Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Posts Tagged ‘pro forma

When the Best Plan is to Not have a (Detailed) Plan

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Russ Roberts recently interviewed Sam Altman, of YCombinator. In this EconTalk episode, Sam offered the following insights into what level of planning he expects to see from those who apply to become part of YCombinator:

Sam Altman: I’ve never written [a business plan] in my life. At the stage that we are operating at, it’s irrelevant. Like financial projections also we never look at. … We would rather them spend the time working on their product, talking to users. What we care about is: Have you built a product? Have you spoken to users? Can we see that? Can we talk about where it may involve?

I think this is exactly right. As actuaries, our first instinct is to measure, quantify, and plan. However, you don’t have to have a detailed financial plan before engaging in an activity. What you have to have is a rational basis for believing that the activity has substantial merit. The level of modeling and projections must be related to (a) the ability of the forecaster to model accurately, and (b) the relative cost of producing the forecast. There is art in knowing when to model and when not to.

For young start-ups, the ability to forecast accurately is low, and the cost of forecasting is high, especially the opportunity cost. Further, if the business case has merit, the value proposition has to be easy to explain or it won’t take off. Business plans and pro formas should properly be viewed as a means of communication, not an end of themselves. And frequently the idea and business prospects can be best communicated in words, with examples, or with simple math that demonstrates scalability. And the simplest communication vehicle is frequently the most persuasive.

 

Written by Victor

August 26, 2014 at 2:05 am