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Concept Stage:
Business Model: When
a Rolls Royce is definitely not a car.
By
Gerald Youngblood and David Mackie
Managing Partners, seedstage.com |
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A business model
is a system. It requires a comprehensive understanding of the economic value proposition
that is defensible within a competitive marketplace. For any given product, there
can be multiple business models.
Why
It's Important
Your business model can
make or break your company. If you can't make money, you're not going to have a business
-- and this means substantial money. An investor wants a 20X return to balance the
level of investment risk.
How It
Works
You need to settle on
one model and go with it, but if you realize you're wrong, you must immediately take
steps to correct this. It's a delicate balance. So start thinking about what you're
going to give customers, under what terms, in return for what. Think about what compels
someone to buy what you make. And think about how you're going to make money at it.
Let's use building houses as an example, to get a feel for the many possible business
models. You can build a house and sell it, or you can build it and rent it. You can
also build a spec home and sell it, or you can build a custom home and sell it. Each
of these involves a different system.
You also can create a new business with an existing product by using a new business
model -- this is what FedEx did. And you can create the wrong business with your
business model. A Rolls Royce, for example, is a status symbol, so it competes with
yachts and furs -- not with cars. You must base your plan on a defensible, profitable
business model, preferably one that can remain flexible in the face of competition. |
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| DO: |
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- Develop a business
model that interacts with your competitors' - look at their strengths and find the
weaknesses therein, like Avis and Dell Computer did.
- Consider scale -
the business model may have to be big to be successful.
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| DON'T: |
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- Limit your focus
to designing or building your product - you must know who will buy your product,
why, and how you're going to make money.
- Count on leisurely
testing your business model to get it right - with the Internet has come a compression
in the development stages for startups.
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