This article is related to my earlier article “Customer First”. Steve Blank at his interview at the Commonwealth Club on 8 November 2012 commented that large companies at its core execute known business models, whereas start ups in their early days are searching for a business model. He had gone through 8 start ups in the technological sectors, some that failed.
Steve Blank: How to Build a Great Company, Step by Step
Author of Startup Owners Manual
HR Practitioners need to understand this because:
- They worked for other people (I had personally went through these challenges and pains so I want to give you some insight).
- Some are hired for stage 2 to put in the operating framework, processes and so on.
- It helps them understand what is going on inside the business when they see the Managing Director or CEO being transferred or replaced.
- He or she may instructed by the Board to fire existing management staff including himself or herself if the Board decide to acquire another company.
- Not every top management executive has the strengths to do and move through all the 3 stages well.
- He or she would have the opportunity of seeing how people, even top management people allow self-importance get the better of them when it comes to making business decisions.
An Act of Faith
Steve Bank said that a start-up is a faith and passion based enterprise from day one and the entrepreneur’s job is to turn that faith and passion into fact as quickly as he can.
Blind faith is recklessness, but if you can see the possibilities and the opportunities, it is no longer blind faith.
3 Stages of a Start Up
Steve Bank pointed out that a start up goes through 3 stages: search, build and execute.
For the first stage, he defined a start up as a temporary organization designed to search for scalable and repeatable business model. He said that the aim of the start up stage is not build product or get customers.
This is the stage when the entrepreneur with the business idea has to assess his idea for business viability. By that, I meant checking out whether something that you think that potential customers would want is really what they wanted.
What Is A Business Model?
Ben Benson said:
- Income will not make you wealthy. To be wealthy, you need to own equity in a series of transactions.
- A business model is a cash flow model showing how you move cash into and out of the business.
He pointed out that value creation is the cross section of:
- Ability to meet the demand.
- The difficulty in replacing you or it (business moat).
Ben Benson:The 7 Laws of Wealth
John Paul DeJoria said this: “ Whatever your product or service is, it has to be so good that you are not in the selling business; you are in the reorder business.”
John Paul DeJoria: Be In the Reorder Business
Differences between Corporate Person and an Entrepreneur
There is also a difference between the job nature of persons with similar job titles from a large company and a start up. The person in the large company executes the known business model. The entrepreneur in a start up has to verify the business model works that is a customer is excited to want to pay for the entrepreneur’s solution.
The required skill for the entrepreneur is listening skill rather than being excited about telling the customer about his unverified or untested solution. The entrepreneur should ask the prospective customer what problems or needs or wants does he or she have and not make the mistake of trying to get an sales order.
The entrepreneur has to be the one that spend 20 percent of his time to do this, and not immediately hire a sales person to talk to customers as he would be the one that would be adjusting the initial business model.
Testing and Reiteration of Business Model
When all the above verification is made, and the company is in the process of making sales, when sales do not come in, it is important to check which component of business model had went wrong.
Best Person for Stage One
This tends to be a chaotic period when the entrepreneur is adjusting the components of his business model to one that can be monetized.
The personal qualities of the entrepreneur that would fit this role are a sense of curiosity; good listening skills, the love for interacting with potential customers; the ability to recognize patterns (big picture) as well as the details; the ability to see connections where other people do not; and the ability to handle a chaotic situation (including sieving, retracing, verification, follow-up, reiteration).
Often such a person who thinks differently is branded as a crazy one, a radical, a misfit. Steve Bank said that if the start up fund came from a venture capitalist, the entrepreneur may get kicked out once he found the viable business model. An example is the experience of Steve Jobs.
It is a business basics skill but not everyone possesses the gift to do it well. Other more startling examples are Lee Kuan Yew and Mahatma Gandhi. It differentiates the businessman from the entrepreneur. The businessman skips this stage by buying an ongoing business with a working business model.
Apple’s Think Different ad – Narrated by Steve Jobs (1997)
Steve Jobs on “Think Different” Ad – Internal Meeting Sept. 23, 1997
In the second stage, once the business model is identified and verified, the business would require a person that have experience with business operations and who would be able to take business from the early stage in the operating framework, policies, processes, procedures, framework and programs.
The third stage involves growing, building or scaling up the business.
Surviving the Three Stages
Jim Rohn said:
- If you work hard on your job, you can make a living. If you work hard on yourself, you can make a fortune.
- The major value in life is not what you get. The major value in life is what you become.
Jack Ma said the same things, although not in those same words. The business founders such as Bill Gate that survived through the 3 stages financed their own start ups and were able to recognize that they need to hire operating executive that complement their weaknesses and work for 4 to 5 years to address issues for stage 2 and 3 of the business; and learn from them.
Business Plans Versus Business Models
The business plan as purported in business schools is an activity done in the head and not out in the field. If an entrepreneur does a business plan, he is is making untested guesses of his ideas.
What start ups do is to come up with a business model. The next step is to verify untested business model by interacting with the customer as early as possible. In this verification, you will need to first check whether your assumption about the customer’s needs or problems. The second is to check whether your solution solve the customer’s problems or fulfill the customer’s needs.
The Mistakes Start ups Make
The idea behind the phrase “Build a better mousetrap and the world will beat a path to your door” is incorrect.
David Burkus in his article “The Myths of Creativity: Building A Better Mousetrap” pointed out “The U.S. Patent Office has issued over forty-four hundred patents for better versions of the mousetrap; of those, only about twenty designs have ever been developed into a commercially viable product. The most successful design, by far, is the spring trap we all envision in our heads. This version was designed in 1899. Despite the roughly four hundred additional mousetrap designs submitted for a new patent every year, no design has yet surpassed the spring trap. Behind all these issued designs is a simple truth: even if you can build a better mousetrap, there is still a lot of work involved in selling the world on your new design.”
Other mistakes include:
- Creating a business plan based on desk research but fail to verify it.
- Signing on a venture capitalist and spend the money too early.
- Designing, producing and stocking the product ready for making the sales before verifying that there are ready customers that want it.
- Hiring a salesperson to make the sales before verifying that there is a demand for the product.
- Trying to change the sales strategy rather than the business model when there is no sales order.
Author of Business Model Generation