It’s the Business Model, Stupid

by Wayne Willis on November 15, 2010

Ann Miura-Ko (of Floodgate Ventures):  "At the seed stage, it's the business model that matters, not the business plan.  I won't read a 50 page business plan, but send me a picture of your business model, and the hypotheses and assumptions animating it, and I'll take a good look."

Steve Blank has some great work on business model design (in conjunction with his Customer Development™ process), and he recently shared some slides that he and Alexander Osterwalder (author: Business Model Generation) created. After defining business model as “the rationale for how a business creates, delivers and captures value,” Steve and Alexander describe the 9 building blocks for a business plan:

Building Block Description
Customer Segments which customers are you serving?  what do they really want to accomplish?
Value Propositions what are you offering?  what does that do for them?  do they care?
Channels how does the customer segment want to be reached? through which interaction points?
Customer Relationships what relationships are you establishing with each segment? personal? automated? acquisitive? retentive?
Revenue Streams what are customers really willing to pay? how?  transactional or recurring revs?
Key Resources which resources underpin your model? which are essential?
Key Activities which activities do you need to perform well?  what is crucial?
Key Partners which partners and suppliers leverage your model?  who do you really rely on?
Cost Structure what is the resulting cost structure? which key elements drive your costs?

Note that the same product-market can be served using many different business models
.  The key to success is to consider the many alternatives for each building block and get to a few business models that seem most plausible; don’t stop at the first one you think of – which is likely just be the one you already know from another context.  Some questions to consider:

  • open vs. closed
  • transactional vs. recurring revs
  • direct sales vs. channel sales
  • scale vs. scope
  • niche vs. mass market
  • personal vs. automated
  • blue ocean vs. red ocean strategy
  • capital expenditure vs. partnership
  • one segment vs. another
  • paid vs. free
  • distributed vs. centralized
  • physical vs. virtual
  • tailor-made vs. mass production
  • fixed vs. variable costs
  • insource vs. out-sourcing
  • copyright vs. copyleft

Once you choose the business models that seem to make the most sense, get out of the building and talk to customers about whether they’d buy / like this approach.

This 2-1/2 minute snippet (above), Ann summarizes Steve's points about business model in a less academic way, by saying, “When we evaluate a company for funding, we ask the entrepreneur to go thru each element of the business model – namely:

  • Your users (may or may not be the same as customer or payer)
  • Your customers (what’s your value proposition to them?)
  • Pricing (and customer lifetime value?)
  • How you do customer demand creation? (what’s the cost of customer acquisition?)
  • Your sales channel (and what’s in it for them?)
  • Your supply chain (components, design, manufacturing, inventory)

Ann summarizes: “And, based on your assumptions, if the dollars in don’t exceed the dollars out, you need to rethink your business model right then and there.”

It's obvious, of course, but you'll be surprised how many seed stage entrepreneurs don't include (or even know, sometimes), this important information.

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