The psychology of business plans

Entrepreneurship ‘experts’ have long debated the value of business plans. Since some make a living out of selling business planning services, or making decisions based on business plans, and others make a living, or at least a reputation, out of promoting a ‘discover your way as you go’ approach, the debate will very likely go on for many more years. Hopefully, the two sides will eventually agree that planning and action are not mutually exclusive and should reinforce each other.

Until that wise consensus happens, I would like to offer a psychological perspective on business plans. The best way to convey the perspective is to compare a business plan with a parachute. While very few individuals are brave enough to jump from on high without some form of safety arrangement, ‘normal’ people need some kind of parachute. Without the safety net provided by the parachute, they would never jump.

What about entrepreneurship? When the cost of failure is modest, entrepreneurs do not need a parachute. The entrepreneur can get back on his or her feet instantly and try again. Investing in a parachute is a waste of scarce money and jumping from a height of only a few feet with a parachute on one’s back would indeed look ridiculous.

When potential entrepreneurs perceive a high risk, for right or wrong reasons, they often need to rationalise the start-up decision. Having taught and worked with hundreds of would be, and dozens of actual, entrepreneurs, I have seen them worried about giving up a well-paid job, leaving the comfort of working in a predictable environment, using up their savings, or putting their marriage and family at risk. Most of them need the feeling of safety provided by an elaborate business plan to make the leap into entrepreneurship.

Two of my former students, Paul and Pierre, launched a business right after graduation from a programme where they worked together on an entrepreneurial project, as part of the curriculum. Paul had resigned from his job and was keen, from day one, on starting a business that combined his IT expertise and passion for a given field. Pierre, on the other hand, needed much more persuasion. He was the chief financial officer of the French subsidiary of a multinational company and had a growing family. More left brained than Paul, his commitment to an entrepreneurial career shift grew gradually with the elaboration of the business plan they had to write and was reinforced by the positive signals received from different sources, including the MBA faculty and classmates. Without the business plan, Pierre would never make the leap into entrepreneurship.

What happened to Paul and Pierre’s venture afterward? Well, the theoretical business model and the accompanying business plan did not receive empirical validation. The co-founders, in need of seed funding, had to design a new business model, in the same market, and to draft a new ‘investable’ business plan. Pierre realised, ex post, that he had jumped with a flawed parachute on his back. He had burnt his boats and had no other choice but to make the entrepreneurial venture work.

The lesson I take from this case, and many similar ones, is that business planning enables ordinary people to jump into entrepreneurship with a relative, even if exaggerated, feeling of safety. The fact that entrepreneurs discover, after jumping, that the parachute has plenty of holes in it does not really matter. Because the ‘real stuff’ of entrepreneurship can only begin after the jump, anything that makes it possible is good. Some people are driven by a ‘blind’ passion for a field, others have nothing to lose or have the security of a family wealth, and others need the feeling, if not the reality, of a rationalised, well thought through, business plan.

Unlike a parachute provided by a third party, the business plan is crafted by the potential entrepreneur and the process of business planning provides the feeling of knowing where one is putting one’s feet. When the parachute proves, wholly or partially, flawed, the entrepreneur cannot blame a third party. The entrepreneur has only him or herself to blame and must live with the consequences.

If this psychological theory has any validity, we will continue to see a lot of business planning activity and a lot of business plans being burnt after the jump, not before. And please do not misunderstand me, I believe that business planning is sometimes necessary and can have, in some contexts, a substantive, not only psychological, value but this was not the focus of this essay.

– The author is professor of management and entrepreneurship at Essec Business School