Crystal Balls

A colleague once made an observation that business plans are akin to lamp-posts. Drunks lean against them, dogs urinate against them, but properly utilised, they can serve as illumination. I laughed, and shrugged it off – besides, I was slightly under the influence, and after all, I was in the height of my strategic planning days.  20 years later, as a battle-hardened entrepreneur, the phrase still haunts me.

I remember the days at Nortel Networks in the late 80s very well. The walls were crashing down all over Eastern Europe, and everything was up for grabs.  I was based out of the satellite office in the top floor of the Hilton Hotel in downtown Vienna, Austria and was covering the new “Eastern Europe” as Head of Business Planning for the region. I remember poring over the long-term political and economic forecasts from the Economist Intelligence Unit, trying to figure out what the market will be like in 10 years in the fledging new democracies of Poland, Hungary and the then Czechoslovakia.  And I recall my youthful naivety – applying what I had just learned in business school about long-range planning and long-term forecasts. Everybody had crystal balls back then.

The problem with possessing the natural arrogance of an MBA grad and a background in strategic and business planning is that you start to think you have a head start. In reality, you don’t, and here’s how the cookie normally crumbles:

First, you do the consumer research. After all you want to impress the investors you’ve done your homework, right? So you make it nice and quantitative, talk about margin of error, 95% confidence level, market size and so on. Then, you take the percentage of people you have proven are interested in your product and say “ah, ok, so let’s be conservative – even if we only take the percentage of the population who are very interested, that will give us a penetration rate of 5%”.  Penetration leads to demand leads to customer numbers, to orders, to revenue and then cash flow. Oh, and by the way, it’s all a “conservative estimate”.

And then finally, you’ve convinced an investor to put money into the business plan.  But what happens then?  She’s going to hold you to the numbers. Guess what? Either you falter, because you’ve just realised you’ve duped yourself, and you’re no longer sure of your own numbers, or even worse, several quarters later, you under-perform and find your shareholding is diluted because your performance plan was tied into the guesswork you produced in the first place.  Tail wags dog – enter stage left, big kick in your veritable crystal balls.

Business is all about making things and selling things. Period! Business planning is all about fooling yourself with a huge amount of guesswork, or at best a lot of procrastination.  Here’s the test: put two savvy investors in a room. Provide one with a pile of beautifully presented documentation with statistics, research and financial forecasts, all backed up with an experienced team, and provide the other with a half-baked product that is already generating cash, but with substantially less documentation and management team members, you can guess on who is going to place their punt.

If you’re in an early stage start-up, forget the planning, and focus on getting your first order. Murphy’s Law: Things are never as good as you plan, and never as bad as they appear to be.