Business Plans: useful or not?

Over the past few years, we have heard a great deal of conversation about the inadequacy of traditional business plans.   The lean start-up movement has argued that we should focus on developing a basic business model, testing out our ideas, and then refining them through a process of enlightened trial and error.  We should not over-emphasize a lengthy, drawn-out planning process.   The lean start-up movement emphasizes the notion rapid prototyping.   This approach has many merits.

Source: getaliff.blogspot.com

On the other hand, I think we can go too far in diminishing the importance of a business plan.   Dwight Eisenhower once said, "Plans are useless, but planning is indispensable."  In other words, the process of thinking through an issue and developing a strategy can be very useful. 

The mistake that many people make though is becoming too wedded to that original business plan.   A process of research and analysis can be productive, but it must lead quickly to a rapid prototyping phase.  We have to take action, and learn from that action.  However, we can't just leap without any spade work. 

For the Wall Street Journal, London Business School Professor John Mullins has written a great column exposing some of the many problems with traditional business plans.  For those interested in learning more about this topic, I strongly suggest reading his essay. 

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Pivot: The Road to Ruin for Many Startups

The word "pivot" has become part of the entrepreneurial lexicon over the past few years.   Eric Ries developed the "Lean Startup" methodology for building and launching new products.  Ries argues that entrepreneurs should work toward the development of an MVP - minimum viable product - and then listen carefully to customer feedback so that the next iteration of improvements can be put in place.  Entrepreneurs should use the minimum viable product as part of a process of disciplined experimentation, whereby they test core hypotheses about their business model.    As entrepreneurs gather feedback, they should pivot based on what they are learning.  According to Ries, a pivot is a "structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth."

In a blog post for the Wall Street Journal, serial entrepreneur and Stanford Professor Steve Blank offers some cautionary words about the "pivot" concept though.  Blank gives an example of a founder who would rush back to his startup's offices after every customer visit and initiate a fire drill of sorts. The founder would constantly be advocating changes based on his most recent interaction with a customer.  Blank explains the problem:

Pivot as an Excuse
I wasn’t surprised when he pushed back: “I’m just getting out of the building and listening to customers. All I’m doing is pivoting based on their feedback.” By now I’ve heard this more times than I liked. “Yuri, one of the things that make you a great founder is that you have insight others don’t. But like all great founders, some of these insights are simply hallucinations. The problem is you and other founders want immediate action every time you have a new idea. That’s a mistake.
“A pivot is a substantive change to one or more of components to your business model.” You’re using “Pivot” as an excuse to skip the hard stuff – keeping focused on your initial vision and business model and integrating what you’ve heard if and only if you think it’s a substantive improvement to your current business model. There is no possible way you can garner enough information to pivot based on one customer’s feedback or even 20. You need to make sure it’s a better direction than the one you are already heading in.”

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Are Network Effects Over-rated?

Nir Eyal and Sangeet Paul Choudary have written an absolutely terrific column for TechCrunch about network effects.  The essay is titled, "The Network Effect Isn't Good Enough."  Network effects, of course, exist when the value per user rises as the number of users of a particular good or service rises.  When network effects are strong, one firm can become the standard in a market - think eBay in auctions, for instance.  In these situations, firms tend to try to "get big fast" so as to move up the curve and achieve a high value per user.  Then they hope that switching costs will lock users into their good or service.    Eyal and Choudary point out that many startups in Silicon Valley bank heavily on the notion of network effects.  They willingly run up huge losses in the early years, hoping to cover those losses with venture money.  Then they hope to reap the rewards when they have become the dominant player in their particular market. 

The authors point out, however, that network effects may not be the elixir that many startups believe they will be.  Why?  The authors make several key points.  Here is an excerpt from their argument:

For one, in the old days, consumers paid to access the network through their upfront investment in hardware. These upfront costs locked users into the network and once they were in, they were in for good, thus erecting barriers to entry for would-be competitors. However, the cost of providing access to the network has fallen precipitously. The days of customers buying expensive hardware to use a network are gone as is the correlating lock-in effect. In addition to access costs falling to zero, another key component of what once kept users locked into a network has vanished. Once, porting contacts onto a new network, like switching instant messaging services from Yahoo! to AIM, was a non-trivial task. Today however, customers use their Facebook, Twitter or Google profiles to join a new service in seconds. A burgeoning network, take Instagram or Pinterest, can leverage the single sign-on enabled by the social graph to reach critical mass faster than ever before.

In other words, switching costs may not be nearly as high as many startups believe them to be.  Thus, the lock-in effect doesn't materialize as hoped.  Consumers flock to a platform, but then they may just as quickly move on to a different product or service.   Think MySpace relative to Facebook.   This limitation on switching costs may explain why many startups have a hard time "monetizing" their eyeballs.  If they try to extract more value from their consumer, they face the startling possibility that people will simply switch to another product or service. 

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How Big Companies Act Like Startups

Soren Kaplan wrote a terrific article recently for Fast Company.   Kaplan explained how some large companies try to act more like startups in an effort to jumpstart innovation.  He outlines four key practices/principles that invigorate innovation:

1. Follow customers home:  In other words, conduct anthropological research.  Go into customer homes and observe them in their natural settings using various products and services.

2.  Tap outside collaborators:  Bring in experts and innovators from outside the firm to bring fresh perspectives, explain their research, and educate folks about how things are done elsewhere.

3.  Stay small:  Don't think in terms of bet-the-company type projects.  Think instead in terms of low cost, rapid experimentation.

4.  Use the best, invent the rest:  Creating a new product or service doesn't mean inventing the entire thing from scratch.  Often, you can combine off-the-shelf components with proprietary innovations to develop a unique new product.

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Acqui-Hires: Buying Teams of Engineers from Start-ups

The Wall Street Journal reports on the growth of an interesting phenomenon that has existed for some time in Silicon Valley. 

Established technology companies increasingly are buying—and then shutting down—early stage start-ups, mostly to acquire their software-engineering talent.  Investors, attorneys and others involved have dubbed these transactions acqui-hires.  The deals, which typically range in price from about $3 million to $6 million, started to become commonplace in Silicon Valley last year as demand for software engineers soared.

The paper reports that the deals come with some strings attached (naturally).   The employees may have to sign agreements to stay on board at the acquiring company for a few years.   They also may have to sign noncompete agreements that kick in if/when they leave for another firm. 

Even with these types of "strings" attached to a deal, I think these types of acquisitions come with some risk.  On the plus side, you are acquiring a team of engineers that is comfortable and experienced working together.  You are getting more than talent... you are getting a potentially terrific team.  On the downside, you are not much buying much other than the people.  Yes, you can stop them from walking away, or from going to a direct rival (although non-competes can be tough to enforce).  However, just keeping them there contractually does not insure that they will be productive.  You have to keep them happy.  If they have walked away from an entrepreneurial dream, then the task of keeping them engaged and fulfilled may not be easy.  

What do you have to provide for these folks?  It's more than good compensation.  You have to provide them interesting projects on which to work - fulfilling, meaningful work.  You have to make them feel like they are contributing to something bigger than themselves.  You want them to feel ownership of the product or service on which they are working.  It's a tough task, but it's critical if firms wish to make these types of acquisitions successful. 

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Fewer Startups in Japan: Lessons for all Nations

I'm here teaching in Tokyo for a week, as I have each July for the past decade.   Therefore, I thought it would be appropriate to offer a reflection related to Japanese business.  Adam Acar, Associate Professor of Communication at Kobe City University of Foreign Studies in Japan, published an interesting op-ed today in The Japan Times.  The article was titled, "Why Japan Hosts Fewer Startups."  He cites the fact that a study by the Global Entrepreneurship Monitor found that Japan had the lowest entrepreneurship activity of 37 countries studied.   Professor Acar offers several possible explanations for the low rate of startup activity in Japan:

1.  Japan is a collective society, with less emphasis on individual self-achievement.

2.  Japan is a "high power distance" society, meaning that it's tough for young entrepreneurs to deal directly with senior executives at various organizations that might provide financing, supply key inputs for their products, etc.    

3.   Many Japanese value job security a great deal, perhaps even more so than securing the highest compensation possible.  

4.  Many Japanese worry about disappointing others and worry that a failed startup would harm many peers and colleagues. 

5.  Japan's low rate of social network usage relative to many Western nations means that potential entrepreneurs have lower social capital to draw upon as they seek customers, partners, investors, suppliers, employees, and the like. 

One may or may not agree with each of these explanations, or characterizations of Japanese society.  However, I do think all countries and regions should consider these hypotheses as they think about how to stimulate entrepreneurial activity.  

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