Business Planning: Bet Small, Win Big
There's a growing body of thought that the importance of a business plan for startups is often overstated. Not that planning is unimportant. Quite the contrary. What is in question is not so much planning per se, but the depth to which that planning must go. For instance, is it really necessary to have a two or three-year projection of revenue and expenses as part of your initial plan?
The fact is, most startups have limited funds and resources for detailed market research. As much as anything, owners rely on anecdotal evidence that their product or service has a viable market.
"Live" Market Research
Frequently there's only one way to substantiate this anecdotal evidence — you must take the product into a live market. Only then can you validate your market assumptions and establish a clear price which buyers are willing to pay for what your company offers.
Some startups turn to focus groups as an early way of predicting market acceptance and price points. Yet, even well-designed focus groups are notoriously weak in anticipating the price point at which customers will embrace a product, or even if they will embrace it at all.
It was this reality, in part, which gave rise to the "lean startup movement." Eric Ries, who sired the concept of lean startups, had previously been part of several business launches. He came to realize that the feedback from pre-launch focus groups was a poor predictor of how the market would actually respond to a given product.
And it turns out that focus groups are even less helpful if your product or service is particularly innovative. Steve Jobs is famous for dismissing the importance of getting feedback from focus groups when he was developing a revolutionary product. He asked, "How can anyone tell me how they would use a product or what they would pay for it when they've never seen anything like it before?"
Building Momentum Incrementally
Let me quickly add, however, that I'm not advocating some haphazard, willy-nilly approach to starting a business. Any startup deserves careful forethought. I'm simply saying that you should not beat yourself up just because you cannot base your cash flow projections for the first two years on solid data. Sometimes the data is just not there.
When that's the case, you must build your startup's momentum incrementally, using a strategy of making "small bets," then seeing which one (or ones) pay off. Once you have that feedback, you can make informed decisions about which services or products to stake your business on and which ones to abandon.
The reason that these are called "small bets" is because you limit the investment that you put at risk. You maintain a minimum inventory, even though you might get better pricing if you purchased much larger quantities. You purposefully restrict the venues in which you promote your product, first to contain the size of your inventory and second to control marketing costs.
If the small bet succeeds, you then capitalize on the lessons learned, expand your inventory, enlarge your distribution efforts, and put more dollars and energy into marketing.
The same principle holds for startups which market services. If you see the potential for a half-dozen services, put some of them on the back burner at first. Start by offering only two or three of your proposed services. Restrict your promotional efforts to a targeted, limited audience. But don't be extravagant in your marketing effort. Spend only enough to evaluate the receptivity to your service at a price point which makes good business sense for you.
If it turns out that you've overestimated the appeal of a given service, set it aside and place a small bet on another one.
Making Small Bets
It's always wiser to make two or three small bets rather than betting the entire ranch on a single product or service. While small bets which pay off can always be the opening hand of a very lucrative game, a huge bet that fails can leave a startup so cash-strapped or discouraged that it never recovers.
On the other hand, you don't want to make small bets right and left, either. Hold yourself to two or three. When you have too many small bets in play at the same time, you cannot devote the requisite energy and focus to each of them individually. You therefore limit the opportunity for your small bets to prove their merits and succeed.
The primary purpose of small bets is not to limit risk, but to use a low-risk way of uncovering your most profitable options. Unless you give each small bet every opportunity to demonstrate its worth, it's pointless to make the bet in the first place.
Now, in some instances the small bet, wait-and-see strategy is not an option. If your startup requires large amounts of upfront seed money, your investors or your banker will want to see a detailed business plan, one that projects finances two or three years in the future. To get the money you need, you must commit yourself to a set of revenue and expense projections.
Even within the execution of this more detailed plan, however, you can still rely on a small bet strategy. Find out what works and improve on it. Find out what doesn't work and scrap it.
And make these small bets emotionally as well as financially. That is, don't invest your hopes and aspirations so much on any bet that you cannot readily walk away from it should it produce disappointing results. Choose your bets wisely. Choose them strategically. And win big, one small bet at a time.
This article first appeared in Encore Entrepreneur inbox magazine on April 24, 2014.