Nesheim Online

TIP OF THE WEEK: Agility is required for survival

I'll be in Norway next week fishing for salmon and sea trout, thinking about how I can be agile enough to keep up with my very much younger host and his ten year old son.

When I go fly fishing I watch how agile the fish and the bugs they eat are. It is amazing to see how these beautiful creations of God change direction suddenly when they encounter either opportunity or danger. Swimming, flying, leaping, they are rapid in their responses to necessitated change.

There is a great lesson about agility in the August 3, 2009 Wall Street Journal story about startups changing business models.

Slide and other high profile startups continue to struggle to get significant revenue traction. So what have their CEOs done? They have abandoned selling advertising (dumped whole teams doing such things) and jumped into another business model in hopes of finally getting it right.

This is not a sign of bad management. It is a sign of agility.

To stand still, tough it out, "work until we get it working" leads to suicide, death of a startup. Large corporation managers are prone to do that (once).

Street smart serial entrepreneurs instead jump off the losing business model and invent a new one.

This takes a combination of wisdom, courage and creativity. Agility is not about gut feel leaps of faith over cliffs. It is about calculated moves. The changes are risky and are done with deliberation. Numbers are produced as well as intuitive thinking. The core team openly debates alternatives. The mixture leads to creative ideas about possible new business models and what to do them.

If you were also thinking about strategy, you are right: agility is closely related. Both involve moves (maneuver in French). But agility is applied to much more than strategy. When agility works on a business model, the whole company switches into action.

BOTTOM LINE: Agility in changing business models (how you make money) is key to survival of a new enterprise. Yes, a carefully thought through plan is the best way to start, but if it is not generating the revenue you need, have the courage to drop it and go create a new business model. When you get it right, you'll realize both great revenue and see your business building a powerful unfair competitive advantage.

STARTUP BUSINESS MODELS: How can one distinguish you from the competition?

Over the last three years, business models have risen in importance. Now they have become the core of the method for converting a good idea into a wining startup. In this series I'll explore what a business model is and how you can use it to win.
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How would you like to compete against 65,000 other products in the same store?

That's what is facing the herd of software developers eager to get rich quick selling applications that work on the Apple iPhone. Details can be found in "Seeking Fame in Apple's Sea of Apps" (Wall Street Journal, July 15, 2009).

That is not where you want to be. That sea is filled with ruthless sharks, branded giants and schools of blood thirsty piranhas.It is so congested that ethical limits are crossed by desperate competitors. Digital Chocolate abbreviated the word each to "ea" in product descriptions so that searches for Electronic Arts programs would hop to those of Digital Chocolate (Digital Chocolate has stopped using the abbreviation). Lost is not where you want your products to be.

You can use a business model to stand out. It can make your new enterprise distinguished. Customers will find you, understand how you are special and immediately make a clear distinction between you and your most direct competitor.

Think about how a startup stood out when it was the first to offer large software applications for rent that had up to then been available only at price tags starting at $100,000 plus the cost and time and delays inherent in the traditionally painful upgrade and installation projects in Fortune 500 corporations. That is what lead to the IPO of Salesforce.com.

Think about how it hit the news headlines when the first semiconductor startup announced it would design and sell chips but the company would not own a factory to manufacture them. Today it is the way all new semiconductor startups are born.

Can you recall the first Internet stories about the Korean gaming companies that began selling virtual clothing for avatars? Even you may still be amazed at that way of making money (if you don't live in Asia where that business model is booming).

Notice the obvious: Fresh business models are bold. It takes guts to depart from the norm. It takes confidence to tell investors that you will leave the proven business models and launch in a fresh direction. If your personal character can not do that, reconsider your interest in being an entrepreneur. The boldness required to stand out is needed to get investors, employees and bloggers.

BOTTOM LINE: To stand out in today's crowded startup world calls for every creative skill you have. Inventing a fresh business model is one way to be distinguished. That distinction can add a powerful element to your unfair advantage. Such boldness can be quickly labled "unfair" by your competitors.

STARTUP BUSINESS MODELS: What are they? Why are they important?

Over the last three years, business models have risen in importance. Now they have become the core of the method for converting a good idea into a wining startup. In this series I'll explore what a business model is and how you can use it to win.

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QUESTION: "What is a startup business model?"
ANSWER: It is a description of how your new enterprise will make money.

Sounds simple, doesn't it? But let's dig deeper and then see how simple it sounds to you.

• How should you measure "make money?" Most people start with a measure of profit. Sales minus expenses minus taxes equals profit. Implication: You need a model of your income statement. That calls for a financial forecast. Can you do that? And did you know the business model also calls for an explanation of how much cash you will need to keep the business growing? That calls for a balance sheet. Can you build one?
• What year should you use to measure making money? Your first years will be showing losses. Should you use the year before you to IPO? Or how about the year before that? All of them will show different profit compared to prior years.
• Should you use a "typical year" whatever that means? Is any year typical or normal? Probably not. Each has special conditions: Year of Launch, Year of Growth, Year of Break even and so on. Yet you have an idea of what it means to make money with your business. So let's continue.
• What are your sources of sales and revenue? That is a good place to start talking about how you'll make money. Describe your customers and what they'll pay you for. Put products and services into your financial forecast, in detail. What mix of customers will purchase what mix of products and services at what prices? How may clicks will the most active end user make per weekday on your product page? And so on. Information like that will start a description of your business model. And it will trigger other needs for other information and that will help you further describe your business plan.
• How many people are needed (to attain your forecast of sales)? Now you are getting somewhere. Why do you need that number of customer service employees for your forecast of sales? What are you expecting in productivity of your engineers? Why did you choose the number of business development people? Keep going, give quantified reasons for each department, every employee. Remember to similarly justify outsourced services. All of them will work to produce the sales you have forecast. They are part of your business model. And their wages will account for over half, perhaps even two thirds of your cash spent each month.
• What expenses must be spent (to attain your forecast of sales)? Now for the rest of the story. Here is where you add up all the costs needed to purchase what your people need to do the work you hired them to do. Do it line by line for each department. Justify every expense. This will complete your story. Add these expenses to the wages, subtract from sales and revenue and presto you have profit.
• How much equipment will you need? That should be very easy to explain. Most startups will purchase very little equipment other than computers and a bit of furniture for each employee. Explain every item purchased. That goes into your balance sheet. It is part of your business model.
• What is the time needed to collect cash from your customers? How fast will you pay for things you have purchased? This is the next set of numbers for your balance sheet. How fast will a credit card company send you cash? How slow do you intend to pay your suppliers? Your decisions will be a huge determinant of the cash you will burn each month. That number is central to your story about your business model.

That is what you need to tell the story about your business model. Use Excel to build your mode. If you want to use a simple prepared model, try the one I sell for $25, QuickUp. With your numbers ready, go on to summarize your story in no more than three simple Power Point slides. After that you are done.

QUESTION: "Why is it important to describe my business model?"
ANSWER: In today's market for startup investors, you cannot attract them without a great business model.

The days are over when "Build it and they will come" ruled. No more will investors finance a Facebook that "will figure out how to make money some day." Twitter number two has to know how to make money.

Also, experienced, talented people will look for the same thing: a business model that can make a lot of money, quickly. That is how you attract them to your new enterprise.

BOTTOM LINE: To get your money (and top talented people) in today's challenging conditions, turn your brain on and innovate a clever business model. That's what it takes. Yes, it does require a lot of work. But you know that nothing worth doing is easy. So get going. When you have created a clever business model, you'll be way ahead of your competition. It will be central to your unfair competitive advantage.

BUSINESS MODEL BOLDNESS: Choose and add power to your unfair advantage

Spoke today with a wise private investor, a wealthy man who understands engineers and new markets for real products that have world class winner potential. He also understands what leads to weakness and even failure. We discussed what might become the business model for his most recent startup, an exciting chip-based enterprise that has recently emerged from stealth mode. Customers are lining up at the door already, waiting for the first chips. The business model choice has to be made very quickly.

Last night my class of students from all over the Asian world (National University of Singapore in Silicon Valley) presented their business ideas. Each had clever a business model that the team believed will contribute to their idea's success. They already realize the importance of using a business model for competitive advantage.

It is wise to re-consider your business model choice before going for money. Often you'll discover the analysis will lead you to a much better business. It may require some guts, courage, to make the change, but if you do, you often end up much stronger than before.

Good examples to think about are Rambus, Qualcomm and Intel. The first makes money licensing semiconductor technology (specialized memory chips). The last makes chips and sells them. The second does both.

Other examples are Google and Yahoo and Amazon. The first is an advertising giant that uses a good (not "the best") search engine to enable its clever collection of revenue generating businesses. The last sells merchandise over the Internet and is the world's largest e-commerce company. The second is a portal that has a wide mixture of revenue generating businesses that are tied to its information gathering and disseminating portal.

BOTTOM LINE: As you ponder what else you might do to boost the competitive strength of your new enterprise, think about what different business models you could use. At least a review is worth a few hours of effort. It can help you avoid making a big mistake. It can boost you into a leadership position (Jobs and Apple got the iTunes and iPod combination right and leaped over the already existing MP3 device companies). Be wise, be bold. It can add power to your unfair advantage.

BLOCKED? CHANGE YOUR BUSINESS MODEL: Exploit the blockage, don't let it exploit you

"The lawyers say we can't do that. Now what should we do?" The founder lamented he was blocked. Laws got in the way of his making money. It was discouraging. A good, ethical idea ran into a maze of legal rulings and practice. Investors would not budge. So should the founder quit? What else could he do?

In this case, I suggested the founder go back home and re-think his good idea. Aim for a different way to make money based on the original idea. Be open to derivatives and alternatives popping up. Abandon the original business model. Invent a new one. Find a better way to make money.

Two weeks later, he was back. This time with a fresh way to make money. It was simpler, had strong barriers to entry, and was compelling to all parties, including the lawyers. The original idea was distant, but the new business model was exciting and the second market much larger than the first.

BOTTOM LINE: When you hit a wall, don't bang your head against the bricks in frustration. Instead, use it to think. Invent a better business plan. Think your way around the problem using your creativity. The second idea will likely be better than your first.