Even lean startups need business plans

By Editor August 1, 2013
Sabrina Parsons, PaloAltoSoftware

Sabrina Parsons, PaloAltoSoftwareBy Sabrina Parsons, CEO, Palo Alto Software

As lean startup methods become more common, it is important for entrepreneurs to think twice before scrapping their business plans entirely. While the traditional business plan may not be relevant for today’s tech-heavy startup community, there are effective ways for entrepreneurs to incorporate both approaches. In fact, those that do engage in business planning have been proven to grow 30 percent faster than those who don’t.

It is best practice for entrepreneurs to balance lean startup strategies with ‘live planning’ techniques, and it’s crucial for new business owners to understand that these two approaches are not mutually exclusive. The lean startup methodology advocates experimentation and business model validation as a precursor to forecasting and budgeting. Lean methodology guides entrepreneurs to ‘fail fast’ with their business ideas so they can quickly pivot their product or service to meet customer demand. This method is particularly effective for high-tech startups. It allows entrepreneurs to quickly figure out the real problem and solutions, before they go down the wrong path, and spend investor money producing the wrong solution.

But once an entrepreneur determines the right business model through the Lean Startup methodology, that entrepreneur needs to go through the exercise of putting together a budget forecast, including a cash flow prediction in order to really understand how much funding they will need, and when they will need the cash. A startup will need to justify the forecast with a high-level strategy, and be able to tie the strategy and the funding needs to actual milestones. This is, of course, the type of live planning that we advocate for. There is not an investor out there who doesn’t want to really understand the financial model of a business they are interested in investing in, and also who doesn’t want to see a high level plan from the management team to prove that they can actually implement the ideas.

Here are several universal planning steps that entrepreneurs who are launching even the leanest of startups need to take:

Define your business and vision: Even entrepreneurs that plan to ‘fail fast’ and make alterations based on market feedback need to have a vision for exactly what their business is providing for customers. It’s important to determine what you’re selling, who your customers are, what your plan is for growth and where you realistically see yourself down the road.

Determine your goals: Write down both short term (six to 12 month) and long term (two to five year) goals. Whether you’re launching a lean, high-tech startup or a ‘Main Street’ business with a traditional model, you need to have end-goals that motivate your daily actions.

Understand your customers: No business can meet the needs of everyone. Without a definite idea of your target customer, your business will not produce results. It’s important to determine exactly what needs your product is fulfilling and for which customer demographics, and where these customers can be found. Part of the reason for using the minimum viable product ideas from the Lean Startup strategy is to make sure that the target market you think is going to buy the solution actually has the problem you have outlined.

Know your competition: Learning how your competitors conduct business and reach customers can teach you a lot about your own business. Truly knowing your competitors can help you better understand what works and what doesn’t within your target customer base. It can also help tailor your competitive advantage to meet customer needs that your competitors are not fulfilling.

Project your financials: Regardless of the approach you take to launch your business, knowing your current financials and projecting your potential is the most important. How will you make money? What is your profit potential? What is your break-even point? What are the cash levers in your business, and how long will it take you to get cash-flow positive? Even lean entrepreneurs who will pivot their business direction regularly need to have a solid understanding of where their financials are headed and what they need to achieve to make a profit and reach their goals. No investor will fund a company that can’t lay out a financial model and illustrate how it will be a good investment.

The modern founder shouldn’t ditch the business plan completely, but should understand that the most effective way to launch a startup is to apply live planning methodologies to get the funding they need and then manage their business effectively once it is up and running. Tracking financial progress against a budget and a forecast can quickly help businesses understand where assumptions are wrong, and will give business owners the information they need to pivot quickly and adjust assumptions as they start actually selling their product and or services to customers. Live planning actually goes hand in hand with the Lean Startup methodology and continues to help keep high growth business on track, ready to quickly pivot and understand the financial levers they can maneuver as they drive their business to success. As Eric Reis says in Lean Startup:

Throughout the process of driving, you always have a clear idea of where you’re going. If you’re commuting to work, you don’t give up because there’s a detour in the road or you made a wrong turn. You remain thoroughly focused on getting to your destination.

For entrepreneurs today, it’s not about choosing between planning and not planning, but rather, understanding which combination of the two works best for them. No strategy is ‘one size fits all,’ and all entrepreneurs should take the necessary steps to plan ahead and build a foundation for where their business is heading. Taking these steps will provide you with the freedom to build your business as you wish, while giving you the best possible chance for success.

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Sabrina Parsons has served as CEO of Palo Alto Software since 2007. She and her husband Noah founded a UK software distribution company in 2001 that was acquired by Palo Alto in 2002. As CEO, Sabrina is a staunch supporter of entrepreneurs and entrepreneurial organizations.