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Tom Bryant and Fred Nickols both made assertions about venture capitalists that
might benefit from elaboration for other readers.

Tom said, "But think of the 80-20 rule: How many of those thousands variables
are
really critical? ... How many of them can the human mind sift through very
rapidly? Can we train ourselves (and share that with our students) to identify
the most significant
uncertainties? ... Experienced venture capitalists can reject in minutes over
90% of the
full-blown Business Plan opportunities presented to them. Humans are able to
make decisions on the bases of many different kinds and qualities of
information."

1. Venture capitalists do review strategic business plans on a daily basis.
Hall & Hofer [1993] document 75-290 business plans reviewed per partner per
year. That is an average of 1 plan every day or so. (One might question how
many get rejected in a "few seconds".)

2. Hall & Hofer is a good read: Hall, John & Hofer, Charles W. 1993. Venture
capitalists' decision criteria in new venture evaluation. Journal of Business
Venturing, 8: 25-42.

3. From a cognitive perspective, successful venture capitalists are "experts"
with more than ten years experience (often in banks and investment firms before
becoming V.C.s) and more than 50,000 "chunks" of information (Simon). As in
other expert tasks, such as chess, there are a large number of variables with a
near infinite number of alternatives. Experts cut to the quick by pattern
recognition, which does proceed on the order of seconds, not days.

4. Fred is perceptive about the process: the reader of the plan scans (filters)
for problems, individually and in association with other areas of the plan
(second order or multivariate problems). If the market and action plan pass
muster, naturally one would reject funding a plan with people perceived to be
problems. When "holes" are perceived, they may or may not be deemed fillable.
Often, entrep.s are told that funding is contingent on getting an experienced
marketing or operations person on board. What I believe that the v.c. is trying
to do is reduce uncertainty (by using the best people possible) in all areas
that can be "secured", so that the investment uncertainty is as purely as
possible a function of the product-market. To wager on several areas of
uncertainty is a losing proposition.

5. Internal venture decision-making is similar. For example, John Camillus's
excellent book Strategic Planning and Management Control (1986) documents how
managers "score" an new investment: Does it involve New markets? New products?
New Facilities? Score 1 point for each "New" and that gives a rough estimate of
the riskiness (i.e., probability of failure). Again, the "investors" don't want
to wager on several areas of uncertainty.

6. Lastly, don't forget that the point of a venture capital plan is not to be
precise in a "deterministic" sense. 1) Forcing entrep.s to articulate the plan
reveals their weaknesses. I recently saw (and advised rejecting) a plan that
had 25 pages of text on manufacturing a simple plastic item and less than one
page about how it would be marketed to national chain stores ("We will hire a
salesman"). The plan revealed the person's focus of attention and depth of
knowledge in one area, but lack of breadth. 2) Almost all v.c.'s and corp.
exec's say that they read over the "numbers" to look for the thinking BEHIND
the numbers. Experience tells them that the numbers can not be estimated with
any precision, but they had better be in the ball park. Thus, if I buy your
logic and that you know what you are doing, I can fund your project.
--
Prof. John L. Naman naman+@pitt.edu

Thanks to John Naman for useful additions. The only thing I would add to
the risk assessment scenarios he describes is that the potential reward
makes a difference in the magnitude of allowable risks. Thus, a $10
billion market would be worth more effort reviewing the plan and trying to
find a way to fix it, than would a $1 million market.

It is also clear that different people and organizations have different
abilities to manage different risks. Thus a very strong financial manager
might be more comfortable taking on an opportunity where the current
management team has some apparent weaknesses in financial management, than
should a marketing specialist with similar weaknesses in finance.

Now, where does this leave us as educators? If we start with John Naman's
assertion that experts have 50,000 chunks of information, how do we
introduce students to the first 100 chunks? If we believe that there is no
learning method other than experience, then we concede that we are unable
to analyze others' experiences and develop some form of expert systems. I
won't make that concession. It remains important that we look for ways to
introduce students to the complexity of the system in such a way that they
get a realistic, albeit brief, taste of the issues. Those who find it
intriguing can then purse additional knowledge from a sound base. There
are many kinds of knowledge that are scalable, i.e., we can start with a
small kernel, then grow it.

In this respect, the business planning exercise does seem to be a useful
and efficient device -- but it has some constraints. One constraint, as
noted by Bhide, is that the full-blown version is not a great indicator of
real outcomes. The second, as I've posted here, is that there appears to
be some minimum scope to the exercise, below which students' intolerance
for ambiguity causes more frustration than insight.

Thank you all for your comments. I've committed to spending some time over
the next couple of months thinking through the benefits and limitations of
the business Plan as an heuristic device. When that paper gets written,
I'll post notice here.

Best regards, and Top o' the Season to All!!

Tom Bryant.


+/+/+/+/+/+/+/+/+/+/+/+/+/+/+/+/+/+
Prof. Thomas A. Bryant, Ph.D., Visiting Professor and
State of New Jersey Chair in Small Business & Entrepreneurship
Faculty of Management, MEC 326
Rutgers, The State University of New Jersey
111 Washington Avenue, NEWARK, NJ 07102-3027 U.S.A.
Tel: (973) 353-1062; Fax: (973) 353-1664
e-mail: tabryant@andromeda.rutgers.edu

Tom Bryant said, " It remains important that we look for ways to
introduce students to the complexity of the system in such a way that they
get a realistic, albeit brief, taste of the issues. Those who find it
intriguing can then purse additional knowledge from a sound base. There
are many kinds of knowledge that are scalable, i.e., we can start with a
small kernel, then grow it."

I agree wholeheartedly. Here are some ideas of different ways that students
might begin to build their knowledge base.:

1. Have them review some (existing) bus. plans and compare their assessments
with what expert v.c.'s said.
2. Case studies on start-ups teachs some "scripts" (Shank).
3. Participating (not advising!) in a start-up, e.g. SBDC.
4. Apprenticing/interning at a bank or v.c. firm.

5. At Rice University, students in Ed William's Entrep. class prepare bus.
plans in teams and the course finale is a presentation and assessment by 3
veture capitalists. First prize was $1,000 and grades were a joint function of
the professor and v.c. assessments (it means giving up a little control). Many
businesses have started from these plans, but more importantly, you never saw
students work so hard to learn so much. They sought out missing "chunks" from a
variety of people. The prof's role is both coach and to help build a solid seed
for life-long learning.

6. Have teams review each others plans to find weaknesses. This can be risky
because it can get personal, but I view it important to teach them how to
critically review plans without getting personal.

Anyone else care to add to the "look for ways to introduce students ..."?

--
Prof. John L. Naman naman+@pitt.edu

The important points made by John, Tom and Fred only go to underpin my earlier
assertion that the only people who really get turned on by business plans are the
accountants and, in this latest thread, venture capitalists. The real question in
my opinion is therefore how much do they help individual business managers or
owners who are doing very well by themselves?

Phil Rutherford

Phil! Bus. Plans are a form of discipline. If a v.c. and bank won't fund your
idea because you haven't thought it through, then you have a problem, whether
you do it your self or borrow.

If have listened to a businessman talk to someone about buying and starting
businesses, and the conversation is essentially a verbal form of the written
plan. It is the logic and thinking that counts. If you haven't done it, you are
going to be in trouble pretty soon!
--
Prof. John L. Naman naman+@pitt.edu