Steve Blank writes about meeting two sets of former students, both in fairly similar places as far as age of company and marketplace. One had found itself stymied in their funding phase and feeling as if they had wasted significant time getting to the phase. The other was setting up a meeting with Blank to get his advice on which of several funding offers they should take. What was the difference between the two?
The first group, the group finding itself stuck, had spent four months writing a 60-page business plan with 12 pages of spreadsheets. They focused on collecting information to justify their assumptions about the problem, opportunity, market size, solution, competition and team, They prepared a 5-year sales forecast, a five-year Profit & Loss statement, balance sheet, cash flow and cap table. They prepared a 15 slide presentation and were ready to go pitch. However, once they got their product to actual users, they realized that at least half of their key assumptions were wrong.
The second group, the group about to be funded, decided not to spend time writing a detailed business plan. Instead, they focused on building and testing their business model. A business model is best presented through a business canvas which is usually only one page and illustrates how a company creates, delivers and captures value by presenting the interactions between the different parts of the company.
What is the difference between a business plan and a business canvas and how does that difference change the success possibilities of a company?
The obvious difference is the level of detail. A business plan can top 100 pages (though, that isn’t recommended!) and a business canvas can be done in 1! But this isn’t simply about quantity, there is a significant philosophical and practical difference between a business plan and a business canvas, the former is static, the latter, dynamic.
This static-dynamic difference has a practical difference in the time spent producing the documents as opposed to building the business; the time spent justifying assumptions versus testing and tweaking them. A great deal of time is spent justifying the assumptions of a business plan. The typical business plan plots economics through five years and even though there is a ton of guess work here, a business plan goes to great lengths to back those assumptions up. The business canvas spends a lot less time trying to back up assumptions since it realizes that they are just that, assumptions. Instead, it is focused on making broader assumptions or hypotheses and quickly testing them so that they can be confirmed or adjusted.
There is also a significant philosophical difference created by this static-dynamic difference. Due to the level of detail in a business plan, we tend to think of it as a finished product and our mindset tells us that if things don’t pan out then we just have a bad product or a bad business. The business canvas, on the other hand, is supposed to change. That aspect puts you in the mindset that we are just getting started and moving through a process. In a business canvas change is expected and welcome. A business plan is a finished document, a business canvas is the first step in perfecting the business.
The business canvas offers a business greater flexibility and creates a betterment philosophy. That doesn’t mean that business plans have been rendered useless. Certain investors will want to see a more formal business plan and it might be important for a business to get to that level of financial detail. However, to quote Steve Blank: Unless you have tested the assumptions in your business model first, outside the building, your business plan is just creative writing.