by Richard Dale, Managing Director at Big Data Boston Ventures
Neat technology! Wow—I love the interface, that’s beautiful. What does it actually do? Ahh, and who would use it? Oh, I see. Why would anyone pay for that?
Of course, your business doesn’t suffer from that particular problem, but how do you demonstrate that your business will be around for the long term?
There are many ways to do this, and, like beauty, potential staying power is in the eye of the beholder. And there are many kinds of beholder to be concerned about. Investors want to invest in a company that will be around long enough to have a chance of making money. Customers don’t want to spend time and effort bringing on a new product or service that might go away. Employees (and their spouses) want to know the paycheck and benefits are at least somewhat stable (no matter how many stock options you give them).
The headline on demonstrating staying power is to have a passionate articulation of a strong business model, but also the humility to change it if prompted by evidence that your assumptions are wrong. A business model is based on knowing your target customer segments and the value propositions you are offering them. As I have written elsewhere, a business model is more important than a business plan.
A business model not only needs to be well articulated, it also needs to be strong. The customer segments must be well defined and have scale, urgency around the value proposition, and a willingness (and ability) to pay.
There are two aspects to scale for your customer segments. The first is the numerical size of the market (the product of the number of customers and a realistic price point). The second aspect is that these segments need to be appropriately related. If you have two customer segments, but the second one is 10% the size of the first, why would you ever spend the effort (and risk the loss of focus) to go after the second one? If the first is a consumer offering and the second is an enterprise offering, are you really able to build two completely different infrastructures for sales, marketing, fulfillment, and service?
Even if there are good reasons for customers to buy your product or service—even convincing economic reasons—sometimes that is not sufficient. Habits are hard to break. A new vendor might have a wonderfully superior computer data backup system, but no one replaces their installed backup system until it breaks or runs out of capacity. The risks and disruption in replacing a backup system almost always outweigh an economic argument that the next one is cheaper. When you describe your business model, you need to explain what makes the offering an urgent matter for your customers. Are there compelling reasons to buy, and buy now?
Willingness to pay
In a big market with good reasons to buy, you may still find that customers are not willing to pay. Take internet search, for example. The market is huge, and there are compelling reasons to use it every moment, like when you need to know what movie it was where someone says “we don’t need no stinking badges.” However, no one is paying for internet search. Many more complex situations exist. Take a contrived (but not terribly contrived) example where your startup provides a web self-service portal system. You might want to sell this on the basis that your customer can reduce the number of live customer service agents answering phones. This seems to be a good economic decision for your customer prospect. However, if the web systems are run in one department, and the call center is in another department, who will be willing to pay for the service implementation? The web department has more expenses buying the self-service system, but they don’t see the savings. When you find a buyer who reaps the benefits of spending the money on your offering, then you have a buyer who is much more likely to be willing to pay.
Now, after hard work in customer development, you have found a business model in a market that shows scale, urgency and willingness to pay. You can articulate it well and with passion, so things are going great. The last concern is not to get too attached to this version of the model, and be willing and able to continue to improve and change it—sometimes radically—when circumstances warrant.
Investors, customers and employees can sense if you blind yourself to the flaws that emerge when your business model meets the real world. You sound more promotional than passionate, more defensive than definitive. Instead, you should continue to be thoughtful about the assumptions that underlie the model, the ways you are testing them, and about any divergence from expectations. If you can be passionate about your business but also show that you are committed to learning from reality, being flexible in your beliefs, and basing your decisions on data from the field, then you will demonstrate true staying power.
Richard Dale is Managing Director of Big Data Boston Ventures, a new VC fund that invests in early stage big data companies. Richard’s proven leadership abilities combined with deep technical and operational expertise provide a platform to advise entrepreneurs in building solid technology companies. Richard is a well-regarded mentor to founders of early stage startups in the Big Data Boston and Sigma portfolios, as well as other startups including many from TechStars Boston, MassChallenge, and HealthBox Boston.
Previously Richard was a Principal at Sigma Partners and before that was a co-founder at Phase Forward, a provider of software services for pharmaceutical clinical trials, which went public and later was sold to Oracle. Prior to that Richard worked in a series of management and technical roles at leading technology startups in the Boston area.
Richard blogs at http://venturecyclist.blogspot.com