It seems like almost every team I’m mentoring is busy applying to a business plan contest of one sort or another. Virtually every B-school runs a business plan competition, as do many incubators or accelerators. Many ventures apply to several business plan contests, sometimes simultaneously.
The pros of applying to a business plan contest are pretty clear:
- Planning. The process of applying can help a team solidify its plan and align the founders. It can also expose gaps in their planning. A good business plan competition application will force a team to really work at communicating their value proposition, how they will acquire customers, who is their competition, etc.
- Capital. Most business plan contests award funds to the winners, ranging anywhere from $5,000 to $100,000. This capital can help a team get to the point where they can convince an angel or seed stage investor to capitalize them.
- Credibility. Winning or even placing in a business plan contest helps a team validate it’s venture and provides credibility to other investors, partners or potential hires.
- Exposure. If a venture can get to the final rounds where it has an opportunity to present, the venture can gain invaluable exposure to venture capitalists and angels who frequent business plan competitions, hunting for the next big thing.
- Practice pitching. As the old saw goes, “How do you get to Carnegie Hall? Practice, practice, practice.” All ventures need not only to practice their pitches but to get feedback from experienced members of the entrepreneurial ecosystem: investors, entrepreneurs, consultants, professional service providers and academics, who make up the judges of these competitions.
- Connections. Business plan competitions can be opportunities for networking and making connections that may be valuable to the venture in the future. Many business plan competitions hold networking events for this exact reason.
Ok, so what’s not to like? Well there are a few cons to applying to business plan contests:
- Distraction. The biggest one may be distraction. Instead of focusing on customer development and product development I’ve found ventures too busy applying to multiple business plan contests to actually build their business!
- Opportunity cost. The founders need to do a cost/benefit analysis of applying to a competition. Will the time invested have a high enough probability of a return to make up for the cost of their time in applying?
- Focus on investors, not customers. With far too many ventures I find that the teams suffer from “pre-mature investment syndrome.” They see their peers raising capital and decide that’s what they need to do as well. Instead of investing their time and energy in developing customers, they spend hours honing PowerPoint presentations. Investors are not customers!
The best type of competitions are not business plan competition but prizes or challenges, where a team actually has to build something in competition with other ventures to solve a real-world problem. This is most common in hardware-focused areas, like robotics. Entering a prize competition where a venture has to actually build a prototype rather than just create a pitch deck can provide all the pros of a business plan competition without many of the cons. The X Prize Foundation runs many of this type of competition.
Founders need to make thousands of decisions to build a successful business. Deciding to enter a business plan competition is just one of them. That decision and more importantly how it is made, can be an early indicator of how well the team works together, sets priorities, and employs cost-benefit analyses.