To be successful, a business needs to have a plan for revenue in the short term and profitability in the long. Early-stage founders might be tempted to come up with half a dozen ways the company could make money. Don’t fall into temptation: Five unproven solutions don’t make one actual solution.
Having said that, sometimes there might be several business models that could lead to profitability. The Business Model Canvas approach, where every aspect of the business is condensed onto one slide, offers a holistic view into every aspect of your business. For a pitch deck, however, I think it’s worth narrowing it down to two things: customer acquisition and lifetime value.
For acquisition, focus on where you find your customers, whether those acquisition channels are scalable, and what it costs to acquire a new customer, usually called customer acquisition cost, or CAC.
On the lifetime value front, examine how much each customer is worth, from the moment they show up in your product until they stop using your product. Every dollar they spend along the way is an individual customer’s lifetime value. From there, you can break your customers into different segments: One customer category could be people who come to your platform and immediately leave; another category can be customers who stay for weeks or months or years.
For the sake of simplicity, it’s usually enough to take the total money made from customers and divide that by the number of customers you have — that’s the average value of those customers so far. The challenge is to model out how long they’ll stay. Per definition, you’ll only know a customer’s true lifetime value after they leave; so here, you’ll have to build a model and make some assumptions about how much time your customers will spend with you, and how much money they will spend along the way.
How to think about your business model as part of a VC pitch
A startup’s 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 meant to become a machine that can turn the $100 you put into the top into $150 falling out of the bottom. Take the $150, toss it back into the top of the machine, and you have a rapidly growing, viable, repeatable business model.
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.
It’s also possible to change business models after the business is running. Adobe, for example, used to sell Adobe Photoshop for around $600 but had problems with piracy. By switching its business model to include a subscription to its suite of tools, Adobe was able to decrease instances of piracy while creating a more predictable cash flow.
The important thing is to narrow down the focus of your business model and how you’re going to focus your attention during the sales cycle of your product.
Focus, young Padawan
In order to create a well-oiled startup, you need to find a business model that works for you right now. It’s hard to test more than one business model at a time. Showing an investor that you have five business models doesn’t show that you are closer to finding one that works. Instead, it shows that you’re unsure. That’s not a bad thing: Early-stage startups are vehicles for experimentation, and nobody expects you to hit a home run the first time you swing the bat.
But you should have a good operating plan that shows what you’re going to do in the near term.
Fully flesh out the business model you think is most likely to succeed. Explain the problem and show how your product will solve it, while having a solid grip on how you’ll attract customers, what that will cost you and how much you will charge them to maximize your customer lifetime value.
Remember that you can always include an appendix slide that shows different models you’ve been thinking of. 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 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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