Sample Abstract - 2007 Babson College Entrepreneurship Research Conference The Role of Business Plans in Starting Successful Businesses Principal Topic It is a widely held business school mantra that a new venture should start with a carefully written business plan. While there is no argument in the literature on the importance of having such a plan in approaching investors, there is much more controversy concerning a business plan’s practical value, i.e., whether the business planning effort in fact improves a new venture’s chances of success. There is little empirical evidence on the effectiveness of business planning, and the evidence is often conflicting, as is noted by Van de Ven et al. (1984). In an effort to resolve this controversy we are conducting an empirical study which will explore the role that business plans have played in building new ventures and their subsequent performance. Fewer than 50% of all new enterprises start with a formally written plan, and for those that do, the plan is mainly written for the purpose of attracting funding Shuman, Shaw et al. (1985). Business plans are also the primary source for the investment screening decision (Zacharakis and Meyer, 2000). In addition, the readers of the plan use its information to support their decisions about the “provision of resources to the venture” (Hindle, 1997). In this respect a business plan can be regarded as a selling tool directed at potential investors. On the other hand, there are many examples of ventures that did not have a written plan but have been extremely successful. Robinson and Pearce (1983) and Boyd (1991) did not find any relation between business planning and improving the chances of success of new firms. This conclusion is also supported by Lumpkin et. al (1998), who did not find any correlation between using a formal written business plan and subsequent performance. The issue is far from settled, however, as illustrated by the following studies: Bracker, Keats et al., (1998), found a positive relation between a formal written business plan and company performance. Fiet, et al. (2004) developed and tested a methodology which displayed a high degree of accuracy in evaluating the wealth creation potential of business plans. In addition, an empirical study conducted by Lange, Bygrave et al. (2004) found a significant correlation between having a written a business plan in college or graduate school and subsequently starting a business. Methods/Key Propositions In order to examine the relationship between writing a formal business plan and subsequent company performance, we are conducting a survey that will be sent to a sample of 676 Babson College alumni who have started a full-time company since their graduation from the school in the period 1985-2003. Based on our experience with alumni surveys, we expect a response rate of greater than 50%. Among the propositions
that will be tested are (1) Does writing a formal business plan make a difference in the future success of a company? and (2) Does a business that “gets the business model right” at the beginning achieve greater success than one which does not? Through our survey we will develop a comprehensive set of data bearing on company performance, including company revenue, number of employees, whether a formal business plan was written, amounts and sources of funding, company valuation, number of years in business, value creation for investors, the initial purpose of writing the business plan, the original business model, and significant changes to the model. Implications We believe that the paper will make two important contributions. First, it will provide an empirical test of the practical value of having a written business plan. Second, it will resolve some of the theoretical controversy around whether having a written business plan increases the chances of success of a new venture.