As an early-stage founder, it can be tempting to come up with half a dozen ways your company could make money. Don’t fall for that temptation: Five unproven solutions is no solution at all.
Over the years, I’ve sat in a number of meetings with early-stage entrepreneurs who have a, shall we say, complicated slide that attempts to explain their business model. Usually, this is the result of a founder having come up with a number of business models that they might try, to figure out how to start generating revenue.
The problem? Having more than one business model means you don’t have a business model.
Your only mission is to find a repeatable business model.
I’m quite partial to Steve Blank’s definition of a startup: “A startup is a temporary organization used to search for a repeatable and scalable business model.” Or, put differently, your company is eventually meant to become a machine, in which you put $100 in the top, and $150 falls out of the bottom.
A business model, in this case, is the full stack of how your company operates: How you deploy your resources (money and people) to create products and attract paying customers, and how you retain those customers. There are a number of different ways you can do this — direct to consumer sales, retail channel sales, business-to-business software-as-a-service solutions, subscription-based business models, you name it.
It’s also possible to change business models after the business is running. Adobe, for example, used to sell Adobe Photoshop at around $600, but had problems with piracy. A few years ago, it switched to a $10 per month subscription service instead. That was a stroke of genius: Adobe knows that its serious customers will likely stick around for >5 years, so they won’t make any less money. They’ve solved their piracy problem, and their cash flow is now much more predictable and less tied to the Photoshop release cycle.
In order to create a well-oiled startup, you need to find that business model, and it’s extremely hard to test more than one at a time. Showing an investor that you have five business models doesn’t show that you are closer to finding one that works. It shows the opposite: It means that you’re unsure what is going to work. That’s okay — early-stage startups are vehicles for experimentation, and nobody expects you to hit a home run the first time you swing the bat.
However, you do need to have a good operating plan that shows what you’re going to do for the next 12–18 months, and if you have a handful of business plans, you’ll probably struggle to create a sensible roadmap — there are too many unknowns ahead, if you don’t have a single business model you’re going to be testing.
A better solution is to fully flesh out the business model you think is most likely to be successful. Show what the problem is that you’re solving and explain how your solution is a perfect match for that problem. Explain how you’re going to attract customers, what your expected customer acquisition cost (CAC) is going to be, how you’re going to charge them, and how you’re going to maximize your customer life-time value (LTV).
There’s nothing wrong with having a slide in the appendix of your pitch deck that shows that you’ve thought of alternative business models. Figure out what your business might look like as a B2B SaaS company, as a subscription company, or as a retail-channel company, if you have to — but my bet is that if you have a business model you believe in, you won’t ever need that slide.
Execute hard, fail, then pivot.
Sometimes it’ll feel like you’re running at full speed toward a brick wall that’s coming up awfully quickly. That’s the nature of startups. You’ll never go fast enough, you’ll never have enough resources, and you’ll always want to get answers more quickly. The trick of running an early-stage company is that you’ll need a ton of chutzpah and faith in your plan. Create a good operating plan and execute the ever-living hell out of it.
If your plan turns out to be wrong, and you’re certain your business isn’t going to work out the way you originally envisioned it, come up with a new plan — or “pivot” in startup-speak — and try again.
But only with one business model at a time.
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