Mature organizations typically have strategic planning in some shape or form integrated into their corporate calendar, but it is often the young start-ups that struggle with the concept and the process of planning. This is especially true of organizations moving from idea validation and seed stage to the growth stage. Such organizations have perfected their product-market fit and gained some basic market traction - they have onboarded first few members of the management team and usually have one or more investors on board as well. Here the stakeholders – the management team, the organization beyond, and more importantly, the investors – start looking at founders to set the tone for the coming quarter and the year – essentially move from a day-to-day tactics play to a more structured strategic planning based approach. This expectation becomes even more pertinent when there is an investor on board as the strategic plan then becomes a statement on how the scale on which investor has made a bet will be achieved – usually manifesting as ‘multi-X’ growth guidance. However, Founders who are usually great techies, would rather spend their time on what they feel is more value accretive product or tech-related questions than stare at an excel sheet and build a plan. The most common complaint one hears from the Founders is that unlike established businesses, the uncertainty is too high for them to be able to provide any meaningful estimates. The end result of this ‘planning tug-of-war’ is a hastily baked up plan with targets and initiatives not in touch with ground realities often with the sole objective of placating the investor. As the year progresses and the plan vs actual variance balloons – it leads to some uncomfortable board reviews often leading to an eventual abandonment of the plan and forces the founders to go through a mid-year learning cycle on planning discipline – at a time when they should be actually focusing their energies on execution.
So, do growth stage start-ups really need business planning? The short answer is Yes! The long answer is that a few days spent setting goal post brings a lot of focus in the organizational effort. This is much needed especially in the case of start-ups with limited resources but facing multiple opportunities and threats and therefore, have a strong need to prioritize. It also brings alignment with the board and helps avoid fickle ‘why not look at this opportunity?’ or ‘let’s abandon A and pursue B!’ discussions as business conditions evolve and new opportunities and threats emerge which can potentially derail a smooth running execution machine. But does planning affect one’s ability to adapt or react quickly to new opportunities or threats thereby restricting Start-ups’ nimbleness? Contrary to this popular though flawed notion, a well-worked out plan actually helps set the right resource threshold on when an opportunity should be abandoned, say in face of an unmitigable threat, thereby avoiding the pitfalls of under or over investment. Alternatively, if the threat can be countered through the investment of additional resources, then it also helps to have a well laid out plan enabling resource redistribution (and sizing its impact) or a new resource allocation decision. Similarly, good planning discipline means that any new opportunity thrown Founders’ way would be put through a basic feasibility test to compare with the momentum plan before making any course altering decision. Last but not the least, demonstration of good planning acumen helps boost board’s confidence in Founders’ management abilities and should help stem any brewing thoughts on a possible move to bring in professional CEO to steer the ship – this becomes pertinent in case of organizations which have seen at least a few ‘out of control’ planning cycles.
So how should one go about planning? Does it have to follow the elaborate strategic planning framework used by large corporates or are there any hacks that can simplify the process without compromising the quality? And what does one do about high uncertainty faced by the start-ups which makes any kind of sound estimation so difficult? Finally, when everything else is going agile, how can we make business planning follow suit?
The good old strategic planning framework which works well for mature organizations is an annual cycle that starts with a strategic review and refreshing of the 3-year rolling strategic plan. This plan provides inputs for the annual operating plan (AOP) through the setting of high-level targets and dictating the initiatives which are then detailed out in this bottom-up zero-based annual plan. The AOP then guides the execution for the next year for the organization - interspersed with periodic reviews and culminating in the next planning cycle. This journey from a strategic review to an annual plan roll-out for a mature organization usually takes 2-3 months – a luxury which start-ups can ill afford. Clearly, though planning helps, the conventional strategic planning process needs modifications to work in case of start-ups. However, it is imperative that, just like conventional strategic planning, at end of this modified business planning exercise there is an alignment within the start-up organization on the strategic direction, business targets, and initiatives.
Here are some hacks which can help Start-ups embrace planning discipline without compromising on the much coveted nimbleness or sacrificing too much bandwidth:
Plan for a Quarter
Perhaps this is a no-brainer. For an organization that is on the early stages of growth and on a rapid growth path - the annual plan will not work as things would be evolving far too rapidly. Annual plans in such organizations are prone to getting abandoned which then gives planning a bad name. The right planning horizon in such organizations is a quarter as anything shorter than that will not give teams enough time to execute. Of course, as growth stabilizes and business becomes more predictable, the horizon can be expanded to half-yearly and finally annual. However, even when an organization moves to an annual regime, they must have a provision to revisit the plan every Quarter with an option to revise if necessary.
Review, Align, and then Plan
If we are planning on a quarterly basis then it is important that the time spent on planning is minimized. Therefore, each planning cycle kick-off should include not only a review of the last quarter but also alignment with the board on the objectives for the next quarter. This upfront alignment sets the boundary conditions for the plan development and is useful in avoiding any later changes in the objectives which can lead to rework and delays in plan roll-out. Such discussions must include key management personnel in addition to the founders and the board.
Reviews are typically a statement on plan vs actual performance as well as an update on on-going initiatives. However, a good review discussion must provide insights on what initiatives and interventions/tactics worked or did not work in the ending quarter and therefore, required changes or course correction needed within the context of the current set-up viz. the product-market-customer segment mix (the momentum plan). For instance, basis the review it may be decided to move the contact center team completely in-house basis performance difference between the internal team and the third-party call center. For those start-ups which are looking to pivot, this discussion is useful in developing a shared understanding on why a pivot is unavoidable.
The momentum plan review then sets the ball rolling on alignment discussion where in addition to aligning on the momentum plan (what we should continue doing and what we should drop?), there needs to be an agreement on the core metric that should be the focus of the plan for the next period – it can be same as the last quarter or a new metric depending on the growth evolution – e.g. a progression from number of active users, GMV, Revenue, to (of course!) Margins or Net Income. The board may also want to specify a level for this metric based on the rhythm of the business seen so far and this must be discussed and negotiated between the board and the founders. Finally, this discussion is an ideal platform for exploring strategic moves where both the board and the team may share ideas on new markets, products/features, and customer segments. It is a good idea to structure these as possible strategic alternatives to be explored. This can be achieved by fixing your strategic levers and then fitting these ideas in that framework. For instance, the levers could be Product, Markets, and Customer Segments and an idea to enter say a new city can be translated into ‘same product-new city-same customer segment’ alternative while an idea to launch a new feature for a new customer segment would translate into ‘modified product-same markets-new customer segment’ alternative. Ideally, such alternatives should be kept to 1 or 2 to ensure justice can be done to them when it comes to evaluation.
Focus on initiatives (and their investment productivity)
When it comes to planning, the commonest pitfall is to take the previous period’s target metric growth and apply it indiscriminately to arrive at next period’s figures – a sure shot recipe for a planning debacle. Planning Practitioners will tell you that a good plan is based on a zero-based bottom-up approach which means you start from independent variables and then work your way towards a topline number – clearly an elaborate exercise.
A good way to expedite this is to first quickly establish a baseline based on the organic rhythm of the business (if you keep doing whatever you are doing then where will you be at the end of this plan period?) and then focus on initiatives (and their productivity) which can help drive the metric growth. So, for instance, if you are an e-commerce company with GMV as the target metric, then you may start with your active user base and average purchase ticket size based on the current organic pace of the business to establish a baseline (after adjusting for any activity/initiative which provided a temporary bump in numbers) and then figure out how both can be enhanced. This exercise should lead to the initiatives needed such as introducing new categories, increasing SKUs depth for the current categories, and activities needed to activate dormant users as well as new user acquisition. The investment needed for each of these initiatives should be estimated and then productivity (outcome per dollar of investment) would have to be determined to arrive at the overall impact. Aggregating across these initiatives will provide the finalized target metric estimate. The operational costs, such as say the logistics or customer services costs (and therefore hiring numbers), can then be estimated based on scaling up needed to support the new topline giving you the momentum plan for the next period.
Of course, the question remains what if the baseline, the investment, or the productivity cannot be clearly estimated? If the business has not seen too many cycles then it may not be possible to separate the impact of short-term initiatives and therefore, a baseline cannot be established. Similarly, while investment for initiatives may still be easy to estimate but the productivity may be far more difficult to establish – thereby making this a time-consuming exercise. This is where founders need to embrace uncertainty.
Anyone who has ever done any kind of serious business forecasting would know that it is impossible to get precise estimates of independent factors (growth, costs, etc.) with a good level of confidence. This problem becomes even more pronounced for a start-up given the dearth of available market information and a lack of operating history. This makes any plan or forecast which uses a point-based estimate (a single number for an input variable eg. Growth expected next year is 5%) more prone to be discarded or deemed flawed at the first sign of deviation from the expected path. This is the single biggest reason why young companies avoid investing time in planning – the level of confidence with which one can estimate inputs is usually so low that a point estimate based exercise just does not make sense. Decision Analysis (DA) provides a robust solution for this problem – by using range instead of point estimates (for instance estimating that the expected growth next year would be in the range of 4.5% to 6% - a more realistic estimate than a flat 5% assumption) – which then allows the lack of confidence due to uncertainty (or internal lack of expertise on that input) to be accommodated in the estimations. Higher the degree of confidence about an input, the smaller should be the range and vice-versa. This use of range estimate allows one to embrace the uncertainty in the business environment and get a far more accurate picture of the impact on the target plan metric.
However, the use of range estimate brings its own planning complications. DA practitioners typically define a range estimate by using 3 points estimates – the low case, the base case, and the high case (for instance, using the growth example above the growth expected next year can be taken as 4.5% (low case), 5% (base case), and 6% (high case)). Once the range estimates have been determined for all the input variables, DA uses a simulation which sample these ranges, assuming that these ranges are normally distributed, to generate a range estimate for the target metric (say for instance giving a GMV range with $1.1M (low case), $1.6 (base case), $1.8 M (high case)). A range estimated target metric provides a far better picture as the potential upside and downside is also clearly captured and provides a platform for a meaningful dialogue between the board and the founders within the context of this range. But clearly, if we are talking about rapid planning, then this approach requiring range estimates for all variables and then running the simulation is simply not possible. However, what we can certainly do is build a simplified approach based on the core DA idea of using range estimates. Here’s how:
Adopt usage of range estimates for few critical inputs where there is a lack of confidence in estimation or high uncertainty rather than doing it for all inputs
Instead of using low, base, and high cases – just use worst-case and best-case scenarios (Remember the more confident you are about a variable the shorter the range and vice-versa)
Build two versions of the plan one with all range variables set at worst and the other with all range variables set at best – this is a crude but a quick way to generate the target metric range (worst to best)
Do keep in mind that the worst or best case estimates for target metric(s) arrived at by using the process above are highly unlikely to play out simply because it is highly improbable for all independent variables to be best or worst at the same time. However, it does provide a good picture of the range within which the target metric should lie given all the uncertainties. If this range is too wide, then it indicates a low confidence level on some of the key inputs and it may require getting better external information to fine-tune the estimates.
Since this approach generates a plan where the target metric is a range and not a point estimate – how does one set targets for the team? The solution is very simple - the DA approach uses a probability-weighted average which can be replaced here with a simple average of best and the worst-case values. This average number or a number closer to this can be used as the target while keeping in mind the overall range and therefore, what may or may not be realistically possible. So, say for a target GMV metric the range has been estimated to between $350K to $430K, it would be highly unrealistic to set a target of $450K – a good target would be around $400K.
Strategic Alternatives: Plan & Execute vs Pilot Decision
As a result of the pre-planning discussion, there might one or more strategic alternatives that need to be evaluated. Typically, such initiatives are incremental, that is, over and above the momentum plan unless the start-up is looking to pivot. In either case, these can be evaluated using the approached laid out above (‘Focus on initiatives and their productivity’ and ‘Embrace Uncertainty’) with a key difference that there may not be any baseline in certain cases and the level of confidence on input estimates is more likely to be lower than in case of Momentum plan, thereby giving wider range estimates. Therefore, in case the estimates get too wide to give any meaningful plan and targets, it would be prudent to not develop a plan but instead allocate resources for a Pilot. Based on the pilot outcomes and learnings, a plan can be developed for the next planning cycle.
A plan which has been finalized starting with an upfront board alignment, using a bottom-up zero-based approach, and by incorporating uncertainties provides the board with an objective view of what is possible vis-à-vis their expectation given the current level of resourcing and market conditions. This is, in turn, useful in keeping the board grounded and not get swayed by lofty expectations which may not be in touch with the market realities. Once the plan is approved by the board, the targets can then be disseminated within the larger organization. While there are a number of tools such as OKR platforms that can be used to disseminate targets and track targets, it is the quality of the process using which the targets have been arrived at which lends them credibility – an aspect which has been carefully addressed in these hacks.
There is no denying that Strategic Planning is a necessary evil that cannot be avoided by the founders. However, the adoption of these hacks, which have been designed based on the author’s extensive experience in strategic planning, can definitely make their lives easier when it comes to planning. As start-ups mature, these hacks should evolve into a formal strategic planning process - though the core ideas of upfront alignment, target metric(s), strategic alternatives, uncertainty embracement, zero-based plans, and initiatives investment productivity would remain intact.