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Quite possibly the most commonly offered advice dispensed to anyone interested in starting their own business is "write a business plan." Despite the advice, research on the influence of business plans on start-up outcomes is mixed.

Jay OToole, Blogger

May 23, 2012

7 Min Read

Quite possibly the most commonly offered advice dispensed to anyone interested in starting their own business is "write a business plan." One would think that given the ubiquity of this advice, a business plan is some sort of magical bean from which successful businesses sprout.

Business schools and governments tout business plan competitions. Countless courses are offered on how to write a business plan and what seems to be an endless supply of self-help books for the would-be-entrepreneur are written and sold on writing business plans. Makes sense. Everyone knows you need to have a business plan to start a business. Right?

The question of business planning is often of great importance to individuals moonlighting and making their own games while working for another company, hobbyists, indie game developers and students who dream of selling their own game someday.

On the one hand technological and marketplace developments have made it easier for games to be released without much financial support from publishers and investors. This could dilute the need to business plan because barriers to entry have been scaled back. However, an argument can be made for business plans being even more important because as costs to entry are lowered, more people will bear the risk and accept the costs and business plans might be a tool to justify a decision to take the plunge or put the brakes on.

Why business plan?

Having started two companies myself, I can testify to some of the perceived benefits of writing a business plan. First, writing a business plan can help clarify the goals of the nascent venture. This may be especially important when there is more than one person who is helping to start the new business. Founders do not always share the same vision from day one. Having time to discuss and even argue about what are the ultimate goals of the new venture can help eliminate the need to have difficult conversations in the future. These discussions may also help establish a clear operating agreement and determine equity splits. One of the most difficult conversations to have once money starts coming in is how it should be split up, especially if everyone is not on the same page.

Business planning also provides the emerging business some legitimacy externally. Having a business plan signals a certain amount of seriousness to the new business. This can help with finding others who are needed to help, whether they are employees or ad hoc specialists. Investors may want or even require a business plan before they consider supporting the new business. Even small start-ups seeking investments from friends, family and fools may want to have a business plan. For example, when I started my first business when I was in college, having a business plan enabled me to raise money from acquaintances who otherwise might not even have listed to me. Simply having a business plan to send them got my foot in the door.

Lastly, writing a business plan can help with creating a more detailed picture of the environment in which the new business will operate. To be clear, business planning might not always paint a picture that is supportive of the new venture. It is possible that after talking with industry veterans, getting feedback from potential customers and investors, and listening to suppliers and distributors, the feedback may very well indicate the business idea does not warrant an investment of time or money. On the other hand, the feedback might be very positive. Valid positive feedback can not only nudge you toward a risk you might be hesitating to take, but also provide the detail you need to successful ramp up development of your game. Even if the positive feedback is simply offered for moral support, this positive reinforcement can increase your self-esteem and even raise your self-efficacy.

Why NOT business plan?

There are three main arguments against business plans. First, business planning interferes with actually starting a new business. Taking the time to document steps, generate projections, and create financial statements can pull you away from actually making your game. Anything that slows down game development may be detrimental. For example, if the game you are developing is trying to capitalize on a fad, anything that slows down development increases the risk the game is finished, the fad might have passed and the market for the game has diminished or even vanished.

The second argument against writing a business plan is that it may give you an illusion of control over matters for which you have no control, such as how many people will actually pay for your game once it is released. Even the best estimates are not completely accurate. The people you ask about your business or game idea may not tell you the truth. Or they may tell you that they will definitely buy your game, but when the proverbial rubber meets the road, money is tight. Projections as to distribution outlets may not be accurate. The business plan may include distribution through Steam, but that may not be guaranteed.

The last concern with business planning is it can lead to errors in decision making. When business plans are written, but then not updated, the plans can be obsolete. New information may be available that would suggest a different course of action or decision. Customers may have one need when the business plan is written, but an entirely different need a year later.

What does the research suggest?

Not surprisingly the research on business plans is mixed. Shane and Delmar (2004) asked the question do entrepreneurs who complete business plans before engaging in any promotion influence the likelihood that will continue with their start-up efforts. The authors studied 223 Swedish new ventures during 1998. The results suggest that writing a business plan before talking with customers reduced the likelihood that the new venture is terminated by 46%. Writing a business plan before initiating marketing or promotion reduced the likelihood by 41%. Their research suggests that simply writing a business plan may increase the likelihood that your new business will stick around longer.

More recent research by Julian Lange and colleagues (2007) tells a slightly different story. In their work they examine 116 new ventures started by Babson College alums. A key difference in this work and the work of Shane and Delmar is the outcome being examined. Shane and Delmar examined termination events while this study focuses on company performance in terms of revenue, net income, and number of employees. Results of the regressions on revenue, net income, and employees all fail to provide statistically significant coefficients offering little confidence that new ventures launched with formal written business plans outperform ones launched without them.

Preliminary conclusions - what should an indie game developer do?

There are many other studies that discuss the influence of business plans on new venture persistence and performance. They are meant to be illustrative, but not exhaustive. Despite the mixed evidence offered by the literature on business planning, few if any scholars have found evidence suggesting business planning actually can be detrimental to individuals engaged in starting a company.

From my personal experience talking with investors and founders of game companies, starting with a skeleton of a business plan makes a lot of sense as long as it does not prohibit actually making your game. Having a working prototype or first playable seems to be far more important early on than a polished business plan. If business plans make you feel uncomfortable, consider getting some help through your social network. You don't have to go it alone and you may have colleagues and friends willing to help you put a business plan framework together without expectation of reciprocity.

However, to be clear, if you intend to raise substantial start-up capital from institutional investors or business angels, a business plan is highly suggested.

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Lange, J.E., Mollov, A., Pearlmutter, M., Singh, S., Bygrave, W.D., 2007. Pre-startup formal business plans and post-startup performance: a study of 116 new
ventures. Venture Capital 9, 237–256.

Shane, S., Delmar, F., 2004. Planning for the market: business planning before marketing and the continuation of organizing effort. Journal of Business Venturing 19, 767–785.

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