In my effort to provide useful information to entrepreneurs and aspiring entrepreneurs, I share interesting and helpful articles that I find around the web and think can help answer questions for my followers and help you all move your businesses forward. Often, people write asking me to elaborate on those articles (or pieces of those articles) so I’ve started a series that will do just that. I may combine a few or leave a few out here and there, but I will cover the topics that people most often asked me to elaborate on.
I recently posted an article from RockthePost about common misconceptions people have about launching a new company. The next of those misconceptions that I want to tackle here is the idea that it’s not important to define a business model and figure out how you’ll monetize your product.
One of the side-effects of some of the notoriety and sky-high valuations that big name startups like Twitter and Snapchat have generated in recent years is that many new entrepreneurs have begun to underestimate the importance of clearly defining a business model and knowing how you will monetize whatever product or service you offer. Their belief is that building a popular product or service and rapidly increasing their userbase will result in a quick and lucrative sale of their new business.
This is baffling to me because, essentially, they think that they can ignore the basic building block of what makes a company a company, generate buzz but not profit, and become a millionaire or a billionaire by having done nothing but lose money with their company. Has it ever happened? Yup. Should you bet the farm that it will happen to you? Nope.
The trouble with this view is that the odds are ridiculously long that your company will be the next Twitter or Snapchat. You need to be able to build a profitable business eventually and you need to be able to sustain your business until it is profitable. In order to do that, you need to either get the necessary funding to carry the company or start making money from it almost immediately. Assuming you’re not already independently wealthy with the ability to support yourself and your new company for a long period of time, you’re going to need a solid business model in place.
It’s important that new entrepreneurs recognize that there is a difference between a pre-revenue company and a company that has no plan for revenue generation. A pre-revenue company has revenue on the horizon and a clear plan for getting there. A company that doesn’t have a plan for revenue generation but continues to spend money anyway has worse odds than a degenerate gambler of coming out on top.
Let’s be real: if your company doesn’t generate revenue and you have no idea how it ever will generate revenue, is it really a company or is it a really well-structured hobby? Now, I don’t mean to diminish anyone who’s starting out and hasn’t been able to bring in much cash yet. That’s often a very normal part of building a business. You’re not going to have customers beating down your door the second you go into business. However, you do need to have a plan for who those customers are, where you’ll find them, and what they’ll pay you for. What I mean to point out here is that there are lots of activities that might suck up time and money that are not businesses. Businesses are built to generate profits and your job as a new entrepreneur is to do just that, whether for yourself or for any investors or potential investors. If what you do doesn’t have the promise of generating revenue, it’s not a for-profit business.
I’ve successfully raise angel investment twice and I’ve been on the investors’ side of the table when I was working at a VC firm and other entrepreneurs were seeking funds. I’ve never seen a pitch meeting in which the investors didn’t want the details of the business model nailed down.
So how do you define a business model so that you know exactly what you’re building as you work on your company?
At the most basic level, your business model is just a description of how your company brings in money. That should be a simple enough question to answer so take 5 minutes and write out your business model now. What do you sell? Who do you sell it to? How do you get paid? What is the structure of that payment – i.e. do customers pay by hour or project or subscription for a service? Even if you haven’t started to actually make money from the business model yet, you should know what it is and how you will implement it.
Instead of asking you to tell me what you think, this week, I’m going to ask you to share your homework with us: In the comments section below, let us know what your business model is.
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