ABSTRACT
Our paper examines the relative importance of a written business plan in venture capitalists’ decision-making processes. Venture capitalists invariably have advised entrepreneurs seeking investment funds to focus first and foremost on completing a written business plan. However, evidence has arisen in recent years that there may be differences between what venture capitalists say they want from entrepreneurs and the criteria they actually use in determining which companies to invest in. In particular, increasing anecdotal evidence has indicated that many early-stage companies have successfully raised investment funds without the benefit of having prepared a business plan. Our research is based on a survey of 42 American venture capital and private equity firms conducted in February, 2002. These firms surveyed are all Small Business Investment Companies (SBICs) having a minimum of $5 million private invested capital and are geographically diverse. Data was collected concerning the respondent firms’ approaches and criteria for evaluating recent candidates for investment through a structured questionnaire. Respondents indicated they are giving less credence to written business plans in investment decisions than is generally perceived. When asked if they had invested in at least one business within the last three years without benefit of having reviewed a written business plan, 43% said they had. Only 36% said a written business plan was a very important part of their investment evaluation process. Moreover, 98% said they could become intrigued with a company referred to them that hadn’t prepared a written business plan, and 88% said they would listen to a presentation from an interesting company that hadn’t completed a written business plan. None of the respondents rated investor conferences or business plan contests as very important sources for discovering serious investment candidates. The most significant concern respondents voiced about business plans they had evaluated was that the financial projections were unrealistic.
