I don’t agree with Vivek Wadhwa that losing a business plan competition is better than winning it. However, I do think that business plan competitions force many teams to aim for the wrong target. Here is the comment I left on the TechCrunch post:
I’ve judged the MIT 100K for many years and am currently an EIR at the MIT E-Center. The biggest problem with business plan competitions is that they skew incentives. An entrepreneur’s incentive should be to build a winning business, not win a business competition. Conversely, good business plan competitions should aim to help build great companies.
The benefit of business plan competitions is that they pace a team and force it to deliver on a schedule. Many teams benefit from that process and from the feedback they receive along the way.
The biggest problem I’ve experienced as a judge is that there is no diligence process. Judges are supposed to pick winners based on the claims of the entrepreneurs alone (and a bit of face-to-face time). Without diligence, the teams have an incentive to exaggerate as there is no penalty for slight exaggeration. Judges can only react to gross exaggerations. Teams that are in touch with reality, customers and that understand the challenges involved in building successful businesses have a higher likelihood of being subtly penalized during judging when reviewed alongside folks more likely to over-promise. No, it’s not easy for judges to correct for this.
The solution is to introduce diligence as an integral part of business plan competitions. The suggestion I made to the 100K was to organize a diligence team that runs alongside teams participating in the competition. The goal of the diligence team is not to poke holes at the entrepreneurs’ dreams. It is to make the teams and the companies they want to build stronger and more likely to survive in the real world. And, yes, in the end, hopefully more deserving companies would win and there will be a higher correlation over time between companies that win and companies that succeed. Wouldn’t that be nice?
Alas, the student-organized MIT 100K competition is finding little interest inside the MIT and Sloan student bodies to participate in the diligence process.
In the end, it is the entrepreneurs that lose.