even increase your sales as well.

Review of chapter 6,7 and 8

Everything that we read in these 3 chapters is ESSENTIAL to being a good sub2 investor and without these item I and you would not be worth a darn! We can honestly say that Nick has saved me countless hours of work and heartache by what he as so graciously wrote about in this section of the book. THANK YOU NICK!!!

How many of you know which scenarios to avoid when you are evaluating a sub2 deal? huh? How many of you know what to say to a lender to keep them from feeling like their loan is not jeopordized and keep them from not calling the loan due?

Don’t think that for one moment you know everything there is to know! You will learn something that you hadn’t thought of when you read Nick’s book!!

About the close

Chapter 8 is all about the close. He discusses what he says to customers and how to lead them to the close when actually doing a tabletop closing. He explains the differences between a title closing and a tabletop closing and helps take some of the fear out of doing your own tabletop closing (good information for someone who has never done one). He actually walks you through one of his typical closings.

So far from what we read these are the get down to business chapters. You van thoroughly enjoyed the guidance in these 3 chapters.


Doing your due diligence

Chapter 7 consists of doing your due diligence. He talks about what you need to evaluate in the seller and when you should avoid a transaction all together. He then goes into how you should evaluate whether the property’s #’s are going to make sense or not. This information is invaluable to a new investor like me. He talks about the DOS clause (Due On Sale). Specifically what will probably trigger the loan being called due. He also gives you ways to let the lender know that you have taken the property without triggering the DOS.