Week 3 ENT 640: Evaluating and the Importance of a Business Model

Evaluating, the second fundamental of early stage investing, “is the time killer of all the stages” says Amis and Stevenson in Winning Angels. There is not one way to evaluate a deal and angel investors are as different as the deals they see.  Some angel investors do a lot of due diligence before investing, some rely on their intuition, some rely on crunching lots of numbers, some work with other investors and some focus on the entrepreneur and its team. (Amis and Stevenson) Regardless of their approach to evaluating a deal, it is an important and ongoing step.  In Winning Angels, Amis and Stevenson suggest that the angel investor should look at the following four elements: people, business opportunity, context, and the deal which make up the investment opportunity.

Much could be written about all the elements’ importance, but for this week my interest was sparked when reading about business opportunity and the business model.  The business model is one of four sub elements within the business opportunity. (Amis and Stevenson)

A business model is defined as a way in which a company generates revenue and makes a profit from company operations. (Investopedia) It is much more than that and there are many business models out there.  Here are some examples of different business models and associated companies you may be familiar with. (Muehlhausen)

Model:                                 Companies:

Cheap Chic                         Target, Trader Joes, Ikea (inexpensive yet stylish products)

Bricks and Clicks              Bestbuy.com (any company that also has a physical location)

Multilevel Marketing       Isagenix, Amway, Avon (create a sales network out of one’s personal network)

Franchise                            Wendy’s, NBA, Nothing Bundt (opportunities for others to run an established business)

Subscription Model          Lifetime Fitness, YMCA, or software as a service (Involves recurring revenue)

 

According to Amis and Stevenson, the business model distills down into a few words what the company does. For example, electronic retail store for books, obviously Amazon. (Amis and Stevenson) The business models above have been around for years and some of the most successful startups are the ones with new business models. Peter Cohan writes about three of the new business models which have certainly changed the way business is done.

  1. Hold a Reverse Auction: Buyers determine their price for a service and the seller accepts the price, but the buyer must agree to the seller’s terms. Think Priceline.
  2. Orchestrate Demand Aggregation: All the sellers and buyers are in the same virtual location.  This gives both buyers and sellers lots of choices. Think eBay.
  3. Set up Person to Person Exchanges: Homes are used as options for travelers. Think Airbnb.

In the 7 Steps for Establishing the Right Business Model, Martin Zwilling gives the entrepreneur the steps for creating the right business model.

  1. Size the value of your solution in the target market: products too expensive will not work and prices too low could leave you exposed.
  2. Confirm that your product or service solves the problem: Do a test with real customers. Are they as excited as you?  Listen to the feedback and make changes.
  3. Test your channel and support strategy: Pitch the whole business model to potential customers and include the pricing, marketing, distribution, and maintenance. Listen to the feedback, because at this point you can change direction easily without too much cost.
  4. Talk to industry experts and investors: The evaluation stage is a good time to talk to potential investors and industry experts. Again, their feedback can be critical and may produce connections for sales or distribution down the road.
  5. Plan and execute a pilot or local rollout: Set up a limited rollout in a certain store or city. This allows you to test the price and quality without too much exposure.  Changes can still be made during the evaluation stage.
  6. Focus on collecting customer references: Ask those first few customers for testimonials which you can publish. If you are unable to garner their support, the business may not grow as big as you think.
  7. Target national trade shows and industry association groups. This is another way to expose the product(s) and business model. The feedback can validate what you are doing and may turn into a source for leads in the future.

Amis and Stevenson believe that a good business model can survive a bad business plan.  The key is to have a model that clearly articulates how it will make money and why customers will buy from you.

During the evaluation stage the angel investor needs to be able to see that the entrepreneur knows which business model he or she is using or understands that a new model is being created.  The entrepreneur needs to provide clarity when presenting the deal so that an angel investor who may not know the industry can still understand the intent from the business model.

Resources:

Cohan, Peter S. “6 Great Business Models to Consider for a Startup.” Entrepreneur. Entrepreneur Media, 30 Apr. 2014. Web. 29 May 2017.

Staff, Investopedia. “Business Model.” Investopedia. Investopedia, 16 May 2015. Web. 29 May 2017.

Muehlhausen, Jim. “Examples of Business Models.” Dummies. Wiley, n.d. Web. 29 May 2017.

Zwilling, Martin. “7 Steps for Establishing the Right Business Model.” Entrepreneur. Entrepreneur Media, 30 Jan. 2015. Web. 29 May 2017.

5 thoughts on “Week 3 ENT 640: Evaluating and the Importance of a Business Model

  1. Hi Cece,
    I like your perspective on having the right type of business model. Sometimes you can tell by the kind of business one plans to start if it will be successful or not in the right environment. I also like your examples of different business models that are in place and working.
    Thank you

  2. CeCe,
    Great job on posting. I like the idea, plan or execute a pilot or local rollout. The only drawback is the new owners can get discouraged if they do not yield a good turnout. My advice would be to persevere and learn from the experience. Considering marketing a different way or think about what kind of customers the soft open did attract. Figure out a way to draw similar customers in. Use feedback that you received from customers and try to implement if possible. Utilizing feedback also shows investors that you are listening to your customers and responding to their demands.

  3. I was very interested in reading the different business models you listed in this post. It’s important to know which business model(s) you want to pursue. I think there is a model missing from this lineup, that is becoming increasingly more common, and that is online and franchising. There are companies, especially in the collectible toy industry, that don’t have physical locations, but they sell their products in brick-and-mortar locations. They also sell their product on their own website, just in case what you are looking for is not available at retailers.

  4. Cece,
    You broke this subject down in a really great way. I find it interesting that a business model is all too often lacking in many small businesses. Furthermore, ask them what their competitive advantage is and you may get answers like “our prices, our people, our products.” But simply saying that isn’t enough. Each of those would be fine if there were no competition anywhere near them, but the fact is that there are multiple options for just about any product or service these days. In my view, that makes the subject of business strategy even more important than ever before.
    Austin

  5. Cece,
    I like how you summarized the Evaluating stage. It is succinct and easy to understand. Like Austin, I find so few startup business have a workable business model. It seems that the primary goal is to get revenue coming in the door and there’s little regard to how to sustain that revenue through a defined and repeatable processes. There is even less regard, I think, for how a small business can differentiate itself from competitors to create competitive advantage. (P. S. If you’re interested in learning more about the later, I suggest the book, The Blue Ocean Strategy.).
    -David

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