Should You Ditch Your Business Plan?

John Mullins is a professor at the London Business School, where he focuses on entrepreneurship and marketing. In 2003, he released the bestseller The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan. Mullins and co-author Randy Komisar of venture capital firm Kleiner Perkins build on those ideas in their new book, Getting to Plan B: Breaking Through to a Better Business Model. I spoke with Mullins about the pitfalls of clinging too tightly to your business plan and how lightening your grip can correct some of the common mistakes that lead start-ups to fail.

BNET: What was the genesis of your new book?

Mullins: At LBS's Entrepreneurship Summer School program, we were finding that when students tried to assess if their entrepreneurial ideas were good enough, it was difficult for them to translate qualitative insights about how attractive a market or industry is into a quantitative representation of the business. It's hard to develop those insights into a business model that lays out a set of financials and helps you determine if the idea could work. As I wrestled with that concept, I thought people hadn't done clear enough thinking on this topic, and I started to do research. In the course of that research, I met Randy Komisar, who had also been looking at these issues.

BNET: What distinct elements did each author add to the project?

Mullins: I took six weeks away from London to spend in Silicon Valley to meet people who were wrestling with the challenge of starting new ventures. When Randy and I met, we realized we had the same primary concern: "How do you get to a better success rate on start-ups?" Randy had been thinking about this from a process perspective: What is the set of steps you can go through to get from your original idea, let's call it "Plan A", to move toward a better idea that will actually work.

I had been thinking about the economics of start-ups, the quantitative side...numbers you can back up with some real data. We thought these were complementary approaches and together they might form a compelling book.

BNET: What are start-ups getting wrong that leads them to have such a high failure rate, and what are some of your suggestions for them?

Mullins: In our many years of working with start-ups, both Randy and I have made the observation that there is a whole culture that grows up around the business plan. Everybody who starts a business thinks that a) they need to write a business plan and b) once they raise money or start to bootstrap, they must implement their original plan, their Plan A. We think they are badly mistaken. If you talk to angel investors and venture capitalists, they will tell you that they rarely make money on Plan A, it's usually on Plan B or C -- or who knows, Plan Z. The original plan is based on too many untested assumptions, so it's bound to be wrong. It might just be a little bit wrong, but it also might be completely wrong.

The better thing to do is to have a Plan A, since it's a stake in the ground from which to start, but then you need to refine and challenge that by looking at companies that have come before you: analogs and "antilogs." Analogs are companies from which you borrow or steal ideas and numbers. Antilogs are companies that went before you and for which can you say, "I am going to do it differently than that company did." So, you start with studying other companies rather than getting so inwardly focused.

At the end of that process, you have a different product and are starting at a different time, and your product or service is a little different than what came before you. Inevitably some questions arise that you think maybe you have the answers to, but you don't really have any evidence. We call these things "leaps of faith," and we think an entrepreneur's primary job is to identify those few leaps of faith that the business plans rests upon. The entrepreneur needs to find a way to test them in a quick and inexpensive way. If the answers pan out along the lines of your hypothesis, great, you are on your way. But more often, when they don't pan out, it signals you are ready for a midcourse correction that can lead you to Plan B.

Next week, we'll hear about how companies such as Paypal eventually honed in on their Plan Bs.