Business Plan Fallacies

I recently had coffee with a business student working on his capstone project.  He wasn’t sure about a few things, and his professor had given him my number.

He told me about his plan and showed me his spreadsheets, along with business plan drafts his classmates were sharing.  They had a lot of great ideas about product, but great product isn’t enough to launch a business.

These students had just spent four years learning about entrepreneurship, but they lacked practical experience.

A lot of what I’ll say here applies only to businesses where sales take place predominantly online.  Here are four things you should know when you’re putting together a business plan:


Your Time Has Value

Every business plan had the assumption that any tasks the student could perform on their own cost nothing.  The most extreme case was one woman who was proficient at web design and was coding up her own site.  She had written down the cost of the website as equalling the cost of hosting it.

These business plans were extremely optimistic about when they’d start showing profit because they left out their major expense.

If you had to hire someone to do these tasks, how much would that cost?  That’s the amount you have to account for your time.  Otherwise your financial projections are dishonest.

Lots of people work without pay when they’re starting their company, but you should be aware that you’re borrowing money from yourself to do it. 

You Don’t Have a Business Plan Without a Sales Plan [1]

Every one of the business plans I saw had a neat idea for a company.  They had distinctive flairs that existing companies in the space didn’t have, they took unique advantage of emerging technology, they had products that seemed like they would be purchasable for reasonable amounts of money.

None of them described how they were going to promote and sell the product.

How will people hear about your business?  How will they find it, decide that they trust it, and learn how your product makes their life better?

“We’ll have a website” isn’t a full answer to any of those questions.


Network Effects Matter

When he told me about his business plan, he emphasized that there was a huge market.  Thousands of local buyers used the existing competitors to purchase high value items every month.

If he could get just a few sellers posting to his site every month, that would bring in enough income to make the business worth running.  How hard could it be to convince 1 or 2% of sellers to list on his site as well?

My guess would be ‘very hard’.  And if you could succeed in getting sellers to move at all, you’d probably get a lot more than 2% of the local market.  Some businesses are subject to network effects – the reason you go there is because everyone else goes there too.

Network effects mean that it’s a hell of a lot harder to convince the first few people to use your service.  Remember this every time you think about launching anything where the value is in the other users.

Your local sandwich shop doesn’t have this problem.


You Can Test a Business Without Spending All The Money

When you have a vision of the product in your head, it’s tempting to spend all the time, effort, and money of building the thing before you test out the business side of things.  You know you’ve got a winner, you know people are going to buy, so build it and they will come.  But that’s a terrible idea.

You can’t be sure that someone is going to buy until you’ve actually got their money in your pocket.  It’s worth testing that you have a market before you pump tens of thousands of dollars into a bet that might not pay out.

My preferred way of testing is to build a ‘coming soon’ landing page.  You can buy a theme for a few dollars, spend an hour putting up the page, and buy a few ads to see if you’re getting anyone interested.

Take pre-orders, but make sure that the customer is aware it’s a pre-order and it’ll take a little while to fulfill.  Don’t promise anything that you’re not certain you can achieve in a reasonable timeframe.

If you run your sales process for a week or two and don’t get any bites, make some changes to your plan and try again.


[1] The corollary to this is that you don’t have a business without sales.