INFLUENCER

Business Plans V/S

Business Models - When
No Plan Survives First
Contact With Customers
Steve Blank

April 24, 2017 5 min read

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I was catching up with an ex-graduate student atCaf Borrone, my

favourite coffee place in Menlo Park. This was the second of three office
hours I was holding that morning for ex-students. He and his co-
founder were both PhDs in applied math who believe they can make
some serious inroads on next generation search. Over coffee he said, I
need some cheering up. I think my startup is going to fail even before I
get funded. Now he had my attention. I thought his technology was was
potentially a killer app. I put down my coffee and listened.

He said, After we graduated we took our great idea, holed up in my

apartment and spent months researching and writing a business plan.
We even entered it in the business plan competition. When were done we
followed your advice and got out of the building and started talking to
potential users and customers. Ok, I said, Whats the problem? He
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replied, Well the customers are not acting like we predicted in our
 plan! There must be something really wrong with our business. We
thought wed take our plan and go raise seed money. We cant raise
money knowing our plan is wrong.

See Also:

Proving Your Business Model to Customers On A Macro Level

Why A Business Plan Is A Must-have For Entrepreneurs... Even If It

Does Not Work Out

How To Prepare For Your First 5 Business Milestones

I said, Congratulations, youre not failing, you just took a three and a
half month detour.

Heres why.

No Plan Survives First Contact With

Customers

These guys had spent 4 months writing a 60-page plan with 12 pages
of spreadsheets. They collected information that justified their
assumptions about the problem, opportunity, market size, their solution
and competitors and their team. They rolled out a five-year sales
forecast with assumptions about their revenue model, pricing, sales,
marketing, customer acquisition cost, etc. Then they had a five-year P&L
statement, balance sheet, cash flow and cap table. It was an exquisitely
crafted plan. Finally, they took the plan and boiled it down to 15 of the
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prettiest slides you ever saw.
 The problem was that two weeks after they got out of the building
talking to potential customers and users, they realised that at least 1/2
of their key assumptions in their wonderfully well-crafted plan were
wrong.

Why A Business Plan Is Different Than A

Business Model

As I listened, I thought about the other startup I had met an hour earlier.
They also had been hard at work for the last 3 months. But they spent
their time differently. Instead of writing a full-fledged business plan,
they had focused onbuilding and testing a business model.

A business model describes how your company creates, delivers and

captures value. Its best understood as a diagram that shows all the flows
between the different parts of your company. This includes how the
product gets distributed to your customers and how money flows back
into your company. And itshows your companys cost structures, how
each department interacts with the othersand where your company can
work with other companies or partners to implement your business.

This team had spent their first two weeks laying out their hypotheses
about sales, marketing, pricing, solution, competitors, etc. and put in
their first-pass financial assumptions. It took just five PowerPoint slides
to capture their assumptions and top line financials.

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 This team didnt spend a lot of time justifying their assumptions because
they knew facts would change their assumptions. Instead of writing a
formal business plan they took their business model and got out of the
building to gather feedback on their critical hypotheses (revenue model,
pricing, sales, marketing, customer acquisition cost, etc.)

They even mocked up their application and tested landing pages,

keywords, customer acquisition cost and other critical assumptions.
After three months they felt they had enough preliminary customer and
user data to go back and write aPowerPoint presentation that
summarised their findings.

This team had wanted to have coffee to chat about which of the four
seed round offers they had received they should accept.

A Plan Is Static, A Model Is Dynamic

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Entrepreneurs treat a business plan, once written as a final

collection of facts. Once completed you dont often hear about people
rewriting their plan. Instead it is treated as the culmination of
everything they know and believe. Its static.

In contrast, a business model is designed to be rapidly changed to reflect

what you find outside the building in talking to customers. Its dynamic.

So do you mean I should never have written a business plan? asked the
founder who had spent the time crafting the perfect plan.

On the contrary, I said. Business plans are quite useful. The writing
exercise forces you to think through all parts of your business. Putting
typetogether the financial model forces you to think about how to build a
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profitable business. But you just discovered that as smart as you and
 your team are, there were no facts inside your apartment.Unless you
have tested the assumptions in your business model first, outside the
building, your business plan is just creative writing.

[This post by Steve Blank first appeared on the official website and has been
reproduced with permission.]

Note from Inc42: The views and opinions expressed are solely those of the author
and does not necessarily reflect the views held by Inc42, its creators or
employees. Inc42 is not responsible for the accuracy of any of the information
supplied by guest bloggers.

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