The End of The Business Plan

This is the Chapter 9 of my e-book Silicon Valley for Foreigners, that can be downloaded for free on www.siliconvalleybook.com or purchased for $2.99 on the iBookStore and Kindle. A new chapter will be posted on this blog every week.

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The first time the word “business plan” appeared in books was in the late XIX century. Since then it has become the norm for large corporations to use BPs when starting a new endeavor or trying to forecast the financial and strategic goals of their businesses.

In the 1970s, business plans became super popular with entrepreneurs and a recurrent topic in universities and startups. At that time, even in Silicon Valley, you would not be taken seriously by investors if you did not have a robust BP when starting a company.

In the 1990s, the usefulness of business plans started to be affected by the exponential growth of the Internet. It became harder for startups to predict user adoption due to amplified network effects, lower barriers to entry, and increased competition.

During the apex of the dot-com bubble, investors from Silicon Valley stopped demanding startups to present detailed business plans. Their assertion was that the Internet was evolving too fast and BPs were a waste of time and energy for entrepreneurs.

Pundits blame this carelessness from investors as one of the culprits for the Internet bubble of the late 1990s. At the time, startups with no feasible business models raised millions of dollars and were valued at incredible multiples using voodoo economics. The result, as everyone remembers, was the dot-com crash of the 2000s, which left a trail of debris all over Silicon Valley. On the flip side, as exceptions to the rule, pioneer Internet startups such as eBay, Yahoo, Amazon, and Google continued to grow exponentially to the surprise of many analysts.

Then, after the storm, came Steve Paul Jobs. The launch of the iPhone in 2007 and, subsequently, the App Store, dramatically expanded the market for software startups. Google’s Android, its main competitor, focused on lower end devices, was the icing on the cake. The dream of having one computer for each person started to materialize in an unprecedented way.

In the United States, as of December 2016, the penetration of smartphones reached 81 percent of the total population or 100 percent of adults. By 2020, there will be more smartphone users in the world than people with access to electricity, running water or bank accounts.

With this enormous growth, and the duopoly of Apple and Google app stores, it is just natural there would be an avalanche of applications for the billions of people who use smartphones every day. It is estimated that, as of May 2017, there were about 2 million mobile apps available.

The app economy changed everything. Enormous companies have been created on the shoulders of smartphones such as Tencent ($250B+), Uber ($69B), WhatsApp ($22B), Supercell ($10B) and Spotify ($8B). Even the mighty Facebook now gets more than 85 percent of its revenues from smartphones and tablets. Anyone willing to stay relevant in the digital world has a mobile first strategy.

Although startups have been benefited by lower barriers to entry, mobile software became a complex and cutthroat endeavor due to a business model where the majority of apps are given for free. The freemium app model inflated customer acquisition costs and increased the average monthly churn rates to an astounding 95 percent. Users now have the option to press the home button on their smartphones and never open disliked apps again.

The business has become so dynamic and unpredictable that, in this new mobile driven world, no startup really knows what is going to happen when an app is released into the market. No one has the formula to either calculate customer acquisition costs, to make an app go viral or to retain users.

This mobile era digression serves to illustrate why business plans became obsolete, at least in Silicon Valley. Startups are simply not able to predict customer behavior anymore as digital products must change every month in order to stay competitive and follow the market dynamics. The same rationale can be applied to large companies endeavoring in online or mobile products. Forecasting the next five years became totally moot.

This logic led investors in Silicon Valley to stop caring about business plans. No sophisticated angels or venture capital firms require a BP in order to invest in early stage startups. Investors may be willing to look at business model premises to understand the entrepreneur’s logic, but they will automatically assume yearly forecasts to be bogus.

Three or five years is an eternity for startups. During this period, new distribution channels arise, disruptive technologies are developed, and consumer behavior changes due to younger demographics and emergent cultural profiles. In other words, the market may reinvent itself every year or so.

For all those reasons, I find it shocking to witness founders and investors outside Silicon Valley, in this day and age, still wasting time on super detailed forecasts before their product is even launched. In my opinion, this is a recipe for disaster and should be considered a giant red flag.

I have talked to dozens of investors in the Bay Area over the years, and none of them has ever witnessed a business plan to accurately predict early stage startups’ metrics. A business plan is only necessary in Silicon Valley when startups grow too fast, reach product/market fit or achieve business model repeatability.

Steve Jobs summarized well the new paradigm shifts in product design. He said: “You can’t just ask customers what they want and then try to give that to them. By the time you get it build, they will want something new.”

In the next chapter, you are going to learn how Silicon Valley entrepreneurs rely on a variation of the scientific method to launch and validate their startups without a business plan.