"I don't get it"
I listen to start up pitches as an investor, a mentor, an advisor or a judge several times a week. Whenever there is an audience of two or more people, at least one person will struggle to understand how the business presented will make money. The answers are not usually clear in the business plan. Naturally the next step is to ask the entrepreneur. The explanations rarely satisfy the audience.
The mobile and digital world does not have the basic concepts and tools to describe a successful business.
The communication gap
Remember this is typically an audience of smart, experienced business people. Most founders are passionate, articulate and talented. This is not a problem of quality, preparation or process. There is a real gap in communication.
Pitches are all about communication. Founders create excitement by offering innovation and catch the attention of investors by showing growth. But entrepreneurs struggle to paint a picture of how their start up business will work.
Obviously this is a problem for investors who are trying to assess the potential of a new business idea. It is also a problem for start up founders and entrepreneurs. Without a clear model for how your business works, how will you make the best strategy and management decisions? Analysts find it even tougher. There is no common set of metrics to evaluate and compare businesses in the digital world.
How business models can help
The business model is the solution to these problems. A business model is simply a set of activities and interactions which define how the engine of a business is constructed (statics) and how it drives performance (dynamics).
Business models emerge from the practices and structures which work commercially. Successful and lasting models provide commercial opportunities all along the value chain including clear wins for customers. Good business models also work well within society to deliver wider benefits.
We already know what works
Mobile and digital technologies have led to an explosion of innovation in software. We have now reached the stage of maturity where 6 clear business models have become established. Some are well tried in technology (licences, eCommerce) others are borrowed from very different environments (SaaS, usage, advertising) or rooted in in our oldest commercial traditions (marketplaces).
We have enough knowledge to describe how these 6 models operate. With a little effort we can measure the activity of each model and show how that activity links to financial performance. This gives you a toolkit to assess the organisation, management, control and prospects of your business using one of these models.
It is then only a short step to paint a clear picture for an investor. The picture will help investors and analysts arrive at a structured evaluation of your business and provide a basis for comparison with your peers.
What's in your toolkit?
Understanding the underlying business model and managing performance using this knowledge is not a substitute for innovation or a constraint on new ideas. Think of business models as a toolkit or a set of APIs that let you unlock management and performance experience and use that knowledge to build a better business.
Which business model could help you explain your business? How could you use that model to run your business better?
Arsham Memarzadeh of @OpenView Partners published a blog post on 13 November "Why Enterprise Mobility Calls For New Metrics and How You Can Help Fill The Void." He is identifying with a common problem. Many investors and advisors struggle to understand how tech start ups make money. Founders explanations are often unclear and business plans rarely include a simple description of the business model. Mobile start ups are even more poorly understood.
Helping investors, leaders and teams
Metrics might help solve this problem. Good business metrics do 3 things - paint a picture of the business for outsiders especially investors; help leaders make better decisions; and influence the behaviour of teams. In a start up context they can help investors, focus management, build culture and drive performance.
Finding the right answers
How can you select measures which help achieve these objectives? Tomasz Tunguz (@tomtunguz) has attempted to fill part of this gap with his regular analysis of public filings by SaaS companies. This is useful but limited by regulatory requirements. To fully answer the question think about these dimensions.
Clarity and transparency
It will take some time to find common metrics which work for each business model and give investors and analysts an accepted basis for comparing companies. Until then the best approach is to try get a clear, easily explained picture of your business. I have to admire the openness of Buffer (@buffer) who have shared their investor term sheet, entire performance dashboard and even the salary levels of everyone in the management team. The dashboard is produced by another start up that believes in full transparency, @baremetrics.
How can we find measures that are clearly linked to business outcomes, communicate the right messages and will be understood by non finance people? What metrics do you use to drive success for your start up?
Tries and conversions
So here we are in the midst of Rugby’s autumn internationals. Over the weekend I am looking for tries (5 from Scotland last week - unbelievable!) and I have spent most of my time during the week talking about conversions. Apologies for the cheesy introduction but not for the topic. In the SaaS world conversion is one of the hottest topics and it gets right to the lifeblood of a SaaS start up.
The free trial model
Let me just go back one step. Free trials have become established as one of the standard options for a SaaS business model. In consumer software there is a mix between freemium models in which you can use the basic service for free forever but have to pay for advanced features and free trials. In enterprise SaaS virtually everyone offers a free trial typically 7, 14 or 30 days. You try the product for a period then have to decide whether to keep it and become a paying customer.
Free trials have proved a great device for filling the sales funnel. There are now a number of channels where it is cheap and easy for a start up to sign up customers for a free trial. Advertising on social media or through search engines has tremendous reach and typically you can find sign ups for two to five dollars. Specialist app stores run by big enterprise vendors like Salesforce and Xero are also a low cost and effective route. Integration with these products is a strong feature for many companies.
Change is hard
But there is a big challenge. Conversion. How do you persuade those users who sign up to become paying customers? A variety of industry sources suggest 3-5% conversion for B2B SaaS is a good solid performance and can lead to profitable operations. 8% is best in class. These numbers suggest conversion is a tough job even for the most successful companies. Why?
There are lots of reasons and I would encourage you to focus on real and very closely understood specifics. There is no substitute for detail in addressing this issue. Many individual issues will relate back to to one very well established business challenge. Change is hard. No matter what the technology or the market dynamics, change always depends on behaviour. Changing behaviour is both difficult and slow. Tomasz Tunguz of Redpoint Ventures (@ttunguz) wrote a great post in March Why Great SaaS Companies Focus on Behaviour Change which captures the essence. Whatever your B2B SaaS proposition, you are asking your customer to make a change to their business and resistance will be tough to overcome.
9 practical ideas
What can you do? Absolute first step is to talk the right language so you recognise the challenge. When someone signs up for a free trial they become a lead NOT a customer. Think in terms of lead generation and conversion and the sales process becomes much clearer. Beyond these here are my top 9 suggestions:
What works for you?
SaaS is in its early stages for software companies and we are all learning. Do the ideas on this list work? What approaches have you used to improve conversion?
Is there real business model innovation?
Innovation in the start up world is not restricted to mobile and digital technology. Almost every week someone announces a new business model. There has also been a bit of a surge in literature about the whole idea of a business model. Perhaps the two best known examples are Business Model Generation by @AlexOsterwalder & @ypigneur and Running Lean by @ashmaurya.
Despite this, I sit in lots of meetings where potential investors struggle to understand how the pitching business makes money. I also read many business plans where the founding team and their advisors have had difficulty articulating a clear business model. I believe that the whole question has become confused and obscured. It is true that there are occasional brand new business models. In practice though the overwhelming majority of start ups have innovative products and marry these to an established and well tried model.
Top 6 start up business models
For software based companies, all the business plans and propositions I see are based on one of six core business models:
How will data be monetised?
Each of these business models has many variations and applications and there are many start ups which try to combine two or more. One of the most interesting areas to watch in the next couple of years will be the business models adopted by companies which essentially sell data for example from wearables or the Internet of things. It is possible to see how almost any of the above models could be applied but which will dominate?
How do you link your business model to your numbers?
I am always eager to hear about truly innovative business ideas. However, business models are rarely the focus of genuinely new thinking. If you are evaluating the potential of a start up business, whether as an investor, an advisor or a founder, figuring out which of these models is most appropriate is a great first step. Applying one of these six ideas will make it much easier to understand and explain how any business actually makes money.
How do you link the operating metrics of your business model to your financial performance?
Mobile for every business
You cannot escape the growth of mobile devices in the years since the iPhone launched the smartphone era in 2007. Sometimes our obsession with smartphones and tablets slightly obscures the underlying fact that mobile was already the fastest growing technology in history before Steve Jobs came along.
It doesn't take a genius to figure out that mobile is a huge business opportunity and there are thousands of start ups across the world which aim to take advantage of the mobile ecosystem. This is great and I love working with these companies. But mobile is not just about mobile. Every start up and every company needs to view the world mobile first, no matter what, how or where they aim to sell.
Grow your market reach
Every business should be mobile because it has the greatest market reach.
A defining feature of mobile is reach. It is fairly well known that phones are the main way of accessing the Internet in many parts of the world. Mobile is also the primary access to information of any kind in the developing world. It's reach is far greater than television, radio and newspapers as well as fixed line communications. This access is quickly becoming better and faster. Informa believes smartphones will reach 30% of Africans by 2017 and at least 14 countries on the continent already have 4G networks.
Reach is not just global though. Mobile reaches far more individual people in any country than traditional communication. This is most obvious with the young who tend not to watch TV news or read the papers. They do pay attention to their phones. Tablets have also opened up the web to an older generation. @PewResearch reported that 43% of US Senior Citizens accessed social media in 2013 up from just 26% in 2010.
Mobile - its personal
Every business should be mobile because it is close to customers.
Mobile is personal. Smartphones and tablets have become essential to people's lives because they are the preferred method of communicating with anyone who we cannot see face to face at any particular moment. In fact mobile has extended our ability to communicate more widely than ever before and all the evidence is that people across the world love it.
As a result, businesses can only succeed in mobile by understanding the behaviour of ordinary people and communicating in ways which respond. Success with mohile will make your business a better business.
A better way of business
Every business should be mobile because it is a better way of doing business.
Mobile has brought a new focus to user experience, a sharper understanding of user behaviour and a more agile way of building, testing and regaining products. The whole way of doing business in mobile first businesses is different. New product cycles are measured in hours or days not weeks or months. User experience comes first and technical requirements well behind. Business practices follow user needs rather than dictate how the user will behave.
Start ups and technology giants which have been winning in mobile are reinventing management and we should all learn to adapt.
If you are thinking about starting a business today why would you not want greater market reach, closer to customers and better business? How can your start up become mobile first?
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.