Posted on techvibes.com
View the original article here
Posted by Robert Simon

Why All Startups Need an Operating Plan

You have raised your first round or seed round of financing and you’re off the races. You are deep into hiring and product development. One of your investors may ask about an Operating Plan. You shrug your shoulders and say, this is a startup, an Operating Plan is not worth the paper it is written on. But you would be wrong in that conclusion.

You replay “It’s a startup, we don’t know what our revenues are going to me and when. It’s not worth the time to put together a plan.” Well, that’s a cop-out and a load of baloney.

Your primary job as CEO is to not run out of money. And to help you achieve that job, and maintain your own job as CEO, the operating plan tells you when you run out of money so you know the timing of your next fund raise.

It is true you don’t have a history of customer sales to help predict timing and size of revenue. No problem. And it is true you don’t know how long product development will take. Again, no problem. But you would be surprised at how much you do know or can estimate within a range that is highly valuable.

Again, the goal of an Operating Plan is to tell you when you run out of money, because we DO NOT want to run out of money. I like initially an 18-month plan because that is the usual period between early stage financings.

First let’s start on the revenue side. You know that revenue in your first year is likely to be modest. Your investors know you are running a startup and revenue will be scarce in the initial years. Take advantage of that leeway. You don’t get extra credit for a higher number, but you do get penalized for coming in below your forecast. Only count revenue you know you have in the bag. And if nothing is imminent, assume revenue is zero for the period. If you do get some revenue, you look like a hero.

On the expense side, you should know quite a bit. Your largest expense will likely be headcount. You have a rough hiring plan and that will drive your expense section. You may not be able to precisely predict the timing of certain hires, but you will likely know the headcount to within 20%. When forecasting expenses, again error on the conservative side and bring expenses in earlier. If hiring takes longer and you end up spending less, again you are a hero.

Resist the temptation to over-promise. Your secondary goal as CEO is to develop confidence and credibility with your board and investors. You do this by creating a plan and achieving that plan. “Make a plan, meet the plan.” It matters less what are the metrics of the plan, it matters more that you meet the plan.

You win if you are able to stretch your funds to the point of the plan.

You lose big for many reasons if you underestimate when you run out of money.

So, it should be worth the time to develop your plan. Good luck.