Aren’t we in the business model generation? Whenever an entrepreneur brings up their new venture, there’s always some smartass in the room who wants to question your business model.
Next time this happens, tell that spreadsheet jockey to hold his horses. The business model is not the first thing on your things to do list when you start your new venture.
Fred Wilson does a great job breaking this down in a post he wrote in his blog titled: Product > Strategy > Business Model
Based on the title, you can see Wilson suggest that business model discussions should come only after the product and strategy are completed. He states:
We have also had many portfolio companies build revenue models that did not line up well with the strategic direction. And in some cases, the companies really did not have a well articulated strategic direction at all. That led to a lot of wasted energy building a team and a customer base that ultimately was not of value to the business. We have seen teams walk away from parts of their business because of such mistakes.
If you don’t have a strategy yet, but have already decided on who and what you are going to charge for you product, then I suggest you go read both Fred Wilson’s post on this topic, as well as go read a follow up post from Mark Suster riffing on what Wilson shared in his post.
There’s always an ongoing debate in the entrepreneurial community about what makes a newly founded business a startup (growth business) vs a lifestyle (small business).
Today I came across yet another perspective on the growth vs lifestyle debate. This one comes from Atlanta serial entrepreneur and angel investor David Cummings from back in 2010. Cummings states:
Growth businesses have a repeatable sales process that doesn’t involve the owner/founder.
In short, the conclusion Cummings is making is that if you are required to be there everyday to generate revenue for you business, then you are not working on a growth startup, you are creating a small lifestyle business.
Either one is ok, just make sure you are clear with yourself on the time commitment and financial outcome your choice may or may not limit you to.
Read the full blog post from David Cummings here.
Developing a financial model for your business is tough stuff. Even tougher if you don’t have a MBA, like me.
I’m pretty good at math being that I am a software engineer. However, the math of financial modeling relies so heavily on assumptions, that it barely looks like real math when you’re done.
As a result, its best to draw from the experience of the experts.
With that said, I found an wonderful case study done back in 2007 by Glenn Kelman, the CEO of Seattle-based Redfin, an online real estate brokerage.
The post is titled Financial Models for Underachievers: Two Years of the Real Numbers of a Startup. In it Kelman shares the early financial models he did for Redfin. Kelman states:
Startups face one primary challenge: To never run out of cash. So when projecting costs, we heeded Guy’s advice that “the three most powerful words you can utter at a board meeting are, ‘We beat projections.’” This convinced us to develop the worst possible financial model that could still be used to raise money.
Kelman is very open with how he created his entire financial model. If you are in need of a framework for your financial model, I suggest you start here.
This is a very intriguing question. Intriguing in the sense that most small business owners would call themselves entrepreneurs, but not all entrepreneurs would call themselves small business owners. Not even if their revenue is small enough to qualify as a small business in the traditional sense.
Seth Godin touches on this topic on his blog in a post titled So, what’s wrong with small business? Godin states
The distinction I’ve always made is that an entrepreneur is trying to make money while she sleeps, and does it with someone else’s money! That she builds a business bigger than herself, that scales for a long time, that is about processes and markets. A small businessperson, on the other hand, is largely a freelancer with support, someone who understands the natural size of her business and wants to enjoy the craft of doing it every day.
I think it’s critical that you know what type of business you are building. As this will drive many of the trade-offs you must make in your business model.
This morning I was reading some of the old post of one of my favorite bloggers Chris Dixon. Back in November 2012 he wrote a great post titled “Some problems are so hard they need to be solved piece by piece” and talked mostly about the Craigslist conundrum. Essentially this conundrum is that Craigslist seems like an easy target for startups since there has been so little innovation on the platform. However, entrepreneurs who have attacked Craigslist by trying to recreate a horizontal platform have mostly failed in comparison to those of have gone after vertical pieces of the classified market.
The secret sauce here is all about focus. When starting a new company, your focus is probably your only advantage over your competition. Chris Dixon states:
The benefits of focusing are: 1) you can create a dramatically better user experience when it’s tailored to a specific use, 2) you can do unscalable hacks when starting out (e.g. AirBnb paying photographers to take pictures of apartments), 3) you need far fewer users to get to minimum viable liquidity, and 4) brand building is easier when you solve a straightforward, narrow problem (e.g. “I need a place to stay this weekend”).