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How to Design a Business Model

Remember that it’s not just the technology: it’s very much the business model and the people that are key to receiving funding.
– John Occhipinti, Woodside Fund in Business 2.0

Veteran entrepreneurs understand that the business model always precedes the business plan. In fact, a convincing business model is often all that is needed by a savvy entrepreneur to make the commitment to pursue a fast moving opportunity. Conversely, a business plan takes several months to put down on paper during which the window of opportunity may shut. For this reason, entrepreneurs who need to be agile and fast moving place more importance on formulating the business model than on writing a business plan.

What the Heck is a Business Model?

Almost everyone talks about business models these days but only a minority truly understands what they are. Even the academics disagree and contradict one another when it comes to formulating a definition. Anyone can have a grand strategy for taking over the world but if they can’t explain in a plausible manner how they will accomplish their goal, no one is going to take them seriously.

When asked, I explain it this way. Your strategy explains what your business will do. Your business model explains how it will do it. The former is the what part; the latter is the how part. Have you ever seen one of those movies where two businessmen agree to do a multi-million dollar deal based on a sketch drawn on the back of an envelope? If you haven’t, you have probably read about such an event in a business magazine or newspaper article. Such stories are the stuff of business lore. Despite their ubiquity, the idea goes directly against what most of us are taught which is that writing a business plan is the mandatory–and unavoidable–first step in creating a business. However, deals resulting in new ventures do happen without a business plan being written. What is required in lieu of the plan is a clearly defined and communicated method of creating value which can be exchanged for what economists call “economic rents” or profits. This is where the business model comes into the startup planning process.

Those sketches on the backs of envelopes and napkins were business models, although they weren’t called that until fairly recently. They are effective in sealing the deal because industry insiders can often communicate value in shorthand.

The purpose of business modeling is not to get the entrepreneur to where she can raise millions based on a quick sketch alone. Instead it has two far more realistic objectives:

– To teach you how to both create and communicate true value to potential customers, suppliers, employees, and even investors, and

– Formulate a startup strategy which will minimize the capital needed to launch your company.

Your picture of the business you wish to build may look different from the one you devise for the startup phase after reading this manual. That’s perfectly normal as the objective here is to get you up and running with as little outside capital as possible. Once you are in the stream of opportunities you can begin to tack towards your original business idea–if it still looks like a good one after a few months of operations. Successful entrepreneurs understand and accept that oftentimes a transitional business model is required to kick-start their venture.

The Startup Guide utilizes business modeling extensively to teach entrepreneurs how to think like savvy veterans when planning their startup strategy. The Guide explains the use of business modeling in simple to understand terms.

Business Model Resources

Need more information? If you answered yes, various academic papers on the subject can be found at this business modeling for startups site.

Here are some additional interesting business model articles:

Business Model Generation

Business Models on the Web

Internet Business Models

The Startup Toolkit

This last one is a fun interactive tool.

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