Over the last month I’ve supported four of our early stage startups in creating their first annual operating plan. Hats off to these founders for the investment: while startups don’t operate on the calendar cycle in the same way as mature companies, the exercise of building and executing against an operating plan is a great discipline for young companies to embrace.
To level set, the basic form of an operating plan is a spreadsheet model with assumptions about customers, revenue, and expense. Often a set of slides with the narrative around strategy and tactics are created to support communication to the broader team and investors.
It’s been a rewarding process working with these teams. The founders have done a stellar job of both the process and the output, and I wanted to share seven observations on their approach.
1. Start with a deadline
In the hectic day-to-day of startups, creating an operating plan can fall by the wayside. Identify an appropriate deadline — a board meeting or company all hands, for example — and milestones between today and that date. Start by committing to a process and timeframe to your board and team.
A three to four-week process is typical; here’s an example from one of the teams:
- Week 2 of December: Identify key assumptions and priorities for 2018
- Week 3 of December: Feedback from [lead VC]; start model
- Week 4 of December: Build out model
- Week 1 of January: Review/feedback from [lead VC]; create slides
- Week 2 of January: Plan finalized; ready to present to full board & team
In addition to the self-accountability, this approach has the added benefit of putting you in the driver’s seat for input and participants.
2. Post Mortem
Spend an hour with your team discussing where you are today relative to your and their initial expectations. Even in well-functioning teams an interactive session yields powerful nuggets of insight.
Different teams use different approaches… simple works just fine: a whiteboard with two questions:
- Where did we make real progress?
- Where could we have done better?
The learning from this becomes a key input into priorities for the coming year.
3. Focus on what you want to learn and prove
At this stage of a startup founders face fundamental choices about go to market strategy such as:
- Are we an inside or field based model?
- Do we sell to the midmarket or enterprise?
- How should we generate leads?
- Should we have a freemium offering?
And so on.
The planning process is a great point to review and prioritize decisions about go to market strategy, and identify experiments that can be run to learn and validate. Identify the most important and build the details into your operating plan.
Doing this in turn enables you to…
4. Fight complexity
I have yet to see an operating plan become shelfware solely as a result of simplicity. Conversely, plenty of overly complex plans never get revisited upon completion.
No two plans are alike. That said, these are the core elements most commonly modeled by enterprise startups under a $1–2 million ARR:
- 1 to 3 market or product segments (eg enterprise, self-service)
- 1 to 3 categories of average deal size (eg seed deal of $10K, large deployment of $200K)
- 3 to 5 key funnel metrics (eg leads, qualified opportunities, trials/POCs, teams, wins)
- Individual headcount modeled by expected cost and start period
- 3 to 5 key non-personnel costs (eg facilities, AWS, marketing)
I regularly get asked for templates. My response: start from a blank spreadsheet.
The formulas and logic aren’t complicated, and by building out the model you’ll get tremendous benefit from understanding the inter-dependencies and sensitivities.
5. Others faced the same question
Your first operating plan will require assumptions where your startup has no historical data.
The good news: others have already gone down the same path. References tools like this are a great starting point, as are the people in your network.
Assume there’s a good answer out there, and approach it as a learning opportunity with peers, board and advisors.
6. Pressure test top down AND bottom up
Some planning process start with a top down approach — “We did $750K ARR last year, can we 3x that this year?” Others start from the opposite direction, focusing on granular assumptions, with revenue growth and expense burn as the output.
In the end, your plan must be credible from both directions.
Two of the teams ran into the issue of the top down *and* bottom up not making sense together. In one case, it was a catalyst to revisit and accelerate marketing plan and hiring ramp to support the desired pipeline and deal growth. In the second case, it resulted in an across-the-board adjustment downward of customer ramp and deal size resulting in a more realistic top line revenue growth rate.
7. Measure, Learn, Adapt
The true impact of an operating plan starts the day it’s finished. Incorporated into the day to day execution of the team and interactions with your board, it is a framework to understand what’s working and what’s not.
One leader shared an experience of what in hindsight was an incorrect assumption about expansion within existing customers. He had incorporated the operating plan metrics into his board briefings and was able to show both the issue and the action plan.
Another leader incorporated the funnel metrics into the regular customer standups to get visibility for the whole team into pipeline health.
As a young startup, most likely more will be wrong than right in your plan. By tracking results against assumptions, you can learn quickly and adapt your strategy accordingly.
Building and executing an operating plan is significant investment for a startup!
Why do it?
Ultimately there are two main benefits: alignment and speed of learning. The operating plan provides a clear set of priorities and desired outcomes shared by your team and key stakeholders. It gives you the framework to assess progress, double down where things are working, and fail fast where they are not.