How do you get from a great idea to a business that will make money and meaningful human impact? Designing a strong business model for your venture is a good place to start!
In this latest video in our Zero to Seed series, learn more about:
- building a first business model
- how to talk about your business model to attract investors and go after grant funding
- how your business model will change over time
"You want to put down everything you understand about your business model right now in a way that's organized and helps you articulate it to other people. It can also be a tool that you can use to communicate with potential investors or supporters of what you're doing or customers even. And then expect to do a series of experiments against it and factor in the feedback and the learning that you get from those experiments to test the next version of it."--- Andrew Browne, Funding Catalyst Lead
Video transcription can be read below.
0:01 Leah: Hey, Andrew. Thanks for doing this today!
0:09 Andrew: Hi Leah, no problem! I'm excited to jump in here.
0:13 Leah: Perfect. Well, let's start at the very beginning. Today we're talking about business modeling. So why don't we start off with a definition? What exactly is a business model?
0:23 Andrew: So a business model simply describes how a company converts the value that they create for their customers into revenue or other forms of value in return It answers the question that entrepreneurs will always get, "How is your company going to make money?" And it considers all the different factors that go into your business, including the costs that you incur in order to create the value that you're trying to create for your customers, how and when you capture that revenue or that value back in revenue form from your customers, and all of the little things that pull a business together and make it happen. So that includes everything from how you connect with your customers, the costs that you might incur there, how you serve your customers. Is it a software platform? Is it a product that you're selling in hardware form? All of those things get considered when you're thinking about your business model, and it's essentially how all of that connects in a way that creates a sustainable model for a great… to turn a great idea into a great business concept.
1:24 Leah: Right. And, you know, as entrepreneurs, we have to encourage them to sort of have more than just a great idea.
1:32 Andrew: Yeah. I mean, ideas are everywhere. Everyone has great ideas. And especially in your own head, they can seem like amazing ideas. The goal when you're thinking about a business model is how do you actually turn that great idea into a great business? And without a great business model that supports a great idea, it's not actually a business. It's maybe a charity, and maybe it takes a different form. But the reality is, if you want a great idea to become something great for many, many people, you have to have a sustainable business model in the long term that's going to support that growth and development and all the costs that you're going to incur to create the value for your customers along the way.
2:08 Leah: Right. You did mention, you know, creating value for people. And, you know, here at Thin Air Labs, we love to talk about creating meaningful human impact. How does that factor into business model development?
2:21 Andrew: Well, I think about this from a few different perspectives.I think the first thing is obviously at Thin Airwe look at human impact as an indicator of the scope of the value that you can create for the business and for the customers we serve. Ultimately, you're not creating a charity. You're creating a business that needs to generate and drive revenue back into the business in order to pay for all the costs you incurred to create value and return to shareholders in the company. So the best way to think about how to create the most human impact possible is to create a really exceptional business model that supports that idea and gets it to market, generates revenue that you can invest back into growing the company to serve more and more people. So when we think about human impact, first of all, it's like on an individual level, how does your product create a positive impact on the individual that's using it or engaging with it? Maybe it's a network. So how does it create value between the interaction between two humans or two people? But to do that at scale, you really need a thought out validated business model that you can grow and scale in order to serve more and more people. So, going from the individual to a customer segment or a group of, you know, a bigger group of customers in order to create more impacts and create more positive human impact, you have to be able to support a business and a business model that is able to support more and more customers.
3:48 Leah: Right. Totally makes sense. Totally makes sense. Okay. So if founders are listening to this and they're thinking about designing their very first business model, how do they get started?
4:00 Andrew: I think it starts on a whiteboard, to be quite honest. There's tools that you can use that help you kind of frame your thinking around how this all fits together. Business model canvas has been around for a long time. There's different variations of these canvases, and these types of tools like Lean Canvas, lots of literature on frameworks, and ways of thinking about how all of these pieces fit together. But, quite honestly, it starts with kind of papering your idea from your head onto a whiteboard of some sort or on pen and paper to understand how all of these things fit together. At the center of that whiteboard should be the value that you're creating with your… for your customers. And then you should be able to factor in all the things that are going to go with the inputs that you have to put into the business in order to create that value. So if it's a software company, we're going to have to hire software engineers and actually build and maintain a product in the software world. If it's a hardware product, you are going to have manufacturing costs and raw material costs, and distribution for any kind of business it is. All of those costs have to be considered as well as how you're actually going to get product to market and capture value in the form of revenue back into the business. So there's a lot of moving pieces there, and there's a lot of functions of a business that drive and relate to a business model. The key is to start with what you know now and understand that there's assumptions baked into that. Sketch it out using some sort of tool that helps you organize your thoughts in a meaningful way and then review it. But understand that there's a lot of unknown still within that model. And your goal from there is to go out and start testing that business model against the real... against the market. A lot of people get caught up here and say, well, in order to test this business model, I need my product offering to be ready or perfect or...perfect is the enemy, of course, but even ready in the sense that it has to be a commercial grade product in order for me to test my business model. I don't believe that to be true. I think that there's lots of ways you can kind of test willingness to pay for a specific value you're trying to create for the customer testing kind of cost inputs that it's going to take in order to build the product that, you know, customers now are willing to pay for. And all of that learning and knowledge and the speed at which you're able to accumulate it is really a competitive advantage as a startup. So the key is to start somewhere. Try to organize your thoughts in a way that connects all the dots within the functions of a business and iterate as you learn more and more about the business. It should be something that you have up on a whiteboard in your office, or wherever you come into work every day you can look at it, you can gut check it against what you've learned over the last 24 hours and make iterations and tweaks on it and then go back to testing it against actual customers in the actual market. So I think a lot of people get caught up, "well, I don't have that fully fleshed out." And that's totally okay, no one does. In fact, you might have a great idea for a product offering. Everyone loves it, but no one wants to pay for it. There's work to do to validate the business model that's going to support the growth of a company based around a product like that. So the mindset you want to go in with is very experimental. You want to put down everything you understand about your business model right now in a way that's organized and helps you articulate it to other people. It can also be a tool that you can use to communicate with potential investors or supporters of what you're doing or customers even. And then expect to do a series of experiments against it and factor in the feedback and the learning that you get from those experiments to test the next version of it.
7:31 Leah: Cool. Sounds like a good plan. I like that thinking. Okay, so here's a big question, and I'm sure a lot of founders are thinking this. Do you need to have your business model in place before you even start talking to investors?
7:44 Andrew: I mean, these are kind of loose terms, right? Like in place could mean it's fully operational and that you're already selling a product. You understand where money comes back into the business, and more revenue is generated and what costs are. I think that you have to have thought put into what the business model could be and potentially different scenarios of what it could be, especially as a company grows from serving ten customers to 100 customers to a thousand. How does the business model change? What investors are going to be looking for is your thought process and how you think about how this becomes a massive company. And on one hand, it's what do you think the product is that's going to be the something that everyone wants, and everyone talks about and recommends to their friends? The other side of it is how does the business function and work in a way that generates revenue above and beyond the cost it takes to create the value for those customers? So the thought process and how you think about that, and also being honest with yourself about what you don't already know and what you're going to have to figure out in the next stage of your venture is really, really important. And that's what investors will be listening for, not necessarily that it's fully fleshed out or fully understood, but that there is a path to a long-term sustainable business that's going to generate revenue above the cost it takes to create value for customers. The other thing to consider here is different investors are coming… you're approaching them, and they're coming in to learn about your business at different stages of your development. Angel investors are going to accept more risk on the business model side than venture capitalists, especially later-stage venture capitalists that are investing growth capital in the companies. Investing growth capital is based on the assumption that the business model is fleshed out, is already fully understood, and you're basically pumping money into the business in order to drive growth. Earlier stage investors and angel investors are coming in saying, you know, we don't know whether or not… like, we don't know what the business model looks like right now. We don't know what it's going to look like in a year from now. But they're making a bet on the founders' ability to figure that out. And on some of the current evidence, that they have to say, yeah, there probably is a business model here. When you think back on some of the early tech… journeys of tech giants like Facebook, you know, there was kind of an understanding with early investors that if you get millions or billions of people on this platform, there's going to be a way and a business model that's going to support revenue generation at scale. But of course, they went back and forth and said, well, is that advertising? Is that the subscription model for users or members? Is there other ways we can generate revenue? All of that was unknown at one point in everyone's journey. And that's the same… the same is true for any venture, right? There's kind of different stages of understanding. And that's why it's so important to be able to kind of test some of those early assumptions early in the process before you even build a product. Well, if I build something like this, and I actually going to be able to generate revenue? If I need to generate revenue, how am I going to find the right customers that are going to pay me that revenue? It kind of forces you to go through this thought process, and that's really what investors are looking for, is how do you think about this? What's your mindset and approach to figuring out what the right business and optimal business model needs to be? And how are you going to go out and actually execute against that? So what I would say is business models are a key risk factor for investors when considering what and when to invest in a company. So questions like, is it fleshed out? Does it make sense? Will it change as the company grows? These are all important questions to ask, but if it's not fully fleshed out at the beginning, it's not too early to talk to investors. But you should be honest with where you think you're at with it, and a lot of founders get ahead of themselves and say, well, I got one customer that paid me one time for this one product, and therefore there's a business model that lives here But there's still a lot of unknowns in some of the other functions of the business that what investors are really looking for, especially in the earlier stages, is how are you going to go and figure this out? And there's accepted risk there when you're investing in companies at that stage, you're typically at that stage investing in, "Yes, there's definitely value to be had for customers here. The founding team is smart and systematic in their approach to figuring out some of the things that they don't know right now. And I'm going to take the bet, even though the business model isn't fleshed out, because I think that they're going to be able to figure that out." And/or it's a pretty standard business model, right? Like a SaaS product or a hardware product that you're selling… like a widget or something that you're selling to different companies. There's examples of business models that work in different sectors that can be pointed to and saying it's going to be something like this. But we think that there's more opportunity in this way. And I think as we grow and mature as a company, these are the things that we're going to explore in order to increase revenues and decrease cost of the business.
12:35 Leah: Cool. That totally makes sense again. Okay. Now you came up with the Funding Catalyst Service for Thin Air Labs. So let's talk about the non-dilutive funding side of things. Do founders need to have that business model set up and in place to go after non-dilutive funding?
12:51 Andrew: I think I would give a similar answer to the last one about private investors. Funding agencies and groups that distribute this type of capital are definitely going to be looking for where you're at in that process and journey of fleshing out the business model as much as they are looking at where you are on your TRL or technology readiness level of your product. It's a factor that they absolutely consider when they're looking at approving funding for different grant applications. A big part of what we do in the Funding Catalyst team is help companies flesh that out, help them with their thinking around it, help them paper and create documents that help explain and articulate their business model at the current form and some of the unknowns that are still there that they're going to have to figure out. And we help them execute against a strategy that's going to help them flesh that out even further. Same thing for different funding bodies. They're going to be looking to invest in and inject capital through grants or otherwise at different stages of the company. So knowing what type of program you're approaching or the type of investor on the private side that you're approaching, and typically when they like to invest in what needs to be known for them to be able to say yes is really, really important and going to save you a bunch of time spinning tires, kind of getting the same kind of responses from similar investors.You need more traction. You need more of this. Sometimes more traction actually means, "I just need a clear line of sight into how this becomes a fully fleshed out business model that generates more revenue than the cost it takes you to create the value." And that can be kind of like a blanket statement that you'll hear from investors often, "come back when you have more traction." I would really try to get a little bit deeper there and say, well, I already have traction. I have paying customers. What don't you see here? What do you need to see more of in order for you to get more comfortable with this investment? And a lot of times, the root of that is actually, "well, I just don't know how you're going to be able to repeat that at scale" or, "I don't know how you're going to get to 100 customers instead of the ten that you have right now." And that's a function of your business model, right? So if you haven't figured that out and an investor is still not… doesn't have a line of sight into how you're going to then it's probably going to be no. And the same is true for any kind of funding bodies. And this is a struggle anytime that you've done this for the first… like if this is your first time raising capital or going after this type of magnitude of capital, you're going to come up against these types of questions. And so a big part of what we do with the Funding Catalyst team is help founders navigate through that, help them answer those questions before they get to zero hour of trying to submit an application and kind of B.S.-ing their way through one of the answers. There's an approach and a framework of thinking that they're looking for. So even if you don't know the answer fully, you can kind of articulate the approach you're taking in order to figure that out. And depending on the risk tolerance or the risk level that different groups are looking to invest in companies at, you know, it's important to approach the right run at the right time, which is another big part of what we do is just thinking about these types of opportunities strategically over a period of time, instead of just going after whatever's right in front of you right now, that seems like a good opportunity. We really try to lay that out and say, "okay, when you when you get your first customer, these are the programs that you should be looking at when you get your next five and you kind of have these things in place and a little bit more validation of your business model, these are the ones that are going to be a better fit." And just helping the entrepreneurs and founders understand the process and what granting agencies are looking for when you're asking for money from them, as well as what investors are looking for as well, which aren't that dissimilar, but there's definitely nuance in terms of why and at what stage they like to invest in different companies.
16:42 Leah: Now, I think you've kind of answered this last question, but let's sort of wrap up with this notion. So you've got your business model down, you're kind of comfortable with it, but should it actually be changing over time?
16:53 Andrew: Yeah, it definitely should. And it should because you're learning as you go, right? You're gathering more information, you're getting more evidence and more validation of your thought process earlier on in your journey. And you should be factoring all of that new information into what your business model needs to be down the road. I would say the other thing that should be noted here, is like a business model to get from 0 to 1 or 1 to 100 or whatever is likely different than one that's going to get you from 100 to 1000. When you think about all the functions that go into a business, customer acquisition, customer onboarding, revenue generation, everything internal to the business, activities that you're executing, cost that you're incurring in order to create a product or a value proposition, those are going to change as the company scales. And, not adapting is actually more dangerous than kind of this experimental thought process of, well, you know, to get your first hundred customers, you might just be able to pick up the phone and call a hundred people, to get to a thousand customers, you don't have the capacity to do that. So how are you going to find and get in front of a thousand customers versus 100 while your business model has to adjust and be able to support that at scale? So, you know, my answer is pretty simple there. Yes, it definitely changes as a company matures, learns more, and gathers more intel and insights into the sector that they're focusing on. All of that information should be factored in to continuously iterate on the business model until you find an optimal version of it that you can really focus on scaling up. But even as you do that, the business model will likely change and evolve as the company continues to mature.
18:38 Leah: Wonderful. That is a lot to chew on. Andrew, thank you so much for spending some time with us and helping us think about that business design model. I like it. Andrew, thanks for this.
18:49 Andrew:Thanks, Leah, no problem!