Monday, December 21, 2009

Are Business Plan Competitions Good For Society?

Once held by just a few M.B.A. programs, business plan competitions are now a routine offering of universities, nonprofit groups and government offices throughout North America, Europe and lately India. They award millions of dollars in prizes and generate lots of free publicity. But some entrepreneurs have a serious question about competitions: Are they good for start-ups?

That is the question being asked in the article found on the New York Times Small Business Blog "You're The Boss." There are plenty of examples of businesses that have sprouted from college business plan competitions into successful companies; a few of which have even been featured on BadskiBlog before (i.e. Mint). However, what the article bemoans is the lack of actual data to determine scientifically if these competitions are actual good for start ups as a whole. As of now there are no comprehensive, multi-competition studies to see if business competitions help start-ups, entrepreneurs or the economy.

Many in the article express the common feeling that the competitions are more focused on teaching entrepreneurs how to seek funding. They cite that giving a staged presentation to supportive academics is much different than say, pitching to investors, executives, and skeptical investors. With that being said they do acknowledge that there is value in receiving frank feedback from peers, coaches and judges that can prepare entrepreneurs for real business situations "where they must listen graciously to potential or existing investors, consultants or customers and then decide whose advice to follow, whose to politely ignore and when to address criticism."

The real worry is that business plan competitions that are fueled by large prizes and hype encourage the new blood entrepreneurs to think that writing the plan or creating an intriguing story is the best way to bring a company into operational existence.

“You write a plan to raise money, not to figure out if you have a valid business idea,” Mr. Sommer said. “In actuality, successful entrepreneurs start by talking to customers and suppliers and test-driving their idea.”

This is where I digress from the tone of the article. Although I think their questioning whether the plans actually produce long term value adding businesses is a valid one, I think that they are focusing on two different stages of entrepreneurship. I have read some great books on entrepreneurship recently and what they all have in common is a belief that entrepreneurship has distinct stages that must be approached differently as to exploit the entrepreneurial spirit effectively throughout the life cycle of the company.

In the book Ready, Fire, Aim author Michael Masterson defines the journey from start up to mature corporations as a four stage maturing that differs immensely on the main problem, challenge, and opportunity at each stage. A stage I entrepreneur is similar to the entrepreneur at these business plan competitions. At this stage you don't really know what you are doing. Your biggest challenge is making that first profitable sale. These innovators are focused on creating an value that a customer is willing to pay for. The main opportunity at this stage is achieving a minimum critical mass of customers, or in other words proving that their idea will be appreciated and desired by the masses.

Now compare those problems, challenges and opportunities with that of the stage II entrepreneur, which is what I believe the article is focusing on when asking if the business plan competition is good for start-ups, entrepreneurs or the economy. A stage II entrepreneur is focused on fast growth. They are likely only breaking even or even losing money. Their main challenge is creating many additional profitable products quickly to ensure the growth of their business. Their main opportunity is increasing cash flow and becoming profitable!

In Peter Drucker's Innovation and Entrepreneurship he describes the difference between start up entrepreneurship and established business entrepreneurship as an entirely different concept known as Entrepreneurial Management. Drucker feels that the belief that large businesses don’t innovate is a misunderstanding. It is not size that is the impediment but the existing operation itself. He says that it takes special effort for the existing business to become entrepreneurial or in this case to remain entrepreneurial. The temptation is to always feed yesterday and starve tomorrow. Entrepreneurship is not natural and not creative; it is work and therefor a company must always ask how can we make the organization receptive to innovation, want innovation, reach for it, work for it? Innovation must be part and parcel of the ordinary, the norm, if not routine. Innovation must be foundation of individual managers success and job security and the need for innovation must be defined and spelled out, and an innovation plan with specific objectives laid out. Can you begin to see how his concept of entrepreneurial management is much different than the focus of an innovator at a business plan competition?

That is why I think the article's line of reasoning a bit off. The business plan competition is focused on the stage I entrepreneur's skill set, yet the author is measuring the success of business plan competitions against the criteria of a stage II entrepreneur. The metrics and studies that they lack would likely focus more on Drucker's entrepreneurial management than that of the traceability to a business plan competition and its impact on the success of their maturing business. Regardless I would make the claim that these competitions are successful in supporting start ups, entrepreneurs, and society as a whole because they undoubtedly provide the opportunity for some of these companies to take a run that may have never had the opportunity without the organized format of the biz plan competition. What are your thoughts? Anyone who has participated in one have any feedback?

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