Planning is important when starting a new venture. For example, writing a business plan will help you organize your thoughts and present your ideas to potential partners or investors. However, there is a balance between planning and "doing" - lots of planning might not help you.
Don't Over Plan
A National Federation of Independent Business study of almost 3000 start-ups showed that company founders who spent lots of time planning, studying and contemplating were no more likely to survive their first 3 years than founders who jumped on opportunities that presented themselves without much planning.
Analyzing the venture's ability to compete for capital, customers, employees and other necessities is a daunting task and a complete analysis has to take numerous industry factors into account. A complete analysis taking into account all, or even most of these business factors, is rarely feasible for most startups. Most entrepreneurs don't have the time and money to collect enough data that would accurately represent the venture's business environment. Besides, the prospects that can be thoroughly analyzed at low cost, will likely lie in very competitive environments.
Planning is Required
This doesn't mean that you should dive in without any planning. Assessing the viability of a new venture before opening the doors is important. A basic business plan is a good idea. Entrepreneurs have many crazy ideas, just thinking about what might go in a business plan will help determine whether an idea should be researched in the first place.
Given that an entrepreneur has to minimize the time and money spent on researching ideas, how much effort should be devoted? The answer is it depends, there is no one-size-fits-all checklist but some guidelines can apply.
One factor is whether your venture requires a lot of startup capital or not. Investors normally require a more thorough business plan with financial details. They want to gauge the entrepreneur's seriousness and competence and whether or not their investment will generate enough return. For these investors, you will have to put together a plausible and detailed financial plan.
The more complicated your venture's operations are the more analysis and planning is required. Complexity increases the chances that things will go wrong, planning will help reduce that risk.
Focus on the Important Issues
Focus on the importance of the issues rather than which issues have the most available data. You might be tempted to do a thorough analysis on a particular issue because the data is available but some issues deserve just a little attention regardless of the availability of data. Likewise some important issues are difficult or impossible to analyze and you'll just have to take your chances. Rapidly changing technologies or regulations make detailed analysis of some issues unfeasible.
Which Ventures Should you Favor
Once losing ventures are screened out, an entrepreneur on a limited budget should favor ventures that have:
- Low startup financing requirements. You're better off with a venture that can be started without lots of external capital and have high enough profit margins for the business to grow with cash from sales.
- A low exit cost. With low exit costs, you can more easily abandon the venture without a large loss of money, time and reputation. Favor ventures where you can spot failure early on.
- High margin for error. The simpler your operations and the lower your fixed costs, the less likely you are to face cash flow problems because of unforeseen circumstances.
- The ability for the owner to cash in. Being locked in an illiquid business with few sustainable advantages makes it difficult to cash in on your efforts. Not only will the you be unable to pursue more attractive opportunities, the likelihood of selling the company or taking it public is slim.
Take Action During the Planning Process
In large corporations there is usually a distinct separation between analysis and execution. As an entrepreneur, you have more flexibility and don't have to have all of the answers before you start taking action. For example, the profitability of a new restaurant might depend heavily on the conditions of the lease. You can test whether favorable lease conditions can be negotiated before doing a lot of other analysis and planing. In this way, you can save a lot of money and time.