"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?
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.