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What’s a startup business model? What makes a startup different than a mom-and-pop business? What’s the difference between a small business and a startup? It’s the business model.

A small business is a small business now and will be a small business 10 years from now. It’s a bagel shop that grows slowly and is profitable. Maybe in 10 years, it can scale to 3 stores. There are little to no economies of scale. Margin improvements plateau at some level. Cost of goods are high, net margins are low and these metrics remain relatively in line with top-line revenue.

A startup business model scales more easily. For instance, there is an ability to deliver 100X the product with a small 2X – 10X increase in capital and personnel costs. Variable costs are small, net margins are huge and fixed costs grow slowly as revenue rockets through the roof.

Some random thoughts about business models:

  1. The Chicken and Egg Model – When a company builds a product where success is dependent on attracting two or more separate constituencies, execution risk is significantly increased. For instance, if Uber, had to attract users and drivers of Black Cars in significant numbers to succeed and an investor evaluating Uber gave them a 10% chance of attracting enough cars to attract users and a 10% chance of attracting enough users to attract cars the execution risk would be rated at 10% X 10%, or 1%. The good news for Uber, they beat those odds. It’s more difficult, it’s riskier and yet it can be done. Uber did it.
  2. The Market You Address Effects Your Model – Are you selling to a low-risk – high-return market? The market you target will affect your ability to raise capital. Are they efficient buyers? Do they have money? Is it expensive to acquire customers? Do the customers spend freely? Selling to non-profits and state and local governments is usually more difficult than selling to commercial entities.  Selling to startups creates risk because startups are notoriously cheap and have such a high failure rate, you will need to build high churn into your model. A Startup, selling to a startup is like a drowning man, trying to save a drowning man.
  3. Competitors and Pricing – Netscape was one of the first big internet startups selling the first commercially successful browser. That was until Microsoft saw the browser as a threat to their business model and subsequently bundled internet explorer as a free alternative browser. You don’t want to compete with Google, Microsoft, or other corporate giants that can bundle and seemingly give away a competitive service to yours at no charge…. unless you give away your product at a high profit. If you truly have a revolutionary disruptive advantage and not some silly easily duplicatable, evolutionary feature, you’re not going to passionately disrupt a Google that bundles a competitive offering and significantly beats your cost…. profitably.
  4. Creating a Market – Creating a brand new market means there’s a high chance that there’s going to be a lot of missionary selling prior to the mercenary selling. If there’s no Gartner or Forester or Yankee group-like organizations covering the space then there’s going to be a lot of market seeds being sewn before the market plants are harvested. If your target market doesn’t wake up in the morning and say, you know what I need? Today I’m going to get myself a Passionately Reinvented Kickass Ninja Rockstar Thing, then you’re going to have to create a market for Passionately Reinvented Kickass Rockstar Things before you can sell enough to start building a business. A good example of a company that created a market would be, Tivo…ultimately Tivo sewed the seeds, and the cable companies that bundled Tivo functionality into their offerings harvested the crops.
  5. B2B vs B2C – Selling to the enterprise has the advantage of being easy to identify and less expensive to contact than B2C. Yet big winners in B to C are the home runs of life while the B2B’s tend to be hitting for singles and doubles.

Here are some things that are not a business model:

  1. Founders getting company logo tattoos on their butts
  2. Selling to small starving companies that are likely to go out of business like startups
  3. Selling a product to a market with no identifiable market pain or need (either because the market is well served and your product is only an evolutionary incremental improvement or because like in the case of the Segway… no one needs it)
  4. Having more Facebook Likes than your competitor who has more revenue growth than you
  5. Winning the Hottest Startup by the Startup Industrial Complex Tech Press
  6. Hosting a super “successful” Hackathon or Happy Hour with people who are not likely to be customers
  7. Never being satisfied enough with your product to invest in customer acquisition
  8. Eloquently talking about your product and its features and consistently answering, “huh?” when asked about revenue traction
  9. Passionately reinventing the kickass life of any citizen
  10. Never doing what it takes to wean yourself from grants and VC capital to actually build a self-sustaining revenue-producing profitable business