Business Model - creating a fabric to link the stakeholders

In the startup context, where survival is primary, entrepreneur’s pursuit is one of finding a business model that would stand their firm in good stead ensuring growth and profitability. One doesn’t have to reiterate the importance of finding the right business model or the long term viability of the company. The term "Business model", often used in the business community, refers simply to the way the company makes money through a set of activities. I had blogged about some prevalent business models a long time back elsewhere and here is a link to the same:
http://somanagement.blogspot.in/2011/05/business-model-journey-this-far.html
 

Given the large number of business models, one could easily believe that finding the right one to suit their business would be easy – however this is not to be.
 

Creating the business model is akin to building a tower from cards. The cards are all balanced and mutually supported. The flexibility at this stage is the ability to move the cards around and ensure the balance is in place. Only if the balance is created can the attempt grow beyond a specific size. Once the card tower is built, it’s time to build stronger bonds - think of glues that would make it more permanent.
 

[Note: this glue itself could be a limiting the growth/flexibility, but that’s the game one has to play - You cannot just build a larger tower if you focus on too much flexibility!]

From my experience of interacting with startups, I clearly notice that – attempting to build a business model relies a lot on finding the right balance between the various stakeholder commitments and then synch their acts to make the complete business engine operate without glitches. It is only over multiple iterations of engagement and testing the various business hypotheses that such a structure could be created and controlled through routines/procedures/policy for the business execution. These sum up the entrepreneurial learning and help guide the business moving ahead. Thus, we could visualize the firm’s business model as a fabric binding the various stakeholders in a specify tension through the binding and dependency of the various activities.
 

A natural question that arises here: is the claimed complexity of Business Model creation in a start up really hard? Why not just imitate?
 

Stated differently the question is - there are existing models that have been used, wouldn't it be just easy to start off by imitating a business model? Here is my argument why this many not be easy:

Yes, imitation could give you a head way into starting (a map say), but eventually you have to design and use a business model that suits your business needs - your customers define that. The geographical limitations, the economical situation, the capability of the talent available, cultural context, all have an influence on the business model that finally emerges. Even large companies that operate businesses across the globe cannot expect the same audience and therefore need to modify their model!

Increase the above stated complexity a hundred or thousand times – that is the environment that a start up is dealing with – the haze surrounding the start up is so high that it probably cannot even see a few meters ahead with clarity! The changes of survival for a start up enhance by actively seeking the right partners and steadily creating a business from the idea. The Business model is developed through multiple iterations of this nature.
 

What role does the entrepreneur’s ingenuity play in the process of building a good Business Model?

While some of the factors explained above are definitely important – my observation is that the initial mindset of the entrepreneur and the founding team would defines largely the business scale. While business are built to cater to customer demands, and one could often confuse the existing customer segment size to define the scope, I perceive it as a function also a stakeholder relationship (resources) and the innovativeness with which the relationships amongst the various stakeholders(my opinion on this listed in an earlier blog) are created to derive a greater benefit. 

Recollect: my claim of saying there is definitely an important role the entrepreneur plays and not everything is defined by the customer! The discussion could be extended to other stakeholders like – employees, suppliers, investors etc. (pick up links to older blogs)

In the context of an established organization, the board  has to be constantly on its toes validating to see if they are living up to the market trends or are they defining the market trends else their lethargy could risk a death changing ecosystem. The business model thus has to constantly evolve.
 

It is hard to consider a lot of dimensions of business and it would definitely benefit if there is some guidance on the same. How do we ensure that the business model effectively covers all aspects of the business? 

I feel a very useful tool that most businesses could use is the Business Model Canvas (check this link- http://www.businessmodelgeneration.com/  for a detailed coverage). Here is more pictorial lively representation of the canvas is as blow :)

The various blocks of the canvas help keep in mind the various components of the business in a balanced manner. If the business keeps a constant vigil on these dimensions it would help them identify when business shifts would be needed. The 9 blocks of the canvas:

1. Customers
2. Value Proposition
3. Customer Relationships
4. Channels
5. Key Partners
6. Key Activities
7. Key Resources
8. Costs
9. Revenue

One clear benefit of the canvas is to emphasize the importance of the various blocks and gets the attention of these towards these and focus on these (lest you miss them). 

The Business Model Canvas though extremely useful, has some limitations in the startup context. I guess this would be the subject of another blog keep watching the space for more.

Customer: Choosing a right customer when possible...

If there is a first point in the journey of any startup which I believe is worth celebrating, it is - when a customer sale has happens.

If one is to make an analogy of startups to plants and their growth - this is comparable to the appearance of the first roots from the seed and penetrating the soil - there by enabling the plant to potentially grow utilizing the nutrients from the environment. Everything else, like raising an investment or finding a supportive supplier etc only enhance the likelihood of the possibility of growth - akin to application of fertilizers or support fences etc. The first positive sign a start up venture surviving the harsh environment and growing into a viable initiative is when the first customer sale happens.
 

The start-up environment is extremely dynamic, and with many different growth avenues available, it is possible that start-ups could easily be confused about the way ahead. The newness of the start-ups enable them be easily mold them for good into a position they might not like to be in. While one could rationalize these as being defined by the market, I also believe there is a sequence which the entrepreneur could try before accepting being molded by market consequences than by organizational choice. I would love to believe that start-ups though liable to these are not as helpless in this pursuit, and there could be a better logic that product start-ups could benefit from.
 

[A word of caution before I move further: what I say here might be most relevant to the high - technology focused product start up than others. But, I am confident that, over period as startups mature, they would like to get in to a position of advantage, and these suggestions would still hold at that point.]

Quick and relevant learning is what I would call the Swiss knife that entrepreneurs should possess when they intend to build their venture. The skillful application of the Swiss knife and its various knives plays an important role in the start up's survival. Given the relevance of learning, it is most apt to focus the start up's customer acquisition and growth plans with a very strong base of learning embedded in it. This is also the underlying theme that I suggest in this blog, and also forms the source of some of the suggestions I make here. I also assume that most of the companies here are relatively growth oriented and building global products.
 

Suggestion 1: Customers from a Developed/Advanced Nations
High-tech product companies from developing countries who are interested in creating global products are better off focusing their efforts on acquiring customers from developed nations like the United States or the European Countries. This approach gets multiple benefits; some of them are listed below:
 

a. Most developing countries have an ecosystem that is not completely ready for the products that these high tech start ups are offering. In such scenario, the growth oriented entrepreneur who often attempts to create something innovative, could be satisfied by making a product that satisfies the local need. (It is almost like believing that local maxima could possibly be the global maxima!)
 

Move beyond the boundaries of the developing market and focus on competing in an international market. (Yes! I hear many start ups cry that they are constrained by the funding issues. But that need not be a limitation - you got to take the risk if you intend to really stay ahead of what is going to come). This could mean finding partner for the company in these advanced nations who could potentially make the product that is user ready!
b. You could lead the change in the local market once you have a good base established - thanks to the difference in the exchange rates between the developed and developing nations. This could give you a head start and resources that help obtain a leadership position in the local market.
 

One could often be blinded that, what worked in the developed countries could be easily applicable for the home market of the entrepreneur in a developing nation. Often, this assumption is way off mark - and being open to customization for the local market at that stage would be essential.
Suggestion 2: Customers as co-producers

Product development in most startups follows the vision of the entrepreneur, and if this doesn’t get aligned with to the realities of the commercial world - the focus could easily shift from having a useful product to just developing a product none could use for years.

Involving the customer early is definitely a key to being able to break this potential trap and anchor the product development with the active involvement by the customer - almost like a co-producer! (At least some end user inputs would be available and thus provide some of the feedback necessary to develop the product further).
 

The caveat in here is to realize when you are being completely held hostage to a single client. The startup would do well to being engaging with more clients of similar appetite and need once the product has reached a presentable stage.
 

Suggestion 3: Create a good lead pipeline
Quantify your customer goals in numeric terms. Goal setting plays a major part in actively pushing the teams towards listening and inculcating the actionable feedback into the development of the enterprise. 

Creating a good pipeline that helps you reach the target set for the firm is a crucial for the survival of the firm. The dispersion in the kind of customers too plays an important role - else the experimentation that forms and important role in the early stages to find the apt customer segment and the value offering to the segment could be way off target and potentially lead to the demise of the firm. 

The mix of leads in the pipeline in some ways should also be reflective of the product - features that you intend to test and validate. Focusing on the most active customer segment, and building a predictable cycle for the segment with good processes and delivery timeliness is the second major milestone after the first mentioned earlier in the blog.
Last but not the least - always be open to change. At the beginning of this blog, we began by saying entrepreneurs need not be reactive always, they could possibly seek a clear advantage if they are proactive in their pursuit of opportunities - It is always possible that in spite of the efforts one would need to change the plans and get back to what could help survive. 

Remember: The warrior who survives the day's war - lives to fight another day!

Suppliers: A boon that could be a pain...

Entrepreneurs starting their ventures often try to build a complete solution themselves. This approach of building the complete product/solution by yourself, has been increasingly debated. While it provides a completely proprietary platform on which you could build your product, it could not just delaying the launch of the product into the market but also potentially distract the entrepreneur from what is to be necessarily pursued. A good search in our surrounding would help us identify many aspects of such an approach might not be needed. 

With the increasing availability of technology or readymade components/products/services, the need to engineering a technology solution for a market gets be reduced to an intelligent assembly of the available components as a solution that could be taken to the market, and validated for its utility. The focus thus could be more on the business generation dimension than on the technology.

This necessitates today’s entrepreneurs to work with a numerous of vendors/suppliers and choosing the right supplier/vendor definitely would be essential. It would be important to note that the term vendor/supplier is not only being limited to those who provide goods/services in the traditional sense alone, in the context of a start-up world, I would also add in players like incubators, accelerators etc who come in as a bundle of offerings.
Here is an example using the incubator/accelerator services that would help set the context better for the points made later on:

Incubators and Accelerators are an important player in the startup ecosystems (especially in the context of developing countries), in that they provide an isolated ecosystem that offer number of benefits. In addition to the access to physical infrastructure including office furniture, meeting/discussion rooms, they could also make available a lot of tacit benefits like – a peer group of companies, mentoring, legal and accounting services etc. In short, the isolated ecosystem is like nursery where plants are built to be effectively transferred to a new environment later on at growth stage.

Assuming that incubators/accelerators only provide a basic office set up that could help the entrepreneurs and their team focus on the work rather than being distracted by the daily pressures of utility services, could blind entrepreneurs to look beyond this. Many incubators/accelerators constantly hold reviews about the progress you have made on your idea - this could be a double edges sword. Frequent reviews could give rise to a very precarious situation.

Entrepreneurs often choose their start ups as a representation of their independence/identity - often to do what they intend to do, and being closely monitoring might push the entrepreneur off comfort of working at a steady pace. Alternatively, there are some other incubators/accelerators that allow the entrepreneurs only access to the resources and it is up to the entrepreneur to make the use of these. 

The choices made by an entrepreneur would have to be defined by what suits the expected direction of the product/service and the entrepreneurs’ personal working style. Here are some caveats for an entrepreneur when thinking of vendors/suppliers for your firm:

• What do I want from the vendor's product/service? 

A clear understanding of the client space is generally hard when one is starting his/her venture and this emerges only over a period of time. Thus, keeping a tab on the large number of vendor products and choosing one from these would be difficult if an entrepreneur isn’t in a position to identify his/her needs clearly.
While the clarity of the client is difficult, the entrepreneur would benefit from being specific about the requirements from the product/service that is to be tested in the market, and yet note that flexibility of replacement is important. If the direction of the product development has been positively validated, then tying up with your vendor for a long term commitment would be best – till then, tying up with a supplier deeply could prove a difficult proposition.

[Note here: Deeply embedding oneself to the vendor product could be a potential pitfall in case you want to revisit the hypothesis of choosing to acquire than build the solution.]

• Do you think the solution from the vendor has the features I am looking for?

The outcome of the first question could be a list of features that the product/service could have – the next act is to validate if the vendor/supplier has the components or whole of features that could help build the product/service. In addition finding a vendor who comes in with not just the features but a willingness to work closely with the start up is important. The apt question thus is:
Is the vendor open to working with you on towards co-creating your product?
Having a vendor who doesn't just offer you a set of features that was requested but really adds value in multiple ways would clearly be preferred [yes, the size of the supplier could play an important role here]. In addition to the above, would (s)he support your venture at a minimum with the following:

• Commitment towards the agreed terms of delivery
• Technical expertise to extend the current product offering
• Insights from personal experience that could benefit my start up

In some exceptional cases, there are instances of vendors who have moved beyond the contractual requirements to not just bear the delays in payment, but also support the entrepreneurs through some sorts of funding.

[Note: Often, the transactional nature of the vendor could limit the growth of your start ups.]

• Am I the only client for the vendor?

If one is to look out for such a vendor, the most common responses would be from people who think they have a spare capacity. The spare capacity could arise from not having anything else to be occupied with rather than the spare capacity being available through an efficient process of management. Thus, there are many people who would try to build their businesses in a necessity oriented manner completely dependent on your business, and not expanding it to include others.

This aspect in my opinion would be a paramount factor for the entrepreneur to consider. If there is one thing that start-ups need to remember at all times, it is that the vendor whom you engage with is not building his/her business completely on your expectations (you would better hire a full time employee or consultant in such scenarios!).
The risk that your company takes in such scenario is not limited to that of your business but also compounds with the risk of your vendors’ business, and this could be extremely catastrophic! [Imagine: A contractual vendor breathing down your neck and waiting at your doors step pressing for the payment on the deadline, when you know that waiting for a 2-3 day could ease the complete cash crunch!]

Past successes of entrepreneurs engaging with a vendor, word of mouth recommendations etc are important indicators that could help choose the right vendor/supplier. Start ups are a risky game - If the choice of the vendor/supplier is not carefully thought through - this could very well increase the odds against you.

Reading the above points again, it becomes clearer that the entrepreneur would benefit better from calling the supplier/vendor as a partner in the progress and not really be known as a "supplier" or "vendor" in the classical interpretation of the word.  In many ways, an employee too is a vendor isn't it? How about the investor! I guess looking at all the stakeholders from this perspective of being a partner could be the subject of another blog!

Raising Investments? Think about these...

A significant portion of startup news deals with startups raising investments and clearly we see such news creating positive waves in the entrepreneurial ecosystem. Why do such news create these positive vibes, and what should other entrepreneurs infer from this is subject of another blog, but for this one we shall limit ourselves to what entrepreneurs need to think of when looking for external investments.
Investment events are a validation in some form of the business potential of the entrepreneur’s idea, but it definitely is not the ultimate state a start-up should reach! The journey from on-boarding an investor to realizing a self-sustaining business with a lot of customers buying the product/service is really the aspiring state for start-up that is just blossoming. Getting an investor thus, is an important but not a necessary milestone in the start-up's journey.
External Investment could take many forms, prominent forms include: Seed Capital, Angle Capital, Venture Capital etc. Each one of these investors come in (often not voluntarily, but through an elaborate persuasion by the entrepreneur), at a different state of the start up.

• Seed Capital is one of the investments coming earliest in the life-cycle of a startup – could often be just after the first investment of the founders. This capital investment is generally acquired when the firm at a stage where there are a lot of experiments going on and the numerous hypotheses on the ideas are still being validated. The buy in by the investor would mostly be based on the entrepreneur's ability or the belief in the idea itself.
• The Angle Capital could be next in the series of investments raised, where the experimentation has possibly yielded a limited range of options to venture into and would benefit from an individual who could be more than just an investor - possibly opening up his/her network to allow the product/service be adopted. There is more than just the return expectation; the buy in to the idea is a bit more personal & emotional.
• The Venture Capital generally comes in at the growth stages of the start-up. At this stage, most of the uncertainties of the business arising from the customer's side (could be product features, pricing, leads, sales cycle etc) are all negotiated and settled to a large extent. The growth plans of the venture, market size, return on investment etc would be key factors that could get the venture capitalist on-board.

On-boarding the right investor isn’t just important for a start up, but could really get the help the start up see the list of the day and overcome its survival challenges. Choosing the wrong investor however, could be catastrophic for the venture.
Start-up investment by its very nature requires a lot of patience and is riskier than debt financing models - where there is periodic return on investment in the form of interest earned. Expecting a start-up to give returns within a year of investment is in most cases unrealistic!
Very often in the geist to raise the investment early, entrepreneurs raise capital from investors who do not understand the dynamics of the way start-up funding operates. Many entrepreneurs are left with painful experiences and sore relationships with such to such experience.
These issues are most common amongst fist time individual investors - it is really an expectation difference and communicating early and clearly about the way such an investment would operate is the best way to handle such scenarios. Personality fit is important to ensure that the investor relationship is working well.
In addition to the financing that an investor gets to the table, following are some of the other issues an entrepreneur would need to think of when raising an investment:

• Past Track Record of the investments – you could benefit from not just the background understanding of the investor but also the kind of inputs one could expect once on-board.
• Expectations of returns (may be in percentage terms) on the investment – will you be willing to share the equity asked for given the background?
• Network of the investor - could be enormously useful not just to gain/extend the product traction, but also hiring the right talent. A lot of feedback on the prospective employee could be learnt about. More about hiring the right employee here.
• What are the other investments (portfolio) that the investor has? - If this is the only investment made by the investor, then the risk is possibly higher on the start up! The above mentioned scenario could be more realistic

The entrepreneur when seeking funding should necessarily do the homework on the investor and not just be enamored by the spreadsheet projection! A realistic alignment is better than a dream that is created without solid grounding.
An experienced investors would have seen a lot of startup issues at close quarters and the suggestions and experience would be of enormous value - investing in choosing the right investor at the right stage and aligning the incentives appropriately would be every important.
Most importantly, you would always need to remember the following - investors are in the company to primarily support your venture - they share the risks of the venture with you, they would only make money for themselves when they make an exit. So ensure that there are exit opportunities for the investors - not having exit opportunities would not make the deal worthy of interest to the investor.
Understanding the pressures of the investors would definitely help explain the numerous horror stories that float around in the ecosystem. The investors are also in it to bake the cake, so that they could make some profit, right!
Note: We haven’t discussed about debt financing here, debt financing should ideally come at a later stage of the venture and if taken up at the wrong time, it would