Academic journal article Entrepreneurial Executive

The Relationship of Investor Decisions and Entrepreneurs' Dispositional and Interpersonal Factors

Academic journal article Entrepreneurial Executive

The Relationship of Investor Decisions and Entrepreneurs' Dispositional and Interpersonal Factors

Article excerpt


Use and Effectiveness of Business Plans

There has been quite a bit of research examining the decision-making processes and criteria of investors, specifically venture capitalists and angel investors. Many familiar with entrepreneurial ventures and startups would probably suggest that a formal business plan is important for obtaining capital from formal sources such as angel investors, venture capitalists, strategic partners and most banks. However, the research relating to business plan efficacy is mixed. Some researchers have confirmed a positive relationship between firm performance and their use of a formal business plan. (Bracker, Keats, & Pearson, 1998; Ford, Matthews, & Baucas, 2003; Delmar & Shane, 2003; Gartner & Liao, 2005). Some have concluded that the relationship between business survival and the presence of written business plans for start-ups is, at best weak. (Perry, 2001). Other researchers have arrived at the opposite conclusion that that there was no performance differences in new business startups with and without written business plans. (Lange, Mollov, Pearlmutter, Singh, & Bygrave, 2007; Lumpkin, Shrader, & Hills, 1998; Miller & Cardinal, 1994;). Further, Keely and Kaapp (1994) concluded that high performing companies were involved more in taking action than planning. Gumpert (2003) believes that entrepreneurs need to spend more time with implementing their plans and much less time on writing and refining it. Others have confirmed that entrepreneurs who had a formal business plan at startup were in the minority. (Bartlett, 2002; Bhide, 2002). In fact, the number of start-ups with business plans have been reported to be around 5%. (Sexton & Van Auken, 1985; Rue & Ibrahim, 1998). Lange et al (2007) conclusions reflect the current state of the evidence that business planning prior to startup improves firm performance is lacking.

Many entrepreneurship professors have emphasized the importance of having a business plan prior to starting up a business. According to Lange, Mollov, Pearlmutter, Singh, and Bygrave (2007), business plans are likely the most prevalently used teaching tool in entrepreneurship education. Despite the fact that business plan emphasis in entrepreneurship education, their use is not supported by research. In 2004, 10 of the top 12 universities in the United States conducted business plan competitions (Honig, 2004). Major universities have sponsored business plan competitions, which can include only a written business plan, or they can include an orally presented business plan or elevator pitch to a team of judges. Some recent research on investor use of business plans is discouraging. Kirsch, Goldfarb, and Gera (2009) discovered that venture capitalists rely more on instinct and expertise in identifying and assessing relevant information and spend little time on evaluating the content of business plans. According to Goldfarb, "business plans don't matter." Venture capitalist (VC), Jeff Fagnan, indicated that he had never invested in an entrepreneur who brought a business plan when they met. Paradoxically, this VC is a judge at a major university's business plan competition (Bowers, 2009). Guy Kawasaki (2006) has suggested that an entrepreneur make the pitch multiple times, use the feedback received from those times, change the pitch, and then write the plan.


Generally, there are several distinct stages in entrepreneurs' efforts to receive funding. Typically, the initial stage involves investors' reviewing a large number of business plans, at which stage, 80% of the applications are eliminated. The second stage is usually includes an oral presentation and by the entrepreneur or entrepreneurial team and then a question and answer period. (Galbraith, DeNoble, Ehrlich, & Mesmer-Magnus, 2010). However, there may be a new trend emerging. There are some investors, such as Jeff Fagan, that prefer a presentation as the first stage (Bowers, 2009). …

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