Why Business Plans Suck and Accountants Make Bad VC's
This is a guest post by David Kirk (@dhkirk). David is an active seed investor, working with technology and web startups. He is the former VP of Corporate Information and Business Systems at AOL and later Senior Vice President (SVP) at Cisco Systems. He has invested in a number of startups including AirPOS (@AirPos) and Planzai (@Planzai). He lives in San Francisco but is originally from Belfast, Northern Ireland. If you are a blogger or member of the media, feel free to republish this content: all we ask is that you accredit David Kirk as the original author and link back to www.techfluffco.posterous.com.
I really like accountants. Accountants have saved me more money on taxes than you can possibly imagine and my current CPA is a cool dude.
But accountants are accountants for a reason. They like working with numbers because they're logical and predictable. They decided to become accountants because it was a safe, stable profession with good prospects. The business world will always need accountants.
Does this sound like your average early stage Venture Capitalist? No. And this is why accountants should NEVER become VC's.
I'm seeing a worrying trend in startup land. Funds, especially institutional funds, in Northern Ireland are hiring accountants as VC's. They're plucking them straight from PwC and Deloitte and asking them to make bets on the next Facebook. After 4 years of auditing books, they're suddenly qualified to decide the fate of early stage companies. They make their decisions based on the rules of accountancy: numbers are logical and everything adds up in neat rows. There are no assumptions, only facts. And outcomes can be predicted through rigorous analysis and spreadsheets.
Except, real startups don't work like that. First-time entrepreneurs have an idea and no idea what to do with it. All they have is a vision. And this is where they meet their first obstacle. A banker will ask for six months of cash flow. An accountant will ask for a twelve month income statement and balance sheet. An accountant-cum-VC will ask for a three year income statement, balance sheet and cash flow predictions and will call it a Business Plan.
Bankers and accountants are happy wallowing in numbers and spreadsheets - that's exactly why I'm happy with mine. But early stage technology investing is about listening to an entrepreneur's idea and seeing its potential. Accountants don't know how to calculate visions so they ask for business plans instead.
I've seen some amazing teams in my investment portfolio struggle to raise finance from VC firms lately. Why? The founder is usually a visionary entrepreneur who hates paperwork. They're creative. They don't know how to assemble risk analysis assessments and GTM plans (this is where investors and VC's can help because they've done it before). The average early-stage VC understands this and works with them to build one. The accountant VC closes his cheque book and promises to call next week. In Northern Ireland, nearly every VC is an accountant. So we now have a crisis: local startups can't access the funds investing in them.
I saw this recently with a young team. They had a great product and incredible traction, with industry giants signing up for it while it was still in beta. The team were only in their twenties. They’d never assembled 25 page business plans and financial models before. They were beyond angel investors (angel investors in NI tend to invest only £10-£20K a round). A normal VC would have looked past this and seen the traction as proof they should invest. The accountant VC told them it would be another 9 months before they could invest in a seed round because they didn’t have a business plan. Apparently, having a business plan would make them “operationally ready”. The other VC firms they pitched to said the same. Their only option was to leave NI for London or Silicon Valley.
Google's first $100,000 investment came before they even incorporated the company. Intel was initially funded "with a one-page business plan simply stating their intention of developing large-scale integrated circuits".
Think those are serious leaps of faith? Perhaps not such a leap when you consider that Andy Bechtolsheim who co-funded Google had been a founder of Sun Systems and Arthur Rock, who had helped start Fairchild Semiconductor as well as Teledyne and Scientific Data Systems, provided $3 million in capital to fund Intel in 1968!
These individuals had started successful companies of their own. They had grown businesses from birth to maturity. But more importantly, they had technology awareness and vision, essential to understand the potential of these ideas. They didn't need to read a business plan. And they probably would have rolled their eyes had they been given one.
Value proposition, available market, go-to-market plan, competitive positioning, yada yada yada, are all really important elements of a successful business. But early stage companies are not businesses yet-they're ideas. Ideas that need nurtured, not forced to conform to the structure of a business plan. I wonder if Larry and Sergey missed class when that lesson was being taught. Or if Andy Grove and Gordon Moore knew it but just couldn't be bothered writing one.
With most startups, the business they become is not what they “planned” when they conceived their idea.
Sweating the details of how to build a commission plan or acquisition costs and acceptance ratios in an early stage company is like booking maternity leave before you've tried to get pregnant. As is sticking tenaciously to a plan because it's the plan-a mistake I see accountant VC's pressure portfolio companies to do regularly.
Entrepreneurs. Just build your product and tell your story. If you want to write a business plan, keep it in under twelve pages and call it short form.
Accountants, stay away from early stage companies. You're killing them.