There are different kinds of business model that you can find. At The Family, we’re looking for entrepreneurs who are searching for a very particular kind of business model: businesses that are scalable, profitable, repeatable.
Scalable: Every new user that you add as you grow costs you less.
Profitable: Duh. Gotta pay the rent.
Repeatable: Once you’ve done it here, you can do it there.
As an entrepreneur, you could find a business model that doesn’t follow all of those rules but that works very well. It just won’t be a startup. For example, a service company can be profitable, and it might even be repeatable. But it won’t be scalable, because each new client that you find will cost you the same amount of effort, or even cost you more.
Startups, the ones searching for their scalable-profitable-repeatable business model, are usually looking for something innovative, a model that takes some part of what the business does and does it differently than anybody would have done before.
If you want a great example of this, watch The Founder. The story of how McDonald’s became huge isn’t really a question of making food. McDonald’s isn’t a food business — it’s a real estate business. That conceptual leap is how Ray Kroc went from a business model that was difficult to scale to one that could be scaled quickly across the globe. He found that something different that no one else in the fast food business was thinking about. After that, it was just a question of having the right brand (seriously, go watch the movie).
What goes into a business model? 6 things.
- The value proposition: What you’re offering, to whom, and how — basically, what are you doing?
- Clients: Who are they? What are their demographics?
- Distribution: How are you connecting the value proposition to the clients?
- Customer service: How do you provide it?
- Partnerships: What kind of partner do you want/need, and how do they change your business?
- Resources: What is needed (materials, talent, etc.) to make your business model viable?
At the beginning, you don’t have all of the answers — that’s why a startup is “searching” for the business model. And that’s why you need to understand a certain fact about startups:
A startup is an organization that is constantly failing, held together only by the determination and faith of its founders, until it either finds success that goes beyond anything those founders could have planned, or it dies.
As soon as things start to take off, there are thousands of problems that arise. It’s easy (kind of) to sell to 50 people and take care of them. It’s hard to sell to 50,000, and nearly impossible to sell to 5,000,000. That’s why the #1 concern of any entrepreneur as things take off should be to strengthen every aspect of their business model.
If they don’t, the business dies. You wouldn’t believe the number of startups that build a good product, find product-market fit, and then get slaughtered by their growth because part of their business model isn’t strong enough. Look at how many startups raise a series A, or even a series B, and then fail. That’s not a problem of a bad idea, or a lack of fans, or anything else — at that stage, it’s a business model problem.
If that surprises you, you aren’t alone. It’s that way for a reason: most everything that the media publishes about startups is a lie (or at least missing so much of the story that it’s indistinguishable from a lie).
Most of the startups that you read about in TechCrunch have NO IDEA how they’re going to achieve the holy grail: scalable, profitable, repeatable. At the same time, entrepreneurs are good at storytelling, so the headlines that you read are “Startup.com raises $20M, plans to boost user growth”. You’ll never read, “Startup.com raises $20M; desperate search for business model continues”.
The problem, especially in Europe, is that those headlines can lead entrepreneurs down a bad path. They believe the stories that come out of Silicon Valley, that their investors will have the same outlook (and the same deep pockets) as a16z, that revenues will come later, let’s just focus on user growth.
But the vast majority of you who are reading this need to understand one thing: you don’t have 8 years to look for your business model like Google did. You need to be considering all 6 parts of the business model and work every day to strengthen them into something solid.
Realize something else: it’s very difficult to innovate on more than one part of the business model at a time. If you think, “I’m going to innovate on distribution and partnerships and resources, that will make me 3 times as strong when it works!”, you’re dead. Doing things differently just because you think, “Well, that’s how startups work!” is the wrong approach.
Startups don’t succeed because they do things differently. They succeed because they do things better.
And they don’t do things better because they reflected on all aspects of the problem and prudently decided on the best course of action. Instead they discovered — somehow, someway — a secret. A secret is something that no one else believes, even when you tell it to them. A real secret takes time for people to accept as true, and by then the startup is a huge success.
What was Google’s secret back in the late ‘90s? That the number of websites was going to explode exponentially. No one else believed that. What was Zuckerberg’s secret with Facebook? That people aren’t really worried about keeping their private life private. People have been ranting about privacy for years, but Facebook’s worth $450B+ and the ironically named Secret is dead.
Entrepreneurs are constantly living in the future in their everyday lives. That means that their business model can’t simply fit a predetermined pattern. You discover it as you’re building it, iterating fast every day.