When you make dinner, you need a menu. When you start a business, you need a plan. A Business Plan.
A Business Plan is a formal document that you use to describe your business: what you intend to do, how you think you’ll make money doing it, who your customers are, how you’re going to get their money, how you’re going to convince them to buy your product, how much money you’re going to charge, how much more money you need to accomplish your goal, and how much money you’re going to return to your investors to compensate them for the enormous risk of funding your crazy business concept.
If you’re going to open a hamburger stand, it’s somewhat important to point out what your vision for the perfect hamburger will be. It is (from the potential investor’s standpoint) far more important that you convince them that their million-dollar investment will net them a multi-million-dollar profit.
You don’t necessarily need investors to start a business. But if you do need more money than you have on hand, you need investors, which means you absolutely need a Business Plan. The more money you need, the better your Plan needs to be.
It’s worth pointing out that VC, or Venture Capital, is nearly impossible to get–unless you’ve already gotten a VC investment for a prior company that ended successfully.
Given that your Business Plan is unlikely to net you a 10-million-dollar investment from a VC, it still makes sense to have one, and to update it frequently. It is a living document. It’s the blueprint for your company.
You don’t absolutely need a business plan. But it helps.
As it turns out, having more than 4 employees increases your chances of the business lasting more than a few years. That’s likely because of the increased responsibility of such a venture: it’s easy to call it quits and get a regular job if it’s just you. It’s much harder if several people are depending on you for a paycheck.
If you have no education or experience in the industry you are starting your business in, you are–surprisingly–just as likely as someone who has both education and experience to have a surviving business. It’s about 70% for inexperienced versus 77% for experienced.
However, that just means survival: the business is still running.
If you have no education or experience, you have about an 8% chance of being profitable, versus a 61% chance for someone with both education and experience.
If you don’t know what you’re doing, you probably don’t know enough to know when to quit. Strength of will can keep you going, but education and experience are essential if you want to make a living.
Dilution means that you reduce the percentage of your company you own in order to get outside investors. You might tell an investor that he can have 50% of your company–a company worth $100K–in exchange for a million dollars that you use to grow the business. Ideally, you get a smaller piece of a bigger pie: that million dollars might help you grow the company to be worth over $10 million. You get 50% of $10 million rather than 100% of $100K.
But, accepting that million dollars might have another cost: loss of some control of your company.
Do you want to be rich, or do you want to be king? You can’t have both.