How to Find Your Business Model
Business Modeling, the Game
- Yes, you are living in a simulation
- How you die = punt on the business model
- Game progression = vital decisions leading to actions that unlock new business models
- Your reserves = courageluck:capital
- How to win the game: see the system levers, to take on the goliaths, to build a world with intended consequences
I am in Montréal for StartupFest, one of the best startup festivals in the world for clever content, amazing humans who run the event, the cooler July weather, compared to NYC, and excellent food.
I am conducting a workshop: How to Find Your Business Model.
After thousands of hours in ExcelTM and working with hundreds of startups and corporate innovators, I’ve come to realize that the work of finding your business model just might drive you mad, until you realize that it is, in fact, a game. Assume the following rules of the game:
1/ You are living in a simulation
No need to search for glitches in the Matrix and share your postulations on a Sub-Reddit. We are living in a simulation. It started about 1100 CE, when humans started to speculate about the financial value of agriculture.
There is archeology to business modeling, and future generations will study our time on this earth, they will see our evolution in the following eras:
For a long time, there were no business models, when the earth was covered in water and little single-celled organisms were swimming about, not thinking about the future. Then land formed and we evolved to bigger bipeds with big brains, and we domesticated other animals and the land. But the modeling didn’t begin until the first debt instruments were created in the 1100s in France when courretiers de change managed agricultural debts throughout the country on behalf of banks. The earliest formulations of discounted cash flow analysis originated in 1849 to value German forests.
The mental models we’ve been practicing which still predominate: we have hundreds of more years in financial future modeling and simulation, followed by less than two centuries of industrialization, and this last little 20+ year blip of digital business models.
This is important to know. Modeling – the act of simulating the future- has been happening for centuries – even long before we made the machines that made the computation that launched the Cambrian era of business model innovation. Because while everything might feel different and uncertain right now, really all we’re doing is adding a digital substrate on top of our financial and industrial logic, we’re not really disrupting anything.
So when we talk about business model innovation today – the SaaS revolution, the marketplaces, crypto exchanges- we have to remember what comes before and therefore what still drives our thinking. This is why the future is here, not yet distributed. Because we are living in a simulated environment – where the constraints are defined by capital and earning power expectations. Depending on where you are in the world some of your investors are still using We’re still using the valuation methodologies developed 200+ years ago.
We are building on the topography of what has come before. Take the case of Netflix.
Netflix is a bold mover who have adapted their business model and leaned into their growth, success and world domination.
But their origins are an industrial era story – they got their first uplift from the adoption of DVDs and DVD players. A pre-1997 business model of moving things through the mail system and growth modeled because of plastic extruded into discs and rights acquired and managed in a mechanistic factory-like model. The genius move to charge subscription was a stroke of genius if only to position the company against the giant Blockbuster and their pesky late fees. The later expansion streaming and mobile-enabled growth and international expansion and House of Cards – all of this new economy modeling- was still happening on the backs of the older economy.
So let’s jump back an era and take a look at Facebook. Facebook is an example of build first, make money later era of eyeball monetization – the loving term invented in the mid-90s that endured through Facebook’s and Google’s winner-take-all status. Their growth funded a flurry of development – but most of it technical and not in the realm of the business model. Not for lack of trying. They’ve bought products like Oculus, they’ve launched Portal, and Libra is FB’s third attempt at devising a payments revenue stream to rival WeChat. There were bad habits created in the build first monetize later era that infects startup ecosystems around the world. We can’t deny Facebook sheer power – non-financial metrics like customer adoption and user engagement driving the value when you engage more than a quarter of the world.
Which brings us to the current era. The everything-as-a-service models as exemplified by the compound annual growth of customers. Zoom was an ingenious combination of technical prowess – a lead engineer who was tired of customers hating his product Webex – to leave his perch at Cisco and launch a Webex killer. He coupled that tech development and awesome user experience with a smart SaaS model. He also entered in the midst of a hugely competitive market but made a major jujitsu move by becoming the preferred partner to – everyone – growing the customer base and achieving high retention and a high viral coefficient – the percent of people whom you invited to Zoom but who then became customers.
But this is not to say that as-a-service like SaaS is the best business. On the contrary – it’s businesses like Alibaba, Tencent, and Amazon who combine all of the models: logistics payments advertising book selling e-commerce marketplaces -in mechanistic recurring flywheels of interconnected beautiful complexity.
- How you die = punt on the business model
What keeps you from starting your business model search? Is it because you know you are wrong? Of course, you are.
All models are wrong, but some are useful. -Box, George E. P.; Norman R. Draper (1987).
I am still, however, perplexed when I work with incubators in Norway, Shanghai, Halifax, Brooklyn – and see this bad behavior everywhere. Here are the most common reasons. Some are leftovers from the 90s (field of dreams approach). I’ve worked with incubators in Norway, Shanghai, Halifax, Brooklyn – and see this bad behavior everywhere.
Or worse- driven by avoidance, fear of rejection, procrastination – business models are not discovered and the consequences are indeed fatal. These are all the self-reported reasons why startups fail, in the founders’ estimation. Note that weak tech and poor code is not on the list. Most of these reasons are a failure to find and optimize the business model.
At this point in the argument, I always get a counterexample. But wait, you say, not everyone started with the business model, first. Some really did build cool sh*t and wonderful things just happened to them, later.
Yes, you are right – if the purpose game turns out to be “he who amasses the largest free user base wins if his name is Mark.” With one-quarter of the world using daily, he’s bested whole religions and most nation states. But when I see Facebook, the company, I see a delegated business model. A company split in two: product, and the business separated from each other. There’s a reason why solving the recent challenges is considered a hard problem. It also constrains Facebook’s future attempts to build new models on top of their original model, as Tencent, Alibaba, and Amazon have so masterfully done.
So bear with me. Accept these terms. Enter the game.
No punting on the business model
You are in a simulation
Here are the controls
3/ Game progression = vital decisions leading to actions that unlock new business models
I have observed over 10,000 business model moves – and here are the two basic components of a business model. First – there’s a decision, based on a strategic move. The decisions lead to actions which then unlock business models.
Here are examples of the kind of actions one can take that unlock value in the form of business models.
For a list of the most common starter models – visit the Business Model Library.
Business model innovators are business model combinators – they are not inventing anything new, they are just combining and recombining business models in novel and interesting ways.
So follow along:
Take out a piece of blank paper – A4, 11×17, or even a PPT slide
In the bottom left, start with your value proposition. The true story – who do you serve, what do you offer. To accelerate the questions you’ll be asked by every mentor and advisor – make sure you clearly define the pain point you are solving for.
In the bottom left, start with your value proposition. The true story – whom do you serve, what do you offer. To accelerate the questions you’ll be asked by every mentor and advisor – make sure you clearly define the pain point you are solving for.
What’s the eventual market size you are aiming for – set a mark on the timeline for when you’ll think you’ll make a dent.
Is this your best possible wedge to enter, and accelerate into the market?
Now let’s follow on to the big vision, the big why.
Before we do – let’s talk about who want to tell your story to, and what kinds of advisors, mentors, and supporters can follow you all the way through to your big vision.
I’ve found working in accelerators around the world that logic is in the eye of the logician – and valuation methodologies are geographically attuned.
An investor in the West Coast wants to see a multibillion-dollar market, and you better be ready to answer the question – “What would you do with 100 MM?” and you better not be trying to earn profits. Spend into your growth!
In parts of NYC, in European cities, and even Montréal, you might be asked for detailed financials, a discounted cash flow analysis, and your plans to reach break-even in a near term time frame. I know because I’m constantly dealing with this friction on boards.
But this same logic has been seen as the Bay Area – NYC arbitrage opportunity. Investors with Wharton MBAs trained on proper valuation methods of Damodoran and Copeland run discounted cash flow and comparable estimates, like realistic pointillist oil painters. West Coast investors are more like abstract watercolorists – broad brush strokes – right in the long arc of time – wrong on the detail. But in the last 10 years that watercolor method has paid off.
Assume: we will get the money and customers and resources and people we need to build this business.
How did the world change?
Sketch it out – claim your True North vision. This is your fixed direction – you can pivot, or tack if you’re a sailor, back and forth and around, but, ultimately you’re aiming in this direction. If you find your team does not agree on this vision, then now is a good time to get aligned. If your vision consists only of “exiting” with a high valuation to a big company – well that’s not exactly a True North vision. You’re going to need something a bit more inspiring if you are going to hire anyone under the age of 30 – so you might as well try.
4/ Your reserves = courage (luck) : capital
Let’s talk about investment. Investment is not the goal. Valuation is not the only metric. Valuation is simply a reflection of the collective belief about your narrative – your narrative about your earning potential.
Carefully controlling your reserves – of courageous decisions, and actions (with a helpful powerup of luck and timing) – these are how you win in the long run. Endurance over velocity. Wise action over too much cash.
You’ll want to think about earning potential even if you want to go it alone and bootstrap all the way because no one is truly in control of the whole game. Even if you want something perfect, something small – you need to look at your context. How competitive is the environment? Are you dependent on tech giants to deliver your services? To acquire your customers? Is your idea so delicious that other investment-hungry copycats will follow suit? How would you feel if someone else with less skill and savvy and smarts raised $200 MM and just outspent you on marketing?
Strategic actions give you leverage, and unlocking meaningful revenues that have that wonderful compounding value of happy retained customers- this gives you leverage in all negotiations. With your partner, your investors, your employees.
5/ How to win the game: see the system levers, to take on the goliaths, to envision a world with intended consequences
But first, you must commit to the practice of business model design. Every day, observe. See the simulation – and how business modeling has shaped this city, your social interactions, the world around you. Notice how the rules of the game change when you travel to a new country.
To conclude – business modeling will help you deal with the consequences of what you build. By taking off the blinders and immersing yourself in the whole system of your business, you’ll be able to help rewrite the rules. This isn’t a First Person Shooter, nor is it World of Warcraft nor Grand Theft Auto.
A provocation: how might we see and design for new intended consequences, valuing:
Customer health measures > DCF, NPV, IRR
Health outcomes > CAC:LTV
Reversing to 350 Parts Per Million > $ 10 BN Valuation
Wellbeing > FOMO
Then model it. Models can help us predict and live into the future we want to see.