Are Formal Planners More Likely To Achieve New Venture Viability? A Counterfactual Model And Analysis

• DOI: http://doi.org/10.1002/sej.1245
• Published date: 01 March 2017
• Author: Christian Hopp,Francis J. Greene
• Date: 01 March 2017

ARE FORMAL PLANNERS MORE LIKELY TO ACHIEVE

NEW VENTURE VIABILITY? A COUNTERFACTUAL

MODEL AND ANALYSIS

FRANCIS J. GREENE

1

and CHRISTIAN HOPP

2

*

1

Entrepreneurship and Innovation, University of Edinburgh Business

School, University of Edinburgh, Edinburgh, U.K.

2

Faculty of Business and Economics, RWTH Aachen University, Aachen,

Germany

Research summary: This study develops and tests a counterfactual model of the relation-

ship between formal written business plans and the achievement of new venture viability.

This is important because extant theory remains oppositional, and there is a practical

need to provide guidance to founders on the utility of formal plans. To test our model, we

use propensity score matching to identify the impact that founder, venture, and environ-

mental factors have on the decision to write a formal plan (selection effects). Having iso-

lated these selection effects, we test whether or not these plans help founders achieve

venture viability (performance effects). Our results, using data on 1,088 founders, identify

two key results: (1)selection effects matter in the decision to plan; and (2)it pays to plan.

Managerial summary: This study assesses whether founders who write formal plans

are more likely to achieve new venture viability. This is important because, despite

its popularity, there is considerable debate about the value of plans. One root rea-

son for this is that what prompts a founder to plan also impacts his/her chances of

creating a viable new venture. The study’s novelty is to separate out influences on

the decision to plan from the plan-venture viability relationship. Our results show

that better-educated founders, those wanting to grow and innovate, and those need-

ing external finance are more likely to plan. Subsequently, having isolated what

prompts planning, we assess if writing a plan actually promotes venture viability.

We find that it pays to plan. Copyright © 2016 Strategic Management Society.

INTRODUCTION

A long-standing debate in the strategy and entrepre-

neurship literatures is whether or not a formal writ-

ten business plan helps the nascent founder achieve

venture viability (Bhide, 2000; Delmar, 2015; Del-

mar and Shane, 2004; Honig and Samuelsson,

2014). Formal plans—here defined as written scripts

that detail markets to be served, proposed products/

services, required resources, and the anticipated

growth and profitability of the new venture

(Stevenson and Van Slyke, 1985)—are central to

this debate. Some scholars argue that written plans

provide a rational synopsis of the steps necessary to

develop a viable venture (Delmar and Shane, 2004).

Other scholars, however, argue that formal plans

add little value and that founders are better off with-

out a formal plan (Carter, Gartner, and Reynolds,

2014; Lange et al., 2007; Mintzberg and Waters,

1985). Given that the extant literature remains oppo-

sitional, the empirical evidence on the efficacy of

formal plans has also remained contradictory,

Keywords: nascent venturing; business plans; formal pla-

nning; counterfactual modelling; propensity score matching;

PSED II

*Correspondence to: Christian Hopp, RWTH Aachen Univer-

sity, TIME Research Area, Kackertstrasse 7, 52012 Aachen,

Germany. E-mail: hopp@time.rwth-aachen.de.

Copyright © 2016 Strategic Management Society

Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 11:36–60 (2017)

Published online 8 February 2017 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1245

making it difficult to substantiate whether plans help

nascent founders achieve venture viability.

In this study, we argue that a principal reason

for these gaps is that few studies have taken

account of what prompts a founder to plan formally

(selection effects). Selection effects are important

because the founder’s prior education and experi-

ence, the type of venture he/she is seeking to cre-

ate, and differences in the environment he/she

faces are likely to impact both on the likelihood of

formal planning and on the chances of achieving

venture viability. Indeed, conflating selection and

performance effects lead to biased estimates of the

plan-performance relationship (Burke, Fraser, and

Greene, 2010).

This article’s primary contribution is to develop

and test a counterfactual model that explicitly iso-

lates selection effects from the plan-viability rela-

tionship. To do so, we focus on key founder,

venture, and environmental antecedents that affect

the decision to formally plan. We focus on the

founder’s educational attainment and prior sectoral

and entrepreneurial experience because they are

important determinants of both plan and venture

outcomes (Burke et al., 2010; Dencker, Gruber,

and Shah, 2009a). Similarly, we examine venture

characteristics such as innovation, growth orienta-

tion, product complexity, the competitive nature of

the external environment, and the need for external

finance because, again, they are key determinants

of the choice to plan (Honig and Karlsson, 2004;

Kim, Longest, and Lippmann, 2015). Finally, we

focus on venture viability because, as McMullen

and Dimov (2013) suggest, it is the conclusion of

the nascent phase of the “entrepreneurial journey.”

To investigate our model, we use propensity

score matching. This allows us to “net out”selec-

tion effects, thereby reducing “the problem of

unfair comparison”(Li, 2013: 214). Subsequently,

we isolate the impact of the plan on venture viabil-

ity. This is a novel contribution because we esti-

mate what would have happened if the planning

founder had instead decided not to plan. Modelling

this counterfactual state is important because, as

Chwolka and Raith (2012) point out, key to under-

standing the value of a plan is to comprehend what

is not chosen, rather than just measuring what turns

out to be chosen.

Empirically, we use Panel Study of Entrepre-

neurial Dynamics (PSED II) data on 1,088 nascent

founders. These data allow us to address issues of

reverse causality and draw stronger causal infer-

ences about the plan-viability relationship. In sum-

mary, the key advantage of our approach—for both

plan advocates and skeptics—is that we take

explicit account of selection biases, develop a

counterfactual model that separates out plan selec-

tion from performance effects, and use large-scale

longitudinal data to assess if founders who write

plans are more likely to achieve new venture

viability.

Our key results are twofold. First, selection

effects matter: better-educated individuals, those

seeking finance, innovators, and those with com-

plex products/services are more likely to plan. Sec-

ond, it pays to plan: founders who formally plan

are more likely to achieve venture viability. These

findings contribute to resolving the ongoing debate

about the value of formal plans. Such findings are

also of practical importance. Despite improvisa-

tional logics such as effectuation (Sarasvathy,

2001), bricolage (Baker and Nelson, 2005), and

lean start up (Ries, 2011) being increasingly taught

in our universities and being promoted as more

reliable mechanisms for founders to achieve ven-

ture viability, our results suggest that the writing of

formal plans is a useful way for actually helping

founders and students orchestrate their fledgling

business propositions. Moreover, our findings have

importance to financiers, who use plans to help

allocate start-up finance, and the millions of nas-

cent founders who choose to write formal plans

(Gumpert, 2002).

Next, we review the extant business plan litera-

ture. Subsequently, we develop our hypotheses,

explain our methodology, and detail our results.

We conclude by reflecting on the implications for

both theory and practice.

LITERATURE REVIEW

We now examine the strategy and entrepreneurship

literatures on formal written plans. The strategy liter-

ature from early conceptual and empirical studies

(Thune and House, 1970) through more recent stud-

ies (Andersen, 2004; Greenley, 1994; Rudd et al.,

2008; Wolf and Floyd, forthcoming) has focused on

whether plans aid performance of large firms. By

comparison, relatively few entrepreneurship studies

have examined the plan-performance relationship for

emerging ventures (Dencker et al., 2009a; Gruber,

A Counterfactual Model and Analysis of Formal Planning 37

Copyright © 2016 Strategic Management Society Strat. Entrepreneurship J., 11:36–60 (2017)

DOI: 10.1002/sej