Your business model should be more than just a picture of your start-up, says Mark Suster.
I recommend you read Fred Wilson's recent blog post about the need for a well articulated business strategy before pushing a particular business model.
Since Arrested Development is back, I thought I'd resurrect Gob Bluth's answer when he was told he needed a "business model" -- he quickly figured out that he was missing one so he asked Starla, the Bluth company secretary, if she would be his business model.
He then brought her to board meetings so nobody could accuse him of not having a business model.
I guess this is the ultimate definition of implementing a business model when you're not clear on strategy!
I found myself in violent agreement with Fred's blog post(s).
My take on his argument is this:
1. You need to first create a compelling product.
Compelling in the sense that you solve a real problem a target group of potential customers has with a product that is significantly better than the alternatives on that market.
In my opinion, no amount of clever marketing or chest beating at conferences can create a market if you don't have an amazing product to begin with.
My most read post on marketing tips highlights this -- please pay attention to tip number four -- you can't have great marketing for bad or mediocre products.
2. You need product / market fit.
Put simply -- you need enough users in a segment who care about what your doing to dictate investing further in the product or in sales and marketing resources.
If you solve a deep problem for a niche user group but not enough users have the problem you won't achieve product / market fit.
Or if you solve a problem for a big segment but your solution isn't significantly better than alternatives -- you won't have a fast-growing, successful business. I often call this "going a mile wide and an inch deep."
The answer to either problem may mean simply refining your product to solve deeper problems or expanding the product scope to meet a larger group of customers' needs.
Product / market fit is everything.
I see many companies these days that just race to raise capital. They see capital raising as the success validator. Sometimes they rush to raise cash because they don't have a well articulated product / market fit and they think having more money will help them have more time to prove the business.
I know what is going through their collective heads, "The more money I have, the more time I have to figure things out."
On the other hand, sometimes, "mo' money, mo' problems."
Raise yours wisely. Spend it wisely. Figure out the appropriate time to step on the gas with more funds. There is no right answer.
I know that the acronyms or business sayings change over time. But the search for product / market fit has been around in various form for a long time.
A. CROSSING THE CHASM
In the 90's, we all talked about "Crossing the Chasm" in which Geoffrey Moore encouraged us to think about solving really deep problems in a particular customer set and then using that satisfied customer set to move on to tangental markets.
The idea of "going deep" with customers has always shaped how I think. Shallow and superficial and racing from segment to segment in search of some take up has never been a strong strategic plan for me.
B. INNOVATOR'S DILEMMA
Second, I was then influenced greatly by Clayton Christensen's work, "The Innovator's Dilemma" in which he argued that "disruptive technology" came from companies who offered products that were significantly cheaper and less functional that the existing market and ended up capturing the needs of customers who previously couldn't buy products due to price / complexity.
He calls this competing with "non consumption."
It was the most profound business strategy book I had read and greatly influenced how I thought about company building and certainly how I think about investing.
I have written this up before if you're interested -- I call it Deflationary Economics.
But when you create a product for a large segment of users who previously couldn't afford products due to price or complexity and if that product can work at "Internet scale," you have the chance to do something truly amazing.
With 30 million registered users on a global basis. 65 million monthly actives. 2.5 billion monthly page views.
All totally free. It has become the largest art community on the web with huge pockets of global users who never had a website in which to express themselves amongst peers and also find ways to monetize their talents on a global basis.
C. LEAN START-UP MOVEMENT
And finally there is the most modern spin on these concepts by two individuals who have built tech start-ups and have done an excellent job at describing the process. In Steve's case, it is "going in search of a business model."
And Steve's desciple (or as Steve will tell you, "He's way past me now!" is Eric Ries who wrote the must own, "The Lean Start-up.")
I think all of these great works (all must reads) scratch at the same thing -- the search to solve a real problem a market has by creating features that add compelling value to your customer such that they will do what customers hate to do -- change behaviors (i.e. use your product).
And in the words of my friend Bill Gross, "Your product has to be 10 times better than what exists in order to be a success."
If you don't want to click through to the link, I'll tell you the answer -- if you're in a competitive market and you aim to solve problems assume you'll have strong competitors so if you need to aim for 10 times as much innovation to end up being three times as good as the market and you need to be three times as good as the market for rapid adoption. But if you have time later -- please watch video with Bill. He's awesome to learn from.
3. Business Model
Fred's third argument is that you need to be careful not to try and scale up your operations (sales staff, marketing, etc.) until you feel clearly you've achieved product / market fit.
He published another MUST READ post about being careful not to confuse early revenue traction with product / market fit.
The money quote:
One of the things I have observed over the years is that a hard charging sales oriented founder/CEO can often hide the defects in a product.
Because the founder is so capable of convincing the market to adopt/purchase the product, the company can get revenue traction with a product that is not really right.
And that can hide all sorts of problems.
That's Sofa King true.
The Need for Strategy
It's something I worry about with companies.
Are we winning because we create compelling marketing materials and have hard-driving sales people that get customers buying product or are we solving a deep-seated customer need?
If it's the former, your company will definitely start to top out at some point.
It's why I never get too excited about sales unless I can scratch the surface of the elusive "why."
If you're not solving a deep seated problem you'll become "shelfware" and won't have a repeatable, scalable business.
So that's why I believe companies need a well articulated strategy. Not a mission statement, mumbo gumbo bullshity, groupthink happy clappy statement to be published on your website.
But a clear, crisp articulation of:
Based on the problems you are solving in today's customer base, your unique skills in solving these problems and where you see the market going, the big question becomes …
In which direction should your company evolve?
Admitting that you will have limited resources and strong competition both in today's market and in the markets you want to enter is the right start of the conversation.
You need to pick wisely because whatever you do, you must do better than other people staring at the same information as you. (Also known as your competitors or future competitors)
I work with many companies.
In some -- like Maker Studios -- we have a very clear and shared purpose for what makes us unique, why we are growing so rapidly and where we think the market is heading (and thus how we must evolve). The team has stated it and has built metrics around key goals for future success.
At other companies, we have very strong revenue growth and an intuition on why we're doing well but a less well articulated case for why people love us today, where we stand relative to alternative options and where we want to evolve as we perceive our customers requirements will evolve.
What I can tell you is this.
I don't work with a single team that isn't trying to pull together a stronger case for our strategy.
In the early days of the company, it's ok to launch a product that you believe will solve a customer problem with a strong intuition about where the value will lie. That can be your "going in strategy" but you know it will need to evolve.
And as you know, the initial product strategies are like war plans, "they never survive first impact with real customers."
That's when you learn. That's when you must reflect on how your customers are using your product. That's where you must cull or refine features people aren't using. That's where you need to separate out your market spin from your internal reality of how customers are (or are not) using your product.
It's why in early-stage teams I personally invest in strong teams not in strong product strategy.
I sometimes see VCs debate ad finitum about a company's strategy. They think they know "here's how your product will be adopted, blah, blah, blah."
I don't mind having the debate but a VC who thinks early on that he/she REALLY knows what is going to happen in the market his fooling him/herself. Markets decide. We simply have a ring-side seat and hopefully make our next moves based on market signals.
From customer feedback, you need to define your company's strategy.
When you know the value of what you provide to a constituency (either your end users or somebody who will pay to interact with your end users) then you can begin to define a strong business model.
Hopefully one more scalable than Gob Bluth's.
This post originally appeared on the blog Both Sides of the Table.