9 takeaways from this video:
00:00:48 One of the least thought about topics when starting a startup is the business model and monetization plan. There have been so many large and successful consumer-oriented companies that people wrongly come to the conclusion that “if you just build it, people will come.” In reality, monetization often comes much later in the company’s existance.
Twitter, during its first seven years, didn’t have a business model and had no monetization plan.
[EDITOR’S NOTE: The following 13 questions are questions you can expect to be asked by a venture capitalist who is considering investing in your startup or opening up his or her rolodex to introduce you to other investors. For even more questions, download my free Strategic Planning & Creative Brief Template which I created with the help of 80 advertising and branding professionals.]
Your product or service:
1. What problem are you solving and for whom?
2. Is your product or service:
- Business to business (B2B)
- Business to Consumer (B2C)
- Business to Business for ultimate Consumer use (B2B2C). If this option, who is the ultimate person selling to the consumer? You, who is a stranger to your client’s consumers? Or your client, who already has a reputation with the consumer but that you are in essence trusting your client to correctly market, sell and represent your brand?
3. Is your product or service a:
- “Nice to have,” in that it makes life more convenient for the consumer
- “Very nice to have,” in that it saves time and money so the consumer can focus on things s/he prefers doing
- “Must have,” in that if the consumer doesn’t have this product they risk losing business to their competitors
Obviously, the closer you can position your product or service as a “must have,” the more you can charge for it.
4. Is your product or service recession-proof? Would consumers continue using it when strapped for cash (cell phone, wifi, car insurance…) or would you be one of the first things they break their contract with (pet care, house cleaner…)?
5. At what stage in development is your product or service?
6. What would an adequate analogy for your product be? (”The Lexus for lobbying software” “The Google for the movie industry”, etc.)
00:10:55 Although the analogy you choose may not perfectly define your business, its purpose is to create a mindframe for the investor to understand: taking an existing business model the investor is familiar with and showing how you plan to implement it into your specific industry. This allows investors who may not be familiar with your business and industry to grasp the idea of what you want to do and where you want your business to go.
[EDITOR’S NOTE: For more information on defining your business model through analogy, watch the Ycombinator lecture Competition Is For Losers; Aim For Monopoly at Stanford University by Peter Thiel.]
7. Is your product or service going to replace manual labor?
7A. If yes, who? Top-level managment? Low-level employees? Entire departments?
00:12:20 If yes to question 7A, then a potential unique selling proposition is that not only does your product or service drive revenue for your client’s firm, it cuts costs, saving both time and money.
8. Would you charge per module or will you offer a paid subscription?
9. Will your product be offered through tiers? Will you offer an enterprise license if clients buy a certain number of subscriptions? Can it be bundled together to offer larger products or taken apart and sold as smaller pieces? Or is it just one all-inclusive product at one set price?
10. Realistically, how many employees in your target client’s company will be touching and using your software? Top CEO’s? Middle-managers and below?
00:18:03 Use caution if you’re offering a product or service which can be bundled or taken apart and be offered as “light versions.” While you do want to be able to sell a useable product to smaller, less financially backed clients who might not be able to really make you money but will help you spread the word about your product, validate your product, and help you to identify and fix any bugs which might creep up before you sell the all-inclusive version to more financially backed clients, you don’t want those financially backed-companies coming in and just wanting to order your “light version.”
That being said, if your product or service is essentially creating a market that doesn’t yet exist, then you have the opportunity to “set a standard” for which your future competitors must try and attain. Therefore a “light” version might not be your best option. In this case, it might be smarter for you to create a “light version,” but under a different product name so clients do not become confused or not be able to distinguish the benefits between your “light” version and your “all-inclusive” version.
00:59:11 Additionally, there is a difference in branding between a product which offers a “free trial” and a product that begins as a “test” and then rolls over into a subscription-based contract unless the user “testing” the product actively cancels the test. Personally, I (Rudina Seseri) dislike “free trial” models because they don’t convert.
11. How scalable is the human element of your product or service?
00:50:55 Technology-based products and services can be used millions of times simultaneously at any hour of the day and with little additional cost. Human-based products and services, however are limited by law, human energy output, working hours, etc. and so are much more expensive and thus less scalable.
Your business model versus your market
12. Does there exist an 80/20 rule within your target consumer demographic? (where 20 percent of of the major industry players account for 80 percent of the industry spending)
13. Is there a follower/leader mentality where the that top 20 major players lead the way and everyone else follows?
13A. If yes, then does your business model involve a two-prong strategy: 1) Trying to get one of the big guys to use your product which will then push your product throughout the market, and 2) Convincing some of the mid- to small-businesses to adopt you which you can then use for validation?
14. What are your statistics and numbers for your bookings, billings, and revenue metrics?
00:23:44 Important metrics to keep track of:
- Bookings is basically your sales: How many contracts are you signing, how long are the contracts? (12-month contracts? 24 months?) and how much money are you bringing in? Signing one 3-year contract at $3M isn’t the same as signing three 1-year contracts for $1M each. The total revenue is the same, but the value is different because one $3M contract is one client with a big check in year one, but no additional revenue for the next two years.
- The billings metric is your ability to collect cash.
- The revenue metric is the total amount of money you’ve billed and collected.
- The upsell and renewal metrics. If the majority of your clients are one time clients who don’t renew and aren’t interested in more products from your business is important, then you’ll have to continually invest in finding new clients.
It’s also important to compare your renewal metric with your total revenue metric. For example, you may have a total renewal revenue of $3M, but if 9 clients didn’t renew and just 1 very large client renewed and/or was upsold, this fact makes a big difference to how the total revenue metric is valued.
You must also consider the worth and lifetime value of your customer: i.e. the retention/churn, customer acquisition costs and the lifetime value of the customer.
[EDITOR’S NOTE: For more information on retention and churn, watch the lecture How to Build Products That Your Users Will Love.]
00:29:02 Generally speaking, the first investment priority of your startup should be spent creating a high-value product for customers. Once you’ve created this product, you turn your investment heavily into sales and marketing.
In fact, you should be firing sales and marketing people faster than you should be hiring them. “B-players” are employees who are just good enough to meet objectives and get the job done. At this crucial stage in your startup’s expansion you can’t afford having people who just get the job done; you need A-players who more than justify their salary and offer you the greatest return on investment (ROI). This should be based on your product’s sales cycle. If you have a 1-month sales cycle, then you can tell within 3 months whether or not your sales person is an A-player or not. But if you’ve got a 12-month sales cycle, then it will take you longer before you find out whether or not the sales team is worth their paycheck. In this case you’ll need to set up milestones in the sales cycle.
It’s at this point in your business that sales and marketing are crucial to the long-term success of your company.
[EDITOR’S NOTE: Recall in Armin Trost’s lecture Recruitment From Application to Offer (Part 1) that there are four basic types of new hirees:
- Right Negative: Based on what I have learned about you, I believe that if I hire you, future performance will be low; so I don’t hire you.
- Right Positive: Based on what I have learned about you, I believe that if I hire you your performance will be very high; so I hire you.
- False-Negative: Based on what I have learned about you, I have predicted that your performance will be low; so I don’t hire you. But if I would have hired you, your performance would have been high.
- False-Positive: Based on what I have learned about you, I predict that you will be a star and will really out-perform, but later on you become another ‘warm body’ in the office. In some countries, ‘getting rid’ of employees is costly and time consuming, further compounding the damage done by choosing to hire this person.
Also, recall in Rory Sutherland’s talk The Next Revolution Will Be Psychological Not Technological that there are only two things in business that actually create value and make money: innovation and marketing; everything else is a cost.]
00:45:10 You can never have enough insurance, but you have to consider whether you can carry the cost of full-coverage insurance in every conceivable circumstance, and how much insurance is enough.
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