DEVELOPING YOUR BUSINESS MODEL AS AN EARLY STAGE STARTUP

Fair enough – mapping out a quantitative five-year plan for an idea, a project, or a just founded startup appears counterintuitive when working in times of agile management, “fail fast” principles and trial and error. Nonetheless, you decided for a business to pursue and to test your hypotheses. A business plan and model should help you to do exactly this. And while external stakeholders such as investors, banks, and accountants might be the ones predominantly asking for it – you should develop this plan primarily for yourself.

Photo: Viviane Wild

Photo: Viviane Wild

1. Get started

So where does a business model fit in within your already bloated up set of one-pagers, teasers, decks, and backup research? Where it all comes together! Yes, that does mean that there are some steps you should have taken care of before diving into your Excel files and unit economics. Regardless of the industry you work in and of whether you have already closed your first angels, or just started working on your company last week – start off with the fundamentals. This means in the usual overused startup slang – design thinking, personae, lean canvas, customer journey mapping, milestones, and only then diving into the numbers. You might have to re-validate your previous assumptions or tweak your model to different extents in these very early steps already, but it’s worth it. You should come out with a clear understanding of the following: What’s the problem I am solving, who am I solving it for, how am I planning to solve it, and how does this affect my money.

2. Dive deeper

Once these first steps are mapped out – dive some levels deeper but still stay on the qualitative side of things. For “setting milestones” you should usually decide on three to four dimensions, which can range from anything like users, product, team, to financial data and KPIs. Put it on a timeline, discuss and add milestones, and see what you think you need to achieve to get your business to the next level. It might help to match it with funding milestones – i.e. when can I start my Series A fundraising, what assumptions do I need to prove until then, what kind of assumptions do I want to prove afterwards and where do I put the collected funds.

We personally like doing this and also see great results when our founders adapt this technique: it proves as a visual stimulus (eg by mapping it out on a whiteboard or Asana board), which can be iterated and applied in daily decision making. Working towards set goals is key in entrepreneurial environments, and prioritizing tasks along company objectives helps massively (think top level OKR for your startup). Furthermore, it provides you with the qualitative milestones across different levels, that you can later incorporate in your business model to justify jumps in growth, scale, conversion etc.

3. Hands on   

Setting up your plan now should be more straight forward than starting from a blank page. Still we suggest to do exactly this, thus our generic answer to the template question is denial. We do not believe in templates, as it will automatically frame your thinking and planning to a major extent. The only template you need, is the white empty canvas with the shades of grey grid… the rest is structure and filling in the blanks.

In your quantitative business model, there should be the following elements at minimum – there can be more, but most can be shown within this structure:

Summary (YoY) =  A yearly overview where everything runs together – more as a general orientation for yourself to see the size of your company

Key Metrics (MoM) = A monthly overview of the key metrics, i.e. what defines your business in marketing, costs, revenue, and bottom line

P&L / CF (MoM) = The profit & loss statement does not necessarily need to be in accounting standards – it should rather serve as a rundown of your primary revenue drivers, how you monetize them, and how your marketing and costs affect your gross margins, eventually calculated down to your bottom line (EBITDA) and back to your cash flow.

Marketing = The marketing sheet, standalone as opposed to the other costs, should clearly define how you plan to generate your revenue drivers – i.e. users, visits, impressions, etc.

OpEx & Payroll = What other costs you need to bear in order to generate your revenues and run your company – and your payroll can be mapped out in detail again – this is crucial for your cost planning.

BackUp = Information such as market sizing, sensitivity analyses, and sanity checks -  can be helpful for third parties to understand your model.

There are countless do’s and don’t’s when it comes to setting up these line items and how the numbers change over time. To not overcomplicate things, keep these bullets in mind when setting it up.

  • Vertical Change: Conversion rates: defining what you make of your channels and users / customers
  • Horizontal Change: Growth. Defining how you scale
  • Revenue Drivers: remembering Paul Graham's Pirates Metrics to get from revenue driver to MRR
    • Acquisition: getting visitors to your website / app
    • Activation: turning visitors to users, users to customers by leveraging the “magic moment”
    • Retention: maintaining users / customers – we like to point out Sarah Travel’s “Hierarchies of Engagement” 
    • Referral: using WOM and referral marketing to acquire new users
    • Revenue: monetizing your users / customers
  • Monetization: we are not fans of oversimplifying things, but Jörg once wrote a nice book on 7 ways how to make money online  that still can be applied to most business models out there

Remember: you are mapping this out for yourself first, to understand your own case. Later other peers such as investors will have a look at your numbers, they of course do want to see the upscale later on – the infamous hockey stick. Per definition, you will not only achieve this by linearly scaling your unit economics – economies of scale, new markets, product loops, growth hacks, partnerships, network effects – all these pitch in for the exponential growth you want to show. Use your previously lined out milestones to point out where in your plan you are making use of such elements to justify your scale.

4. Putting it all together

Once you have this, it’s about putting it together again – taking your monetization model, subtracting the costs your facing in making that sale / service happen (COGS), what you are paying to attract and retain your customers (marketing), your other operational overhead (OpEx), and of course your team (payroll). Eventually you’ll end up with your bottom line – the EBITDA, most likely to be negative in the early stage cases. This is good – tweaking this number to understand the effect on your cash flow (i.e. the change in your cash balance) does not take too much effort in most software cases this early on – in doubt, ask one of your business friends or accelerator of choice for these tedious details. You want to understand how much money you are burning for the first period of time – this defines what you are asking from the investors. If you are being pushed with multiples, DCF valuations, etc. pre-Series A – you are talking to the wrong people. It’s about how much money you need, and what stake of your business you are willing to sell in return. End of story. Investors might use their techniques to see how big your case can be and thus justify their valuations – which is fine, and you should be aware of this as well. Generally, we recommend to have a general fundraising strategy lined out prior to talking to investors and beyond the round you are currently raising – this makes you understand your dilution more clearly and shows you different options. It will turn out different anyway – but it helps you to understand the future a little better.

We do not like step by step guides. We are generally passionate about tech, not accounting – this is why we do like to support in this process within our Accelerator at ASPnP. When founders pitch their ideas to us, we want to understand the size of the market, assumptions about growth and unit economics, but do not want to see a complicate model up front. That’s something that is being developed within the 100 days of iterations, failing, learning and mentoring at ASPnP.