Do Investors Care What Your Business Plan Looks Like?

No less an authority than The Wall Street Journal says this: Venture capitalists don’t read business plans.

The same point was made by a quartet of entrepreneurs at Tuesday’s Rockies Venture Club meeting in Denver.

Photo by juhansonin via Flickr, CC2.0

“Nobody will read your business plan,” said Jeffrey Saffer, co-founder of Quertle, a Web portal for biomedical research that must be doing something right.  Quertle closed a $725,000 angel round last year and will launch May 18.

The Wall Street Journal’s Independent Street blog cites a study from the University of Maryland to support this argument. “Planning documents play, at best, a minor ceremonial role and do not inform venture capitalists,” say the study’s authors, writing in next month’s Strategic Management Journal.  They looked at 718 business plans that circulated between 1999 and 2002, and found that only 58 got funded.

But that beautifully formatted, painstakingly copy-edited product of your sweat, tears and weekends will at best be skimmed, co-author Brent Goldfarb said.

Here’s the paradox: You should write a plan anyway.

Saffer’s partner, Vicki Burnett, agreed: you must prepare a business plan and know it by heart before you approach investors. That process is for you, not them; the journey of plan writing is as important as the destination.

If you’re on that journey, take a look at  “The Top 10 Lies of Entrepreneurs,” a 2006 post by Guy Kawasaki that remains painfully relevant. If you’re meeting potential investors, memorize this list of things never to say. It includes “Gartner says our market is $50 billion” and “No one else is doing this” (perhaps because it’s not worth doing). Finally, this: “ Patents are mostly good for impressing your parents.”

Tim Berry of Palo Alto Software weighed in last week on his blog:

I’ve consulted to venture capitalists in due diligence, for years, my company had venture capital investment in it and bought it back, and lately I’m also an angel investor. And I can tell you this: they may not read the plans, but that’s because the plan is for you, the startup wanna-be, to know what you’re trying to do, and how much money you need, and why, and what you’re going to spend it on. You may only show the VCs the presentation, but if you don’t have a plan behind it, with your numbers straight, then they’ll know it.

At BusinessWeek’s “New Entrepreneur” blog, John Tozzi extends this point. “The important thing here for entrepreneurs to realize is that investors care much more about the traction your business has than how it looks on paper,” he writes. That’s harder to fake than a nice font and the right size margins.