Startup Week 13: Business Model Spreadsheet

Business Model Spreadsheet

The primary difference between a lean startup and a lean founder is that a lean founder has flexibility to chose what the startup is going to be. Typically, when I tell somebody “I am building a startup,” the question back to to me is “what does your startup do?” (the person to ask this question of me most frequently is me).  This question leads founders to transition from exploration mode to execution mode, which is generally a good thing–it forces founders to transition from dreaming to doing, and get critical feedback from potential customers about ideas. But…

Are You Taking the Easiest Path to Profitability?

It is possible that your initial idea, though awesome, has a challenging path to profitability. A good idea without a good business model can actually lead to the worst failures–failures that take years to prove themselves out, and no objective criteria by which a founder can assess whether it is time to pull the plug and move on to the next venture.

This week is about explicitly backing out of execution mode and thinking objectively about a set of opportunities available to you. Up to this point, we have explored a single idea for your business. If you were a lean startup, and you realized that your business was challenged after 13 weeks, you might conduct a pivot. In my opinion, this is not sufficient. You are going to spend the next 3 years of your life focused on a single opportunity, so thinking yourself bold by being able to make a little shift in your business plan seems a bit timid. Be willing to change your distribution channel, your target customer, your industry, anything, and everything. It is time to throw the baby out with the bathwater.

When it comes right down to it, most businesses have a single primary objective: make more money than they spend. But software entrepreneurs tend to spend too little time considering this fundamental goal. There is a lot of complexity, from technical (e.g., whether to use PHP or Rails, to go native Android, native iPhone, or just plain old web) to customer type (e.g., B to B, B to C, B to B to C, ponzi scheme) to network anchors (e.g., Facebook, LinkedIn, Twitter). With all of this complexity, it is easy to lose sight of the primary objective of the business. If you have not envisioned what a rational path to profitability might look like, what are the odds you will pick the right battles and make the right compromises in support of a profitable path? If you have not defined what success looks like, in terms of costs and revenues, how can you determine whether you are making progress or sinking?

Enough with the questions, let’s get to throwing something tangible down to move this conversation along. I built a spreadsheet to compare 5 of my ideas against each other. Boiling down these complex ideas into a one- or two-liner with an associated price tag was a great exercise. You can also do this with Alexander Osterwalder’s business model canvas, but I found that I did not care about all of his blocks, and I liked being able to manipulate the numbers and compare the businesses side-by-side.

The Value of the Business Model Spreadsheet

By writing down how I expect to make money at the highest level, it has made me realize that a lot of the details I thought were important for each of these ideas are probably pretty insignificant to an initial release, and other challenges that were not interesting to me will be very interesting to my target customer (and I have heard that a customer is more likely to purchase your software if it is interesting to them). Prioritizing work items that directly support the business objectives seems to be a rational path, as does prioritizing conversations that can validate that the offer is interesting to your target customers.

Here is the intervention moment: if you are pursuing an opportunity that seems harder to make profitable than an alternate idea, why not bite the bullet right now and switch? This is the problem I have with Lean Startup, is that you can only pivot (granted, what some companies call pivoting I call giving up and starting over, so perhaps this is just a semantic distinction).

The Business Model Spreadsheet Explained

The business model spreadsheet breaks a startup into two phases: profit phase and prototype phase. The profit phase describes the financial state of your business at some point in the future. The data you have provided for the profit phase is entirely conjecture, which brings us to the goal of the prototype phase: to validate, with as little time and money as possible, whether your profit phase is feasible. Given two equal businesses in the profit phase, you should chose the business that can be more efficiently validated in the prototype phase.

By abbreviating your businesses opportunities to a handful of entries in a spreadsheet, you can do some comparative analysis. Is it likely that your sales volume would be higher for opportunity A or B? Is it likely that offer price for opportunity B is higher than opportunity A? Keep fiddling with the numbers until you feel that each of the numbers makes sense with respect to the others.

In determining your cost and time to minimum viable prototype, your goal is to do as little work as humanly possible in order to see whether people will actually pay for your specified offer. If you can do this with a landing page, that is excellent because you should be able to do a landing page in a day using a service like Unbounce (if you need help with this, drop a comment or schedule a call with me on Skypresso and I can walk you through it). If you need to provide a web prototype, stay tuned in the following weeks as we cover super-fast prototyping with Rails, Git, and Heroku.

I look forward to hearing your comments.

Matt

Startup Week 12: Project significant costs and revenues

Startup Cashflow Projections

Cash flow kills most startups. You can have a great plan and a great team, and even be making great progress. But, if you run out of money you die. Further, the more desperately you need money, the less likely you are to get it and the less favorable the terms if you do.

Build a Takeoff Cashflow Plan

Just as you have an execution plan for new features and a customer engagement plan for touching base with key customers, you can create a simple cashflow plan that allows you to project when your funds will run out and you need to raise capital or start making revenues from your customers.

For this post, we are assuming that you are going to bootstrap your business, so your funds need to last until you start making making money. Additionally, we are assuming that you require no salary yourself. Hello ramen.

You can follow along using the LeanFounder Takeoff Cashflow spreadsheet, or just stick with the back of a napkin. To start, figure out the initial capitalization (how much capital you can set aside for your startup) and your takeoff period (how long until your business is generating significant revenue). For this post, we will assume a $50,000 capitalization and a 12 month runway.

Identify major expenses that you expect to pay over the year and determine when these expenses will come due. It is OK if you do not know precisely what your expenses will be (nobody does), but if you are completely at a loss about what you will have to pay and when, you need to get out and gain this understanding.

Once you have your draft projections done, share them with some contacts who have relevant industry experience. Their opinions will be no more wrong or right than yours, but if you consistently getting feedback that your cost projections are wrong that can be a good warning sign.

The Hardest $500 Ever Earned

Employees make money every month. Even that first month when you show up, attend new person training, figure out how the copy machine works, and add almost no value, you get a big fat check. A startup is an entirely different beast. Most software startups never make any money (depending on how you define a startup…and depending on how you define money, because $5 in advertising revenue does not count). Getting somebody to write a check to your company is the ultimate smoke test: you have validated that the entire system works from understanding the problem to delivering a solution.

My guess is that any company that can generate $500 in month 7 after spending $25,000 is going to make some good revenue. This is not to say that the company will grow up to be a billion dollar household name, but it is good validation that the founder is on to something. By setting your initial financial goals small, you are more likely to achieve them (and more likely to realize that your current plan makes absolutely no sense if you cannot imagine how you will make your first $500).

If you have any experiences to the contrary (eg-you earned your first $500 and then crashed), please leave a comment–I would love to hear the story.

Matt