With the current economic storm raging, can a better understanding of business models make for smoother sailing for today’s entrepreneur?What strategies can entrepreneurs adopt to help them weather this storm? John Mullins has researched entrepreneurial ventures and offers some valuable insights.
Webvan was going to be the online grocer, and it raised $375 million to set up operations in nine US cities. It fizzled in 2001 when it could not generate enough volume from customers who wanted to buy milk by using a computer keyboard. Pets.com had a sock puppet mascot that was adored by millions during its 1998–2000 lifespan, only a relatively few of whom were attracted to the idea of buying kitty treats online. Even Flooz.com, which attracted the support of vendors such as bookseller Barnes & Noble, could not convert $35 million of investments into a winning idea for developing a new kind of online currency to be used only for Internet purchases. Flooz flopped in 2001 along with many other ebusinesses.
What can we learn from all the dot.com ventures that went bust at the turn of the millennium? For starters, you can’t make money shipping 50 pound bags of dog food, one at a time. Nor can you make money selling low-profit-margin groceries online from big, expensive automated warehouses. However, it wasn’t that all those core business ideas were necessarily bad; the flaw lay in the business models that were chosen to pursue them. In other words, every new business will assuredly face “storms” in the form of, among other factors, unexpected operational problems, unanticipated competition, unknown customer behaviours and unpredictable economic turbulence. Is there a better way to make a start-up business more storm-proof? Without question, the answer is yes.
Start with the model
Entrepreneurs begin with a new “business model”. What I mean by that term is the economic characteristics that define the heart of the business: how revenue and gross margin are earned, how operating expenses are taken out of that, how working capital happens and how the investment characteristics of the model come together. All those things have to happen in a well-integrated fashion so that the economics stack up. It is the first requisite for any new business.
Randy Komisar, my co-author for Getting to Plan B: Breaking Through to a Better Business Model, and I suggest that there are five key elements in a well thought-through business model: the revenue model, gross margin model, operating model, working capital model and investment model.
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