Before You Write a Business Plan …

Editor’s note: Vivek Wadhwa is Wertheim Fellow at the Harvard Law School and executive in residence at Duke University. He is a tech entrepreneur who founded two technology companies, including Relativity Technologies in Cary. This article is reprinted with permission of BusinessWeek.

DURHAM - Before I launched my last startup, I prepared a business plan exactly as I had been taught in business school. I was determined to lure professional investors, and I thought the key lay in creating lofty financial projections and carefully documenting the details. If all went according to my 40-page plan, my software company would be worth billions in five years by capturing just 1% of the market.

My CEO friends told me that this was one of the most professional business plans they had seen. Yet it didn't take me long to realize that it wasn't worth the paper it was printed on. It bore no resemblance to the company I finally built. I don't think that any of the 100 people I sent it to read more than the executive summary.

True, the analyst reports that I read to prepare the market analysis section provided valuable industry insights. And the process of creating the sales and marketing section forced me to think much harder about how I would achieve my goals. But the two to three months I spent creating the plan would have been better spent if I had instead focused on building my product and speaking to potential customers to understand their needs.

Over the years, I have mentored dozens of entrepreneurs seeking venture capital or angel investment in their new companies and reviewed hundreds of business plans. They all seem to be the same. A startup business plan is always a good piece of fiction filled with great ideas. No one really believes what he reads in them. What venture capitalists look for before they make an investment is a proven product with strong market demand and an experienced management team. And angel investors usually invest in vision and enthusiasm.

(For the remainder of Vivek's column, follow the BusinessWeek link.)