Why Business Models Matter to Startups

There are five big reasons why it is important for a startup to get their business model right

If you don’t have a clear business model nobody understands what you want to do
If you don’t have a clear business model your team don’t do what you think they should be doing
If you don’t have a clear business model it’s hard to design tests to see if it is any good
If you don’t have a good business model growing and scaling is hard
If you don’t have a good business model you can’t improve it and make it truly disruptive

Let’s look at the first

Clarity

I worked with an entrepreneur, I’ll call him Nico, who claimed that he was making $10 million a year. He wanted his business model captured so that he could explain to investors what he was doing.

Great chap, really enthusiastic but after 5, 10, 15 hours I still had absolutely no idea what he was trying to do. Every business model canvas that I sketched out missed what his vision was.

In the end, we parted ways and when I checked back a few months later the website had gone.

When I have worked with other customers with a similar whoosh of ideas we’ve focused down on a single business model and they have gone on to get customers and grow into successful businesses

A clear business model is critical for persuading investors, customers and partners to join your journey

Execution

I worked with an older entrepreneur. He’d been one of the earliest dot com entrepreneurs and sold his startup to NewsCorp for a nice valuation in the early ’90s. With his new venture, he planned to change the nature of the internet.

Again there were a lot of good ideas, but it slowly dawned on me that he had one business model in mind, the dev team had another business model in mind and marketing was working on yet a third.

Needless to say, things did not end well. A clear business model that everyone had bought into in the early days would have saved a lot of money, time and emotional pain. He lost his house in order to pay the developers.

If you don’t have a clear business model your team can’t work together

Testing

I’m a big lean startup fan. Actually I though Isaac Newton dropping apocryphal apples was fun when I did physics. Experiments are good as they quickly help you decide which of your beliefs around the world are……problematic

One entrepreneur I worked with had what was on paper a good business model. It should make money fairly quickly and if it could grow would start having a strong disruptive impact on the sector.

The trouble was that the business model was not structured so as to make it easily testable and a lot of money was spent on the software. When we got out into the field all of the first five experiments that we undertook to connect with customers failed. The target customer did not exist and that left the startup in crisis.

If you can’t test your business model the chance of failure massively increases

Scaling

One of my customers, one of my best friends as well, introduces himself by saying “My name is Shaun and in my first startup, I raised $50million” and then mentions the name of one of the top 5 Silicon Valley VCs.

He’s a hardware guy and does some super innovative things. He can build products of high quality quickly and cheaply. The trouble is that the overall business model is a mess. Even though he has raised $3 million for his current startup it’s a hard sell to investors.

It’s an equally hard sell to get customers because all the parts seem somewhat disjointed and there is no story for them to buy into. So life is a series of difficulties and disappointing sales.

If you don’t have a good business model it’s hard to grow

Innovation

I worked with a great entrepreneur called Jasmine. She’s currently raised $10 million for her Asian based startup and is experiencing rapid growth. Aspects of the business model are unique and very powerful.

Can she be really disruptive? Has she got a really innovative business model? It’s difficult to say because of the wall of money that is being thrown at the sector. She can certainly scale but the underlying innovation is in just one part of the business model, and that process can be imitated by all the other market players.

So to scale, she has to hope that she can get a leadership position at a low enough cost so that she has enough money to build a moat. That seems unlikely and so she will likely stabilise at less than 1% of her available market.

An innovative business model enables you to disrupt competition and the market, not just profit alongside them