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by • November 15, 2012 • Business models, Lean startup meta, Tools & frameworksComments (4)955

A new (old?) model for understanding the stages of a startup

The language we use for startup stages (discovery, validation, customer creation, company building) is abstract. The lines are blurry. And if jumping ahead of yourself is the #1 cause of startup death[1], that’s a problem.

So here’s another way of thinking about the stages of a startup in visual terms using the business model canvas[2]. It’s based around three questions.

Important Business Question #1: does anybody care at all and will they pay us?

Customer segment, value proposition, revenue structure

Who is paying, what are they paying for, and will they pay?

You can beg, borrow, steal, lie, hustle, and fake your way through answering this first Important Question. Nothing needs to be repeatable, nothing needs to be scalable. This is where all those sneaky lean startup MVPs (pre-orders, concierge service, wizard of oz, etc) are worth their weight in gold.

Tech is pretty irrelevant here, so don’t invest too heavily in it. You’re just trying to prove to yourself that somebody, somewhere, cares at least a little bit (enough to give you some cash).

Some businesses have basically zero risk around their revenue model. For example, if you can grow a community around giving financial advice, you are 100% likely to be able to monetize them. You can even find comparables to give you a pretty good idea of what your value per user will be. In cases like that, you can just tick off that bit of the model and move on to other questions.

Important Business Question #2: can it theoretically grow?

Growth is acquisition plus retention. Or, in canvas terms, channel plus relationship.

Channel, customer relationship

How you get them and how you keep them

If you are a sales-driven company, this is where you figure out your roadmap. Your offering gets more productised. You crank up the delivery and follow-through and support and lock folks into recurring contracts and sell sell sell. You build enough tech for the product to work, but you can still concierge a load of it.

On the other hand, if you’re a marketing-driven company, you now have to build a bunch of tech. Acquisition and retention tend to be inseparable from the product. You shift from qualitative feedback (customer development) to quantitative feedback (metrics).

While answering the first Important Question (does anybody care), you were burning through your personal network. Now you’re struggling to figure out how to on-board strangers in a way that might work at scale.

This is the stage where most startups die.

Important Business Question #3: can it actually grow profitably?

In my first company, we had a repeatable sales process which we couldn’t make profitable. The customer-facing side of the business model was fine (the problem was real, the solution fit it, our customers bought repeatedly, and our sales process worked), but our costs were absurd. We were selling licenses for $20k and losing money on every sale.

So in the third stage, you look inward. Can you find a strategy, structure and process which keeps your costs low and your profits high?

This really covers the whole canvas. You make the left half more efficient to control your costs while improving the right half to boost your revenues. You start looking into focusing your activities on a strategic core and outsourcing everything else to partners. The whole business model becomes important for the first time. Since it’s silly to highlight everything, I’ll shorthand it as being about the revenue structure vs. cost structure (where costs are driven by your activities, partners and channel).

Cost structure, revenue structure

Cost of acquisition vs. lifetime value

Part of the role of funding is to allow you to delay the third Important Question. Certain startups will innovate on cost structures from the very beginning (superangels vs. VCs, General Assembly vs. universities, surfair vs. airlines, cardmunch vs. defunct competitors), but most startups leave it till last.

A non-tech example

You walk these steps with most businesses, not just tech startups. Say you’re setting up an innovation agency. Will anyone pay you for innovation consulting? Great, you’re through step 1. Can you get 10 clients? 20 clients? You try sales, you try content marketing… you find something that looks like it’ll work. Now, can you stop working 80 hours a week and jiggle the costs & revenues enough to hire the people you need to scale the thing while simultaneously taking some time off?

The best consultancy I know sells roughly the same £50k package as a bunch of other folks. They’ve got a [mostly] commoditised offering, at least within their specialty. But where their competitors spend 2 weeks building proposals and doing pitches and negotiating, this consultancy either closes or abandons every sale within 2 hours. They’ve focused on their channel costs and have done a wonderful job of making them 40x lower than their competitors. That’s freed up resource for them to be more aggressive (and/or relaxed) in other areas. It’s a good answer to Important Question number three.

[1] As detailed in the startup genome project’s report on premature scaling
[2] The canvas Osterwalder & co at Business Model Generation

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4 Responses to A new (old?) model for understanding the stages of a startup

  1. StartUpJerkFest says:

    a few questions Rob.

    1. Sales Driven means you have a human doing the prospecting, sell / converting to customers?

    2. Marketing Driven means you rely on your advertising and messaging to the marketplace to generate interest and the prospect converts themselves through user tech like a website signup form?

    3. In the consultancy example, a CHANNEL is not only the way a product is distributed, it is also the way it gets sold?

    4. Again in the consultancy example, are you saying since there are already other consultancies in operation and surviving, you can skip the customer discovery phase, (Question #1) ? Or, since you are trying something a little bit different (the 2 hour close), you still need to test if your unique sales channel approach will work, and you test it while in Question #1 ?

    thanks,
    Jerky

    • robfitz says:

      Correct on sales/marketing.

      Channel is probably the most confusing part of the biz model canvas since it covers both how they hear about it (promotional channel) and how they buy it (sales channel) and how they actually get it (distribution channel). I should have been more clear there.

      On the consulting, you still go through the steps, although it could be pretty quick if you’re already connected in the industry and know how to frame the sale thanks to competitors. There’s still a lot of stuff that could go wrong, so I wouldn’t jump straight to buying an office or growing a team without closing the first couple sales. So they got a solid foundation on the basics, and then pushed way ahead by looking at company structure and efficiency (whereas their competitors didn’t)

  2. Josué Vitor says:

    When you consider the second question (can it theoretically grow?), sometimes the partners won’t be envolved besides channel and relationship? (ex. the partner help me growing, like a cloud computing service)

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