Einblick in die Businessplan-Forschung 3
STRATEGY, LEADERSHIP & LEAN MANAGEMENT FOR ALL SECTORS
Problems during the preparation of a business plan
The innovation paradox makes this work plausible by verifying that the business plan as a capital acquisition instrument does not meet the market requirements of Swiss venture capital investors (VC companies).
The text form limits the system representation of the company in which the aspects are networked with each other. Since the company aspects structured in business economic sub-areas as isolated object views do not correspond to the complex, realistic relations within and outside the company, the central requirements for the comprehensibility of mutual dependencies and the plausibility of content statements are not fulfilled.
The clear contradictions of previous studies call into question the form and structure of the business plan: As financial intermediaries, VC companies need a complete and detailed business plan to fulfil their duty of care towards the investors, which clarifies all open questions. On the other hand, too extensive plans are criticized. Due to their heterogeneity and differences in quality, the large number of incoming business plans makes a manual and objectively difficult to assess review procedure necessary.
The resulting reaction times can lead to liquidity bottlenecks or to the loss of the innovative edge of the capital seekers and thus endanger their continued existence. As limited resources mean that only a few minutes are devoted to the business plan in the initial selection phase, there is a danger that the highly formalised process will not allow potential to be recognised in its complexity. While non-routine investors may sort out business plans because of the difficulty of understanding them, experienced investors run the risk of being in the comfort zone and draw hasty conclusions about maximizing efficiency.
On the part of the entrepreneurs, the high level of detail makes it difficult to ensure consistent continuous updating and appropriate use in the practical environment. The resulting discrepancy between the business plan and reality, as well as the rhetorical gloss of the presentation, burden the credibility of the document, which is nevertheless propagated in the literature, by schools and universities, by the industrial environment and by the VC companies themselves as an essential basis for capital acquisition. The business plan is therefore increasingly perceived as a formal act, the benefit of which is limited to the structuring of the business idea into a commercially viable market project. For VC investors, the business plan gives a first impression whose quality allows conclusions to be drawn about the management, but does not plausibilise the sustainable economic viability.
From prose business plan to object-oriented presentation
We have examined the relations between the business plan elements and investigated theoretically and empirically the formal qualitative requirements of Swiss VC companies for the document in the practical environment. Based on these findings, we have constructed a system-theoretical framework that meets the requirements examined and guarantees the consistency of the content. The circular-causal solution model enables the consistent representation of mutual dependencies of the business plan contents, a creation corresponding to the sequential causality as well as the practice-oriented continuous updating. When checking investment objects, the addressee is not bound to the specified sequence at the highest level of detail, because the model can be read in depth: Higher-level statements are checked for plausibility through the interaction of subordinate elements. This allows the necessary information content to be presented consistently and without loss of transparency. The input and output relationships of the elements on the different levels enable the traceability of statements and mutual dependencies of the company aspects. Standardization by means of the framework limits the business plan as an indicator of conceptual and careful management qualities.
Business Plan upheaval
Will the business plan in its present form soon be obsolete? It describes a system as a written text: the company. However, it is not advisable to describe a system verbally, as this forces the author to define a sequence that does not do justice to the actual causality or the internal logic of the theoretical architecture. Since everything in a system is interconnected and mutually influences each other, text loops must be built into the straightforward performance, such as the business plan, and topics that have already been dealt with must be taken up again and again in order to relate them to each other according to the inner logic. As a result, the described concept loses transparency, is time-consuming to create and burdens the comprehensibility of the contents for the assessor. In addition, the complexity of the text representation in the necessary continuous updating takes a lot of time and increases the susceptibility to errors in consistency: every change must also be taken into account in the repetitions as well as in the inner logic of the loops. The business plan as a qualitative and quantitative planning instrument is subject to its natural limits, which not only misuse it, but also burden its quality. In the context of our business plan research, we have verified that the form and structure of the business plan as an acquisition instrument is jointly responsible for the lack of financing for young growth companies in Switzerland despite sufficient available capital and high innovation potential.
As specialists for the financing of start-up companies, VC companies have the task of making innovations marketable and, as incubators, contribute significantly to the creation of jobs and the international competitiveness of the country. The fact that they do not categorically examine applications for financing without a submitted business plan and use it as a basis for decision-making makes the financial intermediaries a representative stakeholder group for the investigation of business plan problems.
It is a research gap to examine the business plan as a market-driven acquisition instrument geared to the requirements of VC companies, in order to develop a more appropriate instrument on this basis. The relevance for practitioners and researchers is underlined by the fact that the results of an in-depth analysis increase the potential of financing and thus contribute significantly to the positive development of the economy.
Innovation Paradox and Business Plan
There is sufficient VC capital in Switzerland, but the young companies lack active investors and financing. Switzerland is a leader in innovation and yet there are too few attractive projects from an investor perspective. On the one hand, this means that innovations have to be translated into business plans much more frequently; on the other hand, the large number of effectively submitted business plans can hardly be handled on time, which plausibilizes the desire for faster selection. The waiting times resulting from selection efficiency can lead to the loss of the innovation lead and burden the criticised attractiveness of originally promising projects. Nevertheless, the lack of projects is justified by the lack of professional and investor-friendly preparation of business models in the form of business plans. This calls into question the conceptual qualifications of young entrepreneurs, even though in Switzerland they have a highly qualified university or higher education level and thus the skills required for professional preparation. In addition, they are supported in this respect by funding and research institutions. The reason for the innovation paradox is therefore not the lack of capital, attractive projects or their concretisation in business plans and not the lack of professionalism in preparing a business plan. The lack of an investor-friendly presentation and the correspondingly inefficient selection process is neither due to the creator nor the addressee, but to the form and structure of the business plan itself: He or she cannot meet the qualitative requirements because he or she cannot transport the innovation potential in an investor-friendly manner and in line with market demands.
Problem of the Classic Business Plan
The practice of the business plan, which became popular with the American VC scene in the 1970s, has meanwhile established itself worldwide as a central planning and design instrument. The definition of the business plan is often lacking in the practice-oriented literature sources, which can be attributed to the extensive standardization of the term. As a communication instrument, it has the central task of convincing potential financial or strategic supporters of the business project of the quality and seriousness. A well-structured business plan is propagated as the best way to achieve financing commitments, and VC companies in particular attach enormous importance to it as an assessment tool. It represents the decision-making basis and prerequisite for assessing the economic viability of the business concept, on the basis of which the sustainability of market positioning and value enhancement opportunities can be reconstructed.
Depending on the stage of development, intended use and complexity of the company, its size varies between twenty and forty pages, consisting of about two thirds of text and one third of numbers. In some cases, more than 100 pages are written as operational guidelines. The higher the capital required, the more comprehensive the business plan is, which is why a more detailed version is suitable for a VC company. Although the importance of the plan is confirmed in various literatures, there are contradictory research results that consider the business plan not essential for capital acquisition. Even the statements of established investors that a comprehensive business plan can neither be read nor implemented by the entrepreneur are increasing. Statements such as "Nothing slows down a VC as much as a comprehensive business plan" (Nivi & Naval, 2014, quoted from Cowan, Bessemer Venture Partners) and "Thirty pages of text and a detailed financial plan over three to five years only fulfil their intended purpose to a limited extent" clarify this criticism. A further problem of the textual burden of a business plan is that the inexperience of a VC investor, but also the routine, can lead to a factually attractive investment object being selected and not pursued further. VC companies search for suitable investment objects mainly reactively on the basis of the large number of business plans received in a highly formalized selection process, which, apart from the terminology, is similar for most financial intermediaries.
In short screening, almost half of the business plans received are sorted out using a structured approach in a very quick pre-evaluation. While before the emergence of technology-oriented branches of industry, investors took ten minutes for the first brief review, more recent research results show that a judgement is made on the basis of the first pages of the business plan. This corresponds to the maximum two-page executive summary at the beginning of the business plan, which must be read and understood in five minutes.
With short, concise and convincing core statements on the respective sub-areas of the business plan, it must provide a quick overview. If this does not arouse the interest of the investors, they reject the financing application at this point. For this reason, it can be assumed that the Executive Summary is the most important section in the initial assessment. In the initial assessment, the framework conditions should be clear with regard to the amount of funds required, technology and industry, geographical proximity and the financing phase.
In the deeper analysis of the remaining concepts for quality assurance of the investment, a further third of the total business plans received are sorted out. As a result, eighty percent of the financing enquiries received are rejected without the preparer being able to comment on the project. The pressure on the decision-making structure of an efficient selection can lead to inexperienced investors overlooking some of the potential in the flood of information, while experienced investors run into the comfort zone, where the decision-making processes have been automated to such an extent that not all available information is analysed in depth any more and projects with premature judgement are sorted out.
This phenomenon can explain the impression of a lack of promising projects as well as the lack of professionalism of heterogeneous business plans. For the necessary risk and potential assessment, VC companies therefore prefer complete and standardised planning documents to non-standardised ones. The document must not only provide the relevant information of the business economic sub-areas, but should also plausibilise the feasibility of achieving the goals as an overall package.
Business models are becoming increasingly important because they can present the entire package transparently. However, a business model is rarely found in the early phases of a company's development because it is established in the market through practical application and experience. Even though it is highly regarded by venture capital investors in terms of communication, the business plan is not a good one: in addition to strategic planning, it also shows the way to operational implementation with a realistic assessment of the framework conditions.
Consequently, the planning document for contacting VC investors is central in the capital-intensive start-up phase, but loses importance later in the investment decision. This would explain why the business plan is hardly updated or not updated at all after the start-up phase, leading to a growing discrepancy between the original planning and reality in a rapidly changing environment. The young entrepreneur lacks time resources and incentives to actively use the document and to adapt it on an ongoing basis. It is an instrument propagated primarily by external institutions and not by the founders, because specialist literature, universities and other opinion leaders in the industrial environment, as well as increasing incentives from state programmes, make the document the first and most important project for the successful establishment of a company: The document is mandatory for access to state programmes, the customary practice of industry has an imitative influence and it is standard for educational institutions. By instructing students, educational institutions support academic science, their government mission, journals and dissertation programs.
As a key instrument it is given a crucial role for any further support and the entrepreneurs write extensive texts with long-term planning as they have learned it. The pressure of current practice leads to it being seen as a symbolic act of the desired legitimacy vis-à-vis stakeholders, regardless of whether it is effectively implemented in the business activity. This makes it all the more plausible that the practical benefits of the business plan, which have been analysed in numerous studies, are controversial with regard to its successful implementation in the market. Examples such as Bill Gates, Steve Jobs and Michael Dell prove that a start-up company can also be successful without it. Even if the preparation of a detailed business plan is controversially discussed by experts as well as entrepreneurs, it makes sense for the conviction of investors. So far, there is no incentive to develop a more useful instrument, because it increases the legitimacy of the company, regardless of whether it succeeds in the market at a later date. The apparent success of the business plan paradigm is regarded as proof that considerable added value is derived from it. In addition to the formal quality, the economic seriousness of the business plan is also controversial among the external experts, since it wants to present the business as brilliantly as possible for the acquisition of venture capital.
FAZIT: The business plan is subject to clear contradictions: Its information content and its connections are the prerequisite for a VC company to evaluate an investment object. Due to the high amount of financing and the duty of care towards the investors, a complete business plan with detailed background information is necessary. On the other hand, the high level of detail is criticized, as it is removed from the practice and therefore regarded as a mere formality with little credibility, which is hardly read and assessed without deeper examination. The more detailed the business plan deals with the content aspects to meet the requirements for completeness, the less transparent it becomes as an overall package. The fact that it propagates due to its undisputed necessity for young enterprises, but serves in practice only for the establishment of contact for investors, makes it also for the young enterprises themselves ever more the pure formality. The young entrepreneur's lack of incentive to continuously update the business plan and integrate it into business practice due to its non-practical usability strengthens the investors' attitude to regard it as a mere formality. Thus the business plan is in a vicious circle without alternative. On the one hand, the information contained in the business plan is essential for the examination of an investment object and on the other hand, due to the text-heavy presentation, it can only be used to a limited extent in practice.
In this way, they distance themselves from reality, which relativizes the necessary significance of the test. This paradigm leads to the conclusion that a new, more useful vessel should be developed.
Conclusion of the Consistency of the Business Plan
Our detailed analysis of content-specific relationships in the business plan shows that it is not possible to logically arrange the sub-areas according to the causal creation process. Each area has a high complexity of input and output relationships to other areas. Irrespective of the order of the sub-areas, the author must therefore jump back and forth. A consistent presentation and updating is hardly manageable with increasing complexity even for managers who are experienced in business economics in the thematic presentation structure of the business plan. On the other hand, the origin of the contents cannot be traced back logically and causally in the business plan, which is why the requirements for objectively measurable plausibility are not fulfilled.
Theoretical requirements for the "Systemic Business Plan" solution model
Plausibility of the Business Plan
The previous theoretical investigation shows that each economic subdivision has different input and output relationships to elements of other subdivisions. In order to ensure objective traceability, the solution model must enable sequential and causal creation. This means that the contents to be described must be structured in such a way that input relations lead only from already seized information and consequently output relations into not yet seized elements. So that the continuous actualization is ensured, the sequential capture process must take place circularly. Such circular-causal or systemic thinking means thinking in terms of effects. Circular processes can be represented abstractly as follows: Impact A is cause B, and impact B is cause A. The circular process of cause and effect in business plan creation is similar to the strategy development process between position, choice and action. Consequently, according to system theory, the circular-causal representation corresponds to the causality of the creation process of a business plan and forms the basis for plausibility as a requirement of the addressee.
Consistency of the Business Plan
The linear-causal representation structured into sub-areas described in isolation is unsuitable for meeting the consistency requirements. The solution model is based on the systemic approach, which does not isolate the elements but considers them holistically. The objects are retained in their real contexts and placed in relation to each other. In contrast to the straight-line causal explanation of the sub-areas described in a sequence, as is the case in the business plan categories, the relations between them are consequently considered in the systemic representation. The enterprise is a system because it consists of an organized set of interrelated elements that serve a common purpose. The theoretical study of the content-specific relationships reflects the basis of system theory, in which each element determines the conditions of all others and therefore the wholeness should be considered. Due to the abstraction of a systemic concept, which is not bound to certain material contents, it can be used as a basis for the framework. An open and dynamic system contains at least one element whose input does not come from an element within the system. Consequently, the enterprise is an open system: it has a multitude of external relations such as the market, competition or exogenous factors which influence the activities and elements of the enterprise and vice versa. For this reason, system reactions can only be predicted to a limited extent. The regulatory framework should make it possible to use scenarios and simulated calculation models to predict the system reactions of the company, which turns it into a dynamic model. The systemic approach as the basis of the regulatory framework thus deals with the relationship, structure and effects between the elements within the business plan.
Completeness of the business plan