Entrepreneurs are typically more passionate about their solution than any other part of the business model which left unchecked can become a problem. While building a product is what you do best and where you derive the biggest sense of accomplishment,
building a product is NOT “the product” of your startup.
Your business model is “the product”.
Your Business Model as “The Product”
Up until recently, I would choose to defer thinking about the “whole” business model because of the sheer number of “unknowables”. My first exposure to business models was by way of attempting to write a business plan. I never got past the executive plan and 10-slide deck. Even there, many of the answers I put down felt like cop-outs: “We’ll just use adwords and SEO to fill the top of the funnel, use a freemium model to lower sign-up friction, then upsell just 10% of them into paying users. Simple.”
The problem with the traditional business plan is that while it is a great *initial* exercise for the entrepreneur, we don’t yet have all the right answers but are expected to pretend we do. More importantly, we see the world differently and need help finding the right answers but the business plan format is not conducive for that.
I stopped writing plans and switched to just building instead, but executing solely based on intuition is not optimal either. Then I stumbled into Customer Development, Lean Startup, and eventually the Business Model Canvas by Alex Osterwalder which is a 1-page format for a business model.
My first impression of the Business Model Canvas was that it was too simple to be useful. I revisited the canvas a month or so later and started tweaking it (under a Creative Commons license) which I blogged about here. I started experimenting with it in talks, workshops, and built an online version of the canvas which eventually became the Lean Canvas shown below:
You should immediately notice that I made the “Solution” box less than one-ninth of the entire canvas – by design. Building solutions is what we do best and is not the problem. It’s the other eight areas that are outside our comfort zone that need attention.
Since I get asked a lot about the specific tweaks I made, I’ve highlighted them below against the original Business Model Canvas:
My main motivations for these tweaks were maximizing the signal to noise ratio on the canvas since it’s already quite space constrained, and making the canvas more actionable from the ground up. I was less interested in retrospectively documenting successful business models, and more interested in capturing and tracking the raw untested hypotheses I was facing.
Or as Sean Murphy would put it I was interested in “solving the system of simultaneous equations that a startup team must solve to find a viable location in a market space”.
Lean Canvas As Your Startup Blueprint
Thinking about the business model as “the product” is quite empowering. It’s not something you back into once you have a product with early traction to pitch investors. Rather, it’s something you can and should be actively building and testing from day one.
The canvas serves as the spec or blueprint for your startup which you can use to systematically build and test your business model much like your product – lending itself to the same Lean Startup meta-principles.
How to Systematically Iterate Your Business Model
Nowadays I start every new product initiative by first sketching a set of Lean Canvases.
I’ve distilled down my process into 3 steps:
Step 1: Document your Plan A
My first step is brainstorming a set of possible models (or system of simultaneous equations) before writing a single a line of code. I usually start with an inkling of the problem, solution, and possible customers in mind. I create multiple canvases for each possible customer segment spending no more than 15 minutes on each.
I then prioritize where to start based on my relative assessment of:
- Customer Pain Level (Problem)
- Ease of Reach (Channel)
- Price/Gross Margin (Revenue Stream/Cost Structure)
- Market Size (Customer Segment)
At the end of this exercise, I might outright eliminate some models and decide to keep others.
Step 2: Identify the riskiest parts of the model by stage and type
Unlike a business plan, the power of the canvas lies in it’s ability to pinpoint areas with the most “unknowables” – aka risk. You need to tackle business model risk much the same way as you would tackle product risk i.e. early and often. Ironically, we do the exact opposite when we choose to defer things like pricing and channels over things we’re more comfortable doing like building the product.
While what you consider risky is somewhat dependent on the type of startup you are building, I find a lot of it is dependent on the stage of your startup. For instance, when considering a new product, the biggest risk I want to mitigate is ensuring this is something worth building in the first place. The riskiest part is often not the solution but the problem.
Step 3: Select the right tactics that maximize for speed, learning, and focus
Once you know what you need to learn, the final step is then setting up a series of experiments designed to uncover some answers as quickly as possible. The tactics that you use is highly dependent on the stage of your startup. For instance, the period before Product/Market Fit is usually riddled with qualitative learning (customer interviews/usability tests), while the period after Product/Market Fit tends to be more quantitative.
I often will test multiple models in parallel at the outset of a product through pivot experiments. For instance, if I were building a file sharing product that could possibly be used by attorneys, doctors, and graphic designers, I would create a Lean Canvas for each and conduct a few broad sweep customer interviews against each customer segment. If I get a strong enough signal from a particular customer segment, I might drop some models over others and the type of experiments I run over time become more focussed on optimizing a single model.
People, People, People
As entrepreneurs we view the world with a strong solution bias. Once we acknowledge that the solution is not the whole product and that we don’t need to pretend to believe our made up answers, we shift from pitching to learning – from other people.
I believe the true benefit of creating a business model/plan is only realized when it facilitates learning from other people.
Customer Development is one such conversation but there are many more that are needed to successfully build out the business model – with internal team members, advisors, partners, and investors.
Business Plans fail to do this, but I’ve been positively encouraged by the conversations I’ve had around the canvas with other entrepreneurs, investors, and advisors. I’ll cover that next time.