What Financial Backers Expect from Business Plans: Effectual Versus Causal Logic
AbstractAim of the Paper For years, business planning (BP) has played a central role in the teaching and practice of new venture creation. However, existing research has provided us with mixed results about its usefulness. Part of the argument against BP is that it relies on top-down logic while emerging bottom-up logic may be more relevant. Sarasvathy (2001) proposed that successful entrepreneurs tend to be effectual rather than causal. Sarasvathy & Wiltbank (2002) also suggested that business angels (BA) and venture capitalists (VC) tend to be more effectual than causal and should then pay less attention to BP. This paper has two objectives. It first checks to what extent different kinds of financial backers (i.e. BA, VC, and bankers) are generally causal or effectual in their thinking when they analyze new ventures. It then clarifies how greatly the content of the business plan prepared by an entrepreneur differs from one type of financial backer. Contribution to the literature This paper advances the literature on the use of BP, especially when entrepreneurs are searching for financial backing. It contributes to a better understanding of the expectations of different financial backers. This paper also clarifies under which conditions a traditional business plan is relevant to achieve financing and defines the type of critical information that must be included in the plan. Methodology The research in this paper is qualitative. We relied on in-depth structured interviews of eight Belgian financial backers: three commercial bankers, three VC, and two BA. The interviews followed a systematic and replicable model, which included the “venturing experience” developed by Sarasvathy & al. (2001). Results and Implications The three different types of financial backers, commercial bankers, venture capitalists (VC), and business angels (BA), all have clear distinctions that separate them from each other. Bas are more effectual than VCs, whereas commercial bankers are more causal. In addition, the content of the expected business plan usually differs between financial backers. BA and VC pay more attention to the entrepreneur, while commercial bankers pay more attention to financials and the plan itself. From a theoretical point of view, the research confirms the importance of adopting a contingent approach when analyzing the expectations and behavior of financial backers and what they mean by BP. For practitioners, the research contributes to the discussion about the usefulness of BP and confirms that it is not the time to ‘burn business plans’ since all financial backers are still willing to receive one. However, the results indicate that the time has come for the content of business plans to evolve in order to remain relevant.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 11-029.
Length: 16 p.
Date of creation: Jul 2011
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- JS Armstrong, 2005. "The Value of Formal Planning for Strategic Decisions: A Reply," General Economics and Teaching 0502065, EconWPA.
- Ardichvili, Alexander & Cardozo, Richard & Ray, Sourav, 2003. "A theory of entrepreneurial opportunity identification and development," Journal of Business Venturing, Elsevier, vol. 18(1), pages 105-123, January.
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