Often I’ve entered a room full of startups at a conference or meetup and you could smell the ambition, passion and self belief thick and muggy in the air. It was inspiring. However, there was always so many people in these rooms and they were all trying to go about things in the same way. Agreement and Paradigms can be a curse.
One of the reasons I pulled back from the startup community in a hands on way was my frustration with the lack of economic concern for robustly engineered business models. So I only help a few people for free these days.
I came from an environment where structuring transactions, a business or a deal required every flow of value to be mapped, risk considered and present valued. This is a foreign concept to most startups and dare I say many of their advisors.
Let’s look at the market standard first.
Business Model Canvas
One of the more modern models is the Business Model Canvas approach (Variation: Lean Canvas). It’s popularity grew in the startup community, and it’s definitely quite practical for first thoughts on your business model. It doesn’t require a whole lot of writing to work out what you’re doing. A full business plan is terrible for this.
So this is basically a ‘filling in the boxes’ type of approach. It isolates the important parts of the business model. It’s things like where your revenue streams are, what your key activities are, what channels you’re going through, what resources you need to effectively cause that revenue stream to come into reality, and so on. It’s a good cheat sheet approach and it’s definitely better than designing a business model on a napkin. The areas roughly relate to each other, but are very wrong for some business types (I’ll cover this later).
So what’s wrong with Business Model Canvas?
They are “cute”. Interesting but ugly. They miss the most important business model aspects that relate to the Attention Economy and secondly how a business relates to strategic advantages it may have. What I refer to as your Edge for each aspect of your business model. Without an edge there is no winning in survival of the fittest.
Unconnected, is another way I would describe it. It’s hard to associate the aspects of business with each other in a real way while they sit in buckets loosely related.
It’s too vague for me to take seriously when analysing a business.
What it is good at is helping people clarify different areas in the business. Mostly about filling gaps that become self evident with this approach. However it’s a very poor way of identifying the extinction factors of risk, the red ocean, cashflow and its’ deadly relationship with time.
Business Model Map
In the past at Bankers Trust and Deutsche Bank I used to do a lot of deal flow modelling to check a transaction would work commercially. We referred to these as “Deal Mud Maps”. It’s about looking at the value flows in the business opportunity or a transaction. Flows can be intangible or tangible.
The nature of capitalism is such that there is often a two-way flow for every element in a business (mostly). For example, if I’m in the business of investing my savings I might give my money to the bank and the opposite flow back is interest payment over time. That’s a principal payment going one way, and interest payments coming back in the opposite direction.
Now this is to be expected. Cause and effect is a part of nature and I’d argue almost everything in life. It makes sense to relate to business in the same way.
Here is an example. It’s a super simplified model of our Saasu.com business that makes web and mobile apps for business productivity.
Our actual proprietary model has about 40 aspects to it.
So once you model your business in this way, it gives you a good idea of where the flows are that need to be funded, resourced and planned. It helps you visualise and set your strategy. It highlights obvious KPI’s you need to track e.g. “Traffic” from search engines.
It’s worth taking the time to do this thoroughly. It makes you realise that there are opportunities you’re missing. When you start writing the boxes and arrows you’ll find there are things that you haven’t taken advantage of or considered.
The two way nature of the approach helps you make sure there is give and take in all areas of your business. I like using Symbiosis and Mimicry in business. Nature successfully does. In the diagram above you can see that we designed Discounts and Referrals into the model for our Accounting Advisors. We didn’t want to charge them to be a “Partner” to be a free sales channel for us. That approach might create short term wins but isn’t sustainable.
You can just do this whole exercise with pen and paper. Play around.
In my view what I have shared is the most similar method I have seen to structured transaction modelling used by investment banks. With specific calculations and numbers assigned to the various flows it would be at a level where it is just like a structured transaction flow diagram. In the complex version there is usually one final arrow out to “Deal Profit”.
In the Business Model Map this would be a point in time Map and you might indicate your funding shortfall or profit expectation. It can also help in your equity splitting work as founders.
The point is you can tweak this approach to fit the purpose. I find models like Business Model Canvas tend to try and jam everyone into the same approach, and thus it’s like a paradigm. You can see many startups religiously following this same business model design playbook. Paradigms are dangerous. They might exclude the strangeness of innovation, contrarianism, mutation, curation and uniqueness which I think are some x-factors that are critical to the success of a business. You need a business model map that will factor these aspects in clearly and with their flows.
Photo by Daria Nepriakhina