Define Your Business Model

The Art of the Start: The Time-tested, Battle-hardened Guide For Anyone Starting Anything
by Guy Kawasaki

(Page 4 of 6)

You want to make meaning. You've come up with a mantra. You've started prototyping your product or service. The fourth step is to define a business model. To do this you need to answer two questions:

• Who has your money in their pockets?
• How are you going to get it into your pocket?

These questions lack subtlety, but they are a useful way to consider the reality of starting an organization - even, and perhaps especially, not-for-profits, which have to fight for money just to stay alive. You can't change the world if you're dead, and when you're out of money you're dead.

More elegantly stated, the first question involves defining your customer and the pain that he feels. The second question centers around creating a sales mechanism to ensure that your revenues exceed your costs. Here are some tips to help you develop your business model:

• BE SPECIFIC. The more precisely you can describe your customer, the better. Many entrepreneurs are afraid of being "niched" to death and then not achieving ubiquity. However, most successful companies started off targeting specific markets and grew (often unexpectedly) to great size by addressing other segments. Few started off with grandiose goals and achieved them.

• KEEP IT SIMPLE. If you can't describe your business model in ten words or less, you don't have a business model. You should use approximately ten words - and employ them wisely by using simple, everyday terminology. Avoid whatever business jargon is currently hip (strategic, mission-critical, world-class, synergistic, first-mover, scalable, enterprise-class, etc.). Business language does not make a business model.* Think of eBay's business model: It charges a listing fee plus a commission. End of story.

• COPY SOMEBODY. Commerce has been around a long time, and by now clever people have pretty much invented every business model that's possible. You can innovate in technology, markets, and customers, but inventing a new business model is a bad bet. Try to relate your business model to one that's already successful and understood. You have plenty of other battles to fight.

My final tip is that you ask women - and only women. My theory is that deep in the DNA of men is a "killer" gene. This gene expresses itself by making men want to kill people, animals, and plants. To a large degree, society has repressed this gene; however, starting an organization whose purpose is to kill another organization is still socially acceptable.

Hence, asking a man about a business model is useless because every business model looks good to someone with the Y chromosome. For example, Sun Microsystems wants to kill Microsoft. When is the last time you bought a computer based on whom the manufacturer wanted to kill?

Women, by contrast, don't have this killer gene. Thus, they are much better judges of the viability of a business model than men are. Don't agree with me? The book The Darwin Awards provides irrefutable proof of women's greater common sense. These awards commemorate "those individuals who have removed themselves from the gene pool in a sublimely idiotic fashion."*

For example, in 1998 two construction workers fell to their demise after cutting a circular hole in the floor while they were standing in the middle of the circle. The Darwin Awards contains nine chapters about the stupidity of men, and one chapter about the stupidity of women. I rest my case.

Weave A Mat (Milestones, Assumptions, And Tasks)

One definition of mat is "a heavy woven net of rope or wire cable placed over a blasting site to keep debris from scattering."* Preventing scattering is exactly what you need to do as the fifth, and final, step of launching your enterprise. In this case, MAT stands for milestones, assumptions, and tasks.

The purpose of compiling the MAT is to understand the scope of what you're undertaking, test assumptions quickly, and provide a method to find and fix the large flaws in your thinking.

Milestones

For most people a startup looks as if it must achieve a seemingly unlimited number of goals. However, out of these goals are some that stand head and shoulders above the others. These are the organization's milestones - they mark significant progress along the road to success. There are seven milestones that every startup must focus on. If you miss any of them, your organization might die.

• Prove your concept.
• Complete design specifications.
• Finish a prototype.
• Raise capital.
• Ship a testable version to customers.
• Ship the final version to customers.
• Achieve breakeven.

These milestones apply to every kind of business. For example, a new school can prove its concept by seeing if two teachers, working as a team, using a new curriculum, can provide more individualized instruction and improve learning in a test classroom. With this proof of concept, the school can then complete the design of its curriculum, raise funds, roll out the prototype, and start teaching classes.

There are other tasks (we'll come to them soon) that are also important to the survival of the organization, but none are as important as these milestones. The timing of these milestones will drive the timing of just about everything else you need to do, so spend 80 percent of your effort on them.

Assumptions

Second, create a comprehensive list of the major assumptions that you are making about the business. These include factors such as

• product or service performance metrics
• market size
• gross margin
• sales calls per salesperson
• conversion rate of prospects to customers
• length of sales cycle
• return on investment for the customer
• technical support calls per unit shipped
• payment cycle for receivables and payables
• compensation requirements
• prices of parts and supplies
• customer return on investment

Continuously track these assumptions, and when they prove false, react to them quickly. Ideally, you can link these assumptions to one of the seven milestones discussed above. Thus, as you reach a milestone, you can test an assumption.

Tasks

Third, create another comprehensive list - this time of the major tasks that are necessary to design, manufacture, sell, ship, and support your product or service. These are necessary to build an organization, though they are not as critical as the seven milestones. They include

• renting office space
• finding key vendors
• setting up accounting and payroll systems
• filing legal documents
• purchasing insurance policies

The point of the list of tasks is to understand and appreciate the totality of what your organization has to accomplish, and to not let anything slip through the cracks in the early, often euphoric days.

Copyright © 2004 Guy Kawasaki. All rights reserved. This excerpt, or any parts thereof, may not be reproduced without permission.

About the Author

Guy Kawasaki, who helped make Macintosh a household name, now runs Garage Technology Ventures, a venture-capital firm. He has held his workshop, "Boot Camp for Start-ups," around the world. Kawasaki is the author of seven previous books, including Rules for Revolutionaries.