VC's don't read business plans; So, what to do?

A recent UMD study has found that VCs pay little attention ot the content of business plans.This is not much of a surprise. I’m generally bearish on business plans, but I do recognize their important role.

Having written several business plans and having successfully competed in business plan competitions, I’ve recognized that many of the highly structured elements of  business plans are simply inappropriate for biotechnology firms. Elements such as five-year financials will almost certainly change, but what is important — and which has not been ruled out by the UMD study — is that the thought processes behind the business plan are important indicators of investment.

One of the things I look for in reviewing business plans (and in reading papers for the Journal of Commercial Biotechnology) is evidence of higher-level thinking. Is the entrepreneur just filling out the sections of a business plan with crude numbers (i.e. the market size is $x and we intend to acquire y% of that market) or have they thought about the numbers and identified the factors contributing to the market size and the steps which will be necessary to acquire any portion of market share?

Despite the recent claims that VCs don’t read business plans, I suspect that they will continue to request them — if only to see if the entrepreneur can define the business proposition. Rather than seeing business plan writing (which, incidentally is not the same as business planning) as a rote exercise, one should look at it as an opportunity to demonstrate advanced understanding of the commercial opportunity and the steps required to realize it.

In a previous post I introduced a slideshow –  Beyond the Business plan — which is a companion lecture to my textbook, Building Biotechnology. The focus of this talk is on addressing the elements beyond a traditional business plan — when conditions change (and they will), what will you do?

Want biotechnology venture capital? Use a shotgun!

On returning from a meeting with a small biotechnology firm in which I serve on the advisory board, I was reminded of a novel strategy for attracting venture capital.

One of the challenges is attracting investment is finding an investor aligned with your company’s future directions. Venture capitalists may be interested only in large companies, in small companies, in diagnostic firms, in drug development, etc. One of the challenges, and opportunities, for small firms, is that their future is very uncertain. This makes it difficult to decide how to pitch the company to potential investors, but it also makes it possible to pitch more than one version of the company.

Using a shotgun approach, it is possible to craft several business plans built a common set of resources, each aimed at a different kind of investor, and simultaneously pitch these different plans to appropriate VCs. The reality is that most investors will realize that there is a great deal of flexibility in the business plan, because there are so many unknown elements in a young company, and pitching more investors increases the likelihood of attracting an investment.