If an idea or a unique invention is the essence of a successful startup, be it future-proofed or not, a business model is a frame to hold it all together and keep it safe from harm.
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Every startup needs a viable path for making money big enough for future investments and to remain a self-sustaining unit. The business model is that road. There is catch though.
A better business model often beats a better technology or idea. Just think about Dell in PCs or Wallmart in retail.
Any business model you choose is about the consumer problem you are solving, a pain you’re trying to subside and doing this better and cheaper than the competition. And in the end, creates a big enough wedge between what consumers are willing to pay and what it costs you.
Business model basically describes how you create, deliver and capture value.
Instead of reinventing the business model, or forging a new path through the jungle, which usually spells doom in the investor’s eyes who are wondering are they going to get a return on something that hasn’t even been tried before, try walking the trails already created by others.
In other words, try adopting one of these business models:
Disrupt
The one that doesn’t make money immediately. One of the more potentially lucrative and exciting ones. This business model is all about disrupting a big market – throwing a bomb into a lake to lure the fish out. And the catching is easier after the bang. Unfortunately, today’s lakes (big markets) are harder to disrupt and to monetize at the same time.
Facebook is the prime example of this business model. Zuckerberg ignored revenue and focused on gaining traffic until several years have passed and everything was ready for advertising. Same can be said about Twitter and Pinterest.
One disrupted blogging and email, the other photo sharing. And both forgot about revenue and had their eyes on traffic, influence and future revenue. Today Facebook net worth stands at $138 billion.
There are two fundamental ways do to this:
- When it comes to money, disruptive entrepreneurs spend their investor’s funds until they grow big enough to create revenue on their own. Say you got an exciting mobile app or a website, and you want the traffic to stimulate the buzz and naturally, you don’t charge users, in hopes of increasing that traffic. When raising money from investors, start with a seed round of a few hundred thousand dollars. That will cover the usual expenses for the first few months as you build the prototype and show that the concept works. Now goes the round of venture capital, maybe a million dollars, as to hire employees and keep working. As the funding burns out you must find a way to increase traffic and go back for more venture capital, this time bigger. That will sustain everything for a while longer without the need to charge customers.
- This one is based on “runway” and “burn rate“. You find some investments, use them, and then return for more. A runway is the maximum amount of capital, while burn rate is the rate at which spend the investments. This isn’t much different from the late 90s market up until the dot-com boom. After the crash, the Facebook winning strategy made people play this game again. Twitter also, even with a business model that is vague. On the other hand, Twitter earnings have been improving from $277 million in 2015 to $510 million in 2017.
Franchise
This is a business model that can go for retailer, manufacturer or distributor type. A franchise will lease its logo, name, and support to those willing to pay and open their own location or branch.
This one is for those who want to go into the business for themselves, but not by themselves.
Buying a franchise will let you get into a proven, big brand that has already created a customer base. You will be in the control of daily operations and marketing, even though usually you will have to cooperate with the parent company when it comes to marketing.
A franchise cost can vary, all depending on the type and size of the location and where the center is located.
This business model worked wonders when Ray Kroc created his gold mine. Nowadays Mcdonald has 37,000 franchisees around the world with over 1,5 millions employees. 80% of Mcdonald restaurants are franchises.
Go Elite
You can try to manufacture high-quality merchandise that will differentiate you from competition, and create something that will be remembered. Making a top-notch product can add extra value to it. Two clear examples are WD-40 and Apple’s iPhone.
You can either make a product out of raw materials or assemble pre-made components into a quality one (E.g. automobile industry). Then you either sell those products directly to consumers or outsource sales to another business.
If you’re trying to sell them yourself at the highest price, you will need to target specific types of customers. The supplement industry is a wonderful example, selling high-quality products to those actively seeking them and who can afford such expenses.
There are many more models and combinations such as the middleman model, becoming a marketplace, subscription and customize everything models. To find the one that you can use, research your environment and the unique situation you’re in. If you view every new situation and circumstance as something singular that be must be thought through without using already established patterns of thinking and behavior, you will truly succeed.
