WHY BUSINESS MODELS ARE MORE IMPORTANT THAN BUSINESS PLANS, AND SOME RAPID BUSINESS MODEL TESTS YOU CAN USE

 

FLOODGATE Fund co-founding partner Ann Miura-Ko believes it's the business model that matters most, rather than the business plan. A well-thought out business model that is data-driven and scenario-focused will be seriously considered. According to Miura-Ko, models do a better job of unearthing assumptions about a company's users, customers, pricing, demand creation, sales channels, supply chain, and overall logistics - all critical components to building a successful venture.

Floodgate Fund's Ann Muira-Ko

Business Models Matter

"I believe that at this stage of development the seed stage for a company, it's the business model that matters not the business plan.  So send me a 50 page business plan, I probably won't read it. But send me a picture of your business model all the hypothesis that you have around your business model and I'll take a really good look. And the reason why that's really important is that business models will enable you to understand exactly what your assumptions are and there are a lot of diagrams that we've put out that show what my version of business model/diagram looks like and Steve has that on his blog. Alexander Osterwalder also has a book on business model generation and so there are different frameworks now that exist out there where you can use them to figure out what your business model looks like."

"The business model is then really, really important because what we have our startups do is they'll go through each component of a business model. In my mind those would be your users, your customers, your pricing which also includes your customer lifetime, how you do customer demand creation, your sales channel, and then on the backend if your producing something or if you have inventory your whole supply chain that could all your components, design, manufacturing, and inventory warehousing. You should have assumptions around your entire business model of how you relate to all these different entities in your ecosystem."     

+ How do the customers view you, what's your value proposition to them? 

+ What's your value proposition to the manufacturers? 

 + What's your value proposition to the sales channel? 

 + How do you do demand creation? 

 + What's the cost of customer acquisition? 

"These are all questions that you should be constantly thinking about. And if the dollars in are not greater than the dollars out, then you need to rethink your business model right then and there. "

 

A successful startup does not flower solely from a great product or idea, says Ann Miura-Ko, partner at FLOODGATE Fund. She argues that success stems from the ability to grow a business around that great idea. The venture ecosystem, a flush customer base, accessible distribution channels and manufacturing - all of these factors must converge into a business model that is both viable and scalable. Fortunately, the Internet allows companies to rapidly test business models, for example, through the use of social media leveraged with demand creation and flexible pricing structures.

Rapid Business Model Testing

"The second element of the democratization of innovation is the fact that we could very quickly test business models. And the reason why this is important is because a startup is ultimately about whether or not just an idea or a product works, it's about whether or not you can actually create a business around it.  Whether or not the ecosystem will support it, the customers will buy it, if the channels will support it and if the manufacturers will actually create it. Because of that we need to be able to test all of these different facets of our business model and do so quickly."

"The beauty of the Internet is that first of all you can have a direct dialogue now with your customer. In one of my classes if I ask my students to test out a web start up.  They can go out and interview 300 people in a bat of an eye and be able to tell you if that product was attractive to that group of people or not.  And it's not unusual for our students to do so. Think of the people who have actual resources to put to bear on that."

"The second thing is that you could also do is demand creation leveraged with social networks and few companies have really proven this out.  A simple example is Groupon where they'll come back and have people post on to their Facebook walls the offers that they have and then that spread the word to all of their friends. There are incentives for others to compact in and sign up for those offers. And most of the Groupon traffic actually comes from Facebook. We've also seen this in one of my portfolio companies ModCloth where we put various Facebook fan pages and the women who actually shop on Maude Cloth will also post things to their Facebook wall. As a result we see a lot of traffic coming in from Facebook. This ability to do crowd generation of customer acquisition is extraordinarily powerful; something that hasn't existed until very recently."

"The third element of the speed of testing our business model that I've seen most recently is the flexible pricing structures that I see. And one example might be in the idea subscription pricing. The reason why subscription pricing is actually has been really interesting because you can change it. And you can change it for half of your customers and for another half of your customer you can have a totally different pricing structure and you can AB test.  This kind of infrastructure has never existed before. And then also the fact that subscription pricing is so low, you can now directly have the user purchase your products instead of going out and having to go through a CIO or an executive to buy your products. You could go directly to the people who are interested in using your product. And now even with an enterprise that's user has a power to purchase your products. Because of that the buying cycles have actually been decreased." 

 

COMMENTARY:   In a blog post dated January 1, 2012, I commented on how to develop successful business models, business model building blocks, the business model canvas and having a big vision which is encapsulated within your business model.  

In this post, Floodgate Fund's Ann Muira-Ko argues that business models matter more than business plans, and she is dead on.  Unfortunately, very few entrepreneurs fail to develop a successful business model that will address all the key issues necessary to market a new idea or product.  If you cannot build a case that gives investors confidence that you can actually make money off of your great idea or product, it will never get funded.  

Having said this, building successful business models is not easy to do for most entrepreneurs because it requires stripping away preconceived notions and prejudices that they have about their idea or product.   Many entrepreneurs will say, "We have a winner. Just give us the money, and we'll make money."   Unfortunately, this is too simplistic and a receipe for disaster when pitching investors.  The investors will want to know the four W's:  Who, What, Where and Why.  

The Business Model Canvas provides the answers to the four W's.  If you look at the key elements of a business model canvas, it's about the four W's: 

Click Image To Enlarge

The Business Model Canvas asks:

• What do we need to do and Why?
• What things will we need and Why?
• What is the value proposition (what are the key value components of our business, product or service offering)? 
• What are the costs and prices?
• What is the distribution plan?
• Who are the target customers? 
• Who are the key competitors?
• Who are the strategic partners and Why you need them?
• Where do you intend to manufacture and Why?
• Where will the product be distributed? 
• Why is customer service, quality, price, distribution so important?

The Business Model Canvas forces founders and their management teams to conduct a thorough analysis and understanding of their business and entire value chain associated with that business including:  

• Key activities (what must be done). 
• Key resources (what will you need to get it done). 
• Value propositon. 
• Customer relationship management. 
• Customer segments. 
• Distribution channels. 
• Strategic partnerships. 
• Costs. 
• Prices.    

Once you know the four W's, this leaves that all important How?   How are you going to do it? What are your specific plans, strategies and programs to accomplish the four W's.  This is where you layout your operations, expansion, launch, sales and marketing initiatives, strategies, media channels and specific programs. It is here where you formalize things like:

• How you will position your company in the marketplace (i.e. how you want to be perceived by the public) such as low prices, premium prices, high quality, low quality, high-tech, low-tech, less features, more features, available everywhere, limited distribution, broad selection, limited selection, green or eco-friendly, socially responsible. 
• How many people will you need?  Staffing and personnel requirements, including the total number of employees, contractors and part-timers you will need to start, year 2, year 3, including members of the management team and key managers.
• How will you market your company's products and services, including your sales and marketing plan, marketing strategies, promotions strategies, specific programs and media channels utilized to reach your target customers.
• How will you keep prices low or high, quality high or low, and keep selection high or low.
• How you intend to launch your business (beta-test A/B, by invitation only, limited launch, formal launch, and when etc.).
• How you intend to acquire customers (advertise, sales promotions, direct mail, infomercials, outbound/inbound marketing, social media, viral, etc.).
• How do you intend to distribute (direct-to-public, dealers, distributors, direct-to-retailers, etc.) 

Ann Miura-Ko says business models matter more than business plans, but don't believe for a single second that you won't need a business plan.  Your business plan provides the "meat and potatoes" that drive your entire business.  

DO prepare an executive summary of 1 to 2 pages in length max.  The executive summary should include:

• Brief history and present status of the business.
• Management team (names, titles and very short bio).
• Product or services offered.
• Industry and size of the market.
• Value proposition.
• Business model.
• Competitive landscape.
• Capital required and uses of funds.
• Business valuation.
• Investor offer (ROI and payback period).
• Exit strategy.
• Contact information. 

Be brief and concise, write short sentences, avoid too much technical jargon, use bullet points, and a few charts, graphs and images if space permits.   NOTE:  Instead of an executive summary, you may prefer to prepare a PowerPoint presentation deck.  Keep the deck to 10-12 slides max laid out similar to the executive summary.

Courtesy of an article dated October  27, 2010 titled, "Business Models Matter" appearing in Stanford University's Entrepreneurial Corner and an article dated October 27, 2010 titled, "Rapid Business Model Testing" appearing in Stanford University's Entrepreneurial Corner

 

 

 

 

 

 

 

 

 

Comments

[Somebody]

yes , i am agree with you . the simple model can explain everything easily. and plans can makes difficult some stage at some points.

[Leola Highsmith]

I agree with Ms. Ko. I think an effective business plan should follow a tangible business model. But a strong business empire is a combination of hard work and luck.