By Jerry Brand, serial entrepreneur and founder of entrepreneurs charity The Brand Foundation (www.brandfoundation.co.uk).
Every successful business startup should begin with a sound, robust business model. Having a strong foundation for your new venture will ensure a much greater chance of success and long-term stability.
Of course, there are many different definitions of what constitutes a ‘business model’, for some it is merely about having some idea of what you want to achieve, a rough estimate of how you are going to make it happen and how you’ll ‘hopefully’ make some money in the process. For others, it’s about complex, longwinded documents and spreadsheets that in most cases will become obsolete quickly. My view is the business model is at the very core of the startup and in reality is the difference between success and failure. Let’s review the latter in this feature.
When looking at the traditional business modeling process, there are usually two things that happen at this stage: i. The business model and subsequent forecast is completely financially driven, and ii. The business plan gets developed alongside this.
The issue is, the business plan soon becomes outdated but rarely gets referred to, or indeed updated; so the best plan is to develop a two page executive summary and bullet point of the model at that given point. That way it is easy and quick to refer to and can be updated more readily. Many may argue against this idea and opt for the traditional drawn-out process but in my experience as an entrepreneur, the model itself means success or failure. So something solid and punchy, which can flex quickly to the inevitable changes, is vital.
In the beginning of the modeling process you should base your thinking around the P&L (Profit & Loss) calculation. By breaking your idea down to basic steps, you can analyse it effectively. The P&L calculation is essentially the predicted income minus the cost of sales, which equals your gross profit (or margin as most will know it). Take away your overheads and depreciation and you are left with your operating profit. Take the interest away, and you have your profit before tax. What we have found through the development of our own business-modeling tool is that the calculation stays the same across all the different market sectors. However, those different market sectors tend to build up parts of the calculation (e.g. the gross profit) in different ways. As such, what is needed is a way of simplifying the segmentation of an idea even further in order to allow anyone with any idea in any market sector, to be able to model the P&L calculation for any business. It is this kind of simplified approach that, in my view, will deliver a more robust forecast from the outset as the important financial analytics and trends are easily compared against competitors.
Where people tend to go wrong in the early days of creating a business model is they use basic spreadsheets that don’t contain sufficient complexities within them to develop these true calculations. Accuracy in your business model is fundamental to success or failure. Get your business model and forecast wrong and it will have the same knock-on effect as the reality of running out of cash. You won’t see the problem coming until it is too late.
If you require funding to launch your business you are also going to have to be able to confidently show your funders that you know what you are doing and that you know your numbers. Sadly there is a misconception (partly due to media such as Dragons’ Den) that many people don’t give this a second thought, which is nonsense. But to be fair, people need access to the right tools and support especially if they have never launched a business before. What we need to do for entrepreneurs across the country however is to dispel the Dragons’ Den myth that all entrepreneurs are in fact, stupid and too risky – when the reverse is true.
How can you realistically evaluate whether or not your idea will sell? Quite simply, you need to be sure that the model is as accurate as it can possibly be and that you can justify your assumptions – you will be challenged! You also need to be confident in your research and/or experience (which is equal in importance to the business model itself). Why will your idea sell? Who are you going to sell it to? What benefits are going to be provided over and above your competition? Are you going to need to invest to make a differentiation to your product or service? These are all questions that you will need to be able to answer with authority.
Many entrepreneurs ask whether they should attempt to test the market first as part of the modeling process. My response would be that the research or experience you have should give you a good enough feel. Remember that true entrepreneurship is about Creativity, Leadership, Impact, Confidence and Knowledge (CLICK). Think about an instinctive feel, ability to take risk in your stride, leading people into the unknown for an adventure and to realise your dreams, and never accepting ‘no’.
You may have one or two known early adopters waiting in the wings along with some trusted employees ready to jump ship and join the new venture too which will help. Unless you are going into a completely new market with little or no experience then that is a different ball game altogether.
When modeling your business it’s a good thing to take into account a ‘market norm’ comparison. So you can check any findings against your costs; what if you are investing in new advances in technology and your model shows that you are not achieving a competitive advantage for that investment? Why are you risking so much for no significant edge?
That said, there is nothing like the real thing; you launch, and you quickly find out how the land lies, who doesn’t actually have the bottle to make that jump to the new venture, or is too risk averse (or lacks the decision making authority) to adopt your new business in return for a great ‘founders’ deal. What you do want to make sure of though, is that you are fully funded and that means being ready for a few surprise risks and opportunities. So you don’t have to come back to the funding source again – if you do, that might be a sign you are experiencing difficulties.
In terms of customer pains and gains, business modeling should be all about the gains you can provide the customer with. If you are lazy and think you can bypass the research part it will come back and bite you at some point (probably at the point you run out of money). If you take the time to model your business idea correctly you stand a much better chance of survival. The alternative – jumping into the unknown – could be compared with betting on the best looking horse running in the 3.30 at Haydock, and you won’t find too many funders willing to take on those odds.
So, your business modeling process is complete but how do you know when you are ready to launch? Easy, when the funder comes up with the cash. They aren’t going to let you go out into the market until they are pretty sure they aren’t gambling wildly on their own investment. When you are sure you have a good set of assumptions that are as stable as they can be, are easy to justify, you have sensible break-even targets and the end result is not stressing your cashflow and funding covenants, you’re a safer bet and good to go.
The Brand Foundation – www.brandfoundation.co.uk
The Brand Foundation is a registered charity (no. 1165700) that is providing a free to use, secure online app, to give all budding entrepreneurs with a great business idea, the chance to succeed; regardless of personal circumstances. Members can register online and model their business idea/s for free using BizKit, a specialist tool that will allow them to forecast their first three years’ trading figures with no future commitment. The Foundation aims to help individuals avoid the common mistakes that so often lead to start up failure.
The Brand Foundation is a not for profit organisation funded through sponsorship and upgrade fees to BizTik (an advanced application that provides full funding analytics and offers access to potential funders).