What’s A Startup? First Principles.

Success consists of going from failure to failure without loss of enthusiasm.
Winston Churchill

Everyone knows what a startup is for – don’t they?

In this post we’re going to offer a new definition of why startups exist: a startup is an organization formed to search for a repeatable and scalable business model.

A Business Model
Ok, but what is a business model?

A business model describes how your company creates, delivers and captures value.

Or in English: A business model describes how your company makes money.
(Or depending on your metrics for success, get users, grow traffic, etc.)

Think of a business model as a drawing that shows all the flows between the different parts of your company.  A business model diagram also shows how the product gets distributed to your customers and how money flows back into your company.  And it shows your company’s cost structures, how each department interacts with the others and where your company fits with other companies or partners to implement your business.

While this is a mouthful, it’s a lot easier to draw.

Drawing A Business Model
Lots of people have been working on how to diagram and draw a business. I had my students drawing theirs for years, but Alexander Osterwalder’s work on business models is the clearest description I’ve read in the last decade. The diagram below is his Business Model template. In your startup’s business model, the boxes will have specific details of your company’s strategy.

Alexander Osterwalder's Business Model Template

(At Stanford, Ann Miura-Ko and I have been working on a simplified Silicon Valley version of this model. Ann will be guest posting more on business models soon.)

But What Does a Business Model Have to Do With My Startup?
Your startup is essentially an organization built to search for a repeatable and scalable business model.  As a founder you start out with:

1) a vision of a product with a set of features,

2) a series of hypotheses about all the pieces of the business model: Who are the customers/users? What’s the distribution channel. How do we price and position the product? How do we create end user demand? Who are our partners? Where/how do we build the product? How do we finance the company, etc.

Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted.

How Does Customer Development, Agile Development and Lean Startups Fit?
The Customer Development process is the way startups quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer DevelopmentAgile Development and if available, open platforms and open source. (This methodology does for startups what the Toyota Lean Production System did for cars.)

Business Plan Versus Business Model
Wait a minute, isn’t the Business Model the same thing as my Business Plan?  Sort of…but better.  A business plan is useful place for you to collect your hypotheses about your business, sales, marketing, customers, market size, etc. (Your investors make you write one, but they never read it.)  A Business Model is how all the pieces in your business plan interconnect.

The Pivot
How do you know your business model is the right one? When revenue, users, traffic, etc., start increasing in a repeatable way you predicted and make your investors happy. The irony is the first time this happens, you may not have found your company’s optimal model.  Most startups change their business model at least once if not several times.  How do you know when reached the one to scale?

Stay tuned. More in future posts.

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • The goal of your early business model can be revenue, or profits, or users, or click-throughs – whatever you and your investors have agreed upon.
  • Customer and Agile Development is the way for startups to quickly iterate and test their hypotheses about their business model
  • Most startups change their business model multiple times.

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