I stumbled on the program Shark Tank on TV in the USA about two years ago. In the program, a panel of wealthy investors usually would give selected startup entrepreneurs the opportunity to pitch of their business idea with the intention of getting at least one of the investors to put money in it. After each pitch, which almost always itemized what appeared like a fool-proof, water-tight plan towards imminent profitability, the investors would pose questions which usually revolved around the scalability of the business.
Such questions usually looked beyond the rosy picture painted by the startup entrepreneurs. Episode after episode, I saw them literally tear into shreds in a matter of seconds, what appeared to be well-laid out plans and projections. I saw business ideas that I thought could never fly being embraced by the investors with sometimes as many as three of the four of them literally competing for the opportunity to have a piece of the pie while giving a wide berth to some ideas that I thought had everything in place! From this program I learnt a very profound lesson.
A scalable business model is fundamental and perhaps more important than the business plan because a good business plan should be a consolidation of a good business model. A business model can be defined as the collection or group of assumptions that must be true in order for a startup to generate a consistent profit.
In the recent past, potential investors and financiers were so fixated on and swayed by having a start-up come up with a comprehensive blueprint or business plan with several attractive but unrealistic projections that end up being nothing but pie-in-the-sky postulations that have no bearing whatsoever with reality. Today’s market-savvy investors however are more concerned with a business model that can demonstrate the ability of a business to scale up over a specified period of time.
As a startup, issues to be included in your written business model must include a very precise description of the kind of customers that will be served by the product or service being offered. Such description should include the strata of society that the customers belong to. This has a lot to do with the pricing profile of the value proposition. In addition, it is important to identify and describe the problem to be solved for those customers as well as what makes those problems peculiar and responsive to the solution offered by the value proposition of your business. Furthermore, the specific features of the solution code or value proposition must be clearly defined and matched with the problem to be solved. Those done, it is vital to define how the value proposition will be communicated and connected with the identified customers. The model should further include an analysis of the economy of scale viz a vis the cost of production or provision of the service as well the cost to the prospective consumer.
Defining these issues alone do not however suffice in a scalable business model. Scalability is based on the ability of the business to turn a profit with a good turnaround time and potential for rapid growth and expansion. In making these assumptions, you must realize that your model must not be a rehash of some other models you may have seen or read about. No two businesses, even when they appear similar, are identical in structure and market experience. Your model should therefore be a product of hard data derived from actual interactions with customers at the beginning of the business.
To be reliable, such data must derive from your own experience with the end-user through direct contact and interaction. This is sometimes done through the giving of samples or mouth-watering discounts. Like a person who goes to a showroom to test-drive a car he intends to purchase, when a customer is given samples of a product with a clear explanation of what problem the product was designed to solve for him, he is delighted to give a feedback that is honest and meaningful to the data compilation process.
From such feedback, you construct a story that communicates credibility. This story and your ability to tell it convincingly to potential investors are factors that resonate more with today’s investors than a professionally crafted business plan that hardly connects with the heart of the entrepreneur, talk less of the investor.
This follows a model popularized by Eric Ries in his book “The Lean Startup”. The Lean Startup Methodology, postulates that a startup should follow three steps to building a credible story for potential investors viz; understanding the problem and defining the solution, creating a minimum viable product and continuously experimenting and measuring impact through proper feedback.
The implication of this for any startup is that you start small by making as little of the product as possible and testing the market by connecting what you have made with real customers. Be prepared if need be, to offer the service or product for free. More often than not, what you are not first willing to do for free may not eventually pay you a fee. At the beginning of every new venture, you are sometimes the only cheerleader you will have.
Your success and scalability will depend on your ability to transfer your enthusiasm about the product to others, first to the customer and subsequently to the investor. Through the feedback you get, you are able to make needed changes or adjustments to the product and its presentation. Then you go back to the customer and repeat the process until you get what the customer wants. Remember, your business only succeeds when the customer says so!
Business is not about producing what you want or like. It is about producing what the customer needs and can part with equal monetary value to have. In other words, you should not venture to produce it on a large scale until you have successfully sold it! This is why some startups take pre-orders!
Using the data resulting from your various interactions with the customer, construct a simple, short but highly believable story that you tell from your heart to anyone who cares to listen in such a graphic way that they are willing to have a stake in the enterprise, either through patronage or through investment. This is what forms the basis of your pitch to investors.
To make your story compelling enough, incorporate real life, relatable characters comprising your customers. Make the picture as vivid as possible. Then take the story further by identifying and explaining a challenge that your characters have. Amplify and illustrate your characters’ frustrating experiences caused by this challenge and show how costly the protracted problem has been to them. Illustrate with hard data based on your interactions with the characters. Remember, you are telling your own story.
The story should conclude with how this problem is resolved in a way that is not only gratifying to all involved but indicates how you intend to scale up to a larger market in a given time-frame if given the necessary support…. continued.
Remember, the sky is not your limit, God is!