Finding a startup business model

Many startups fail because of a lack of research. Founders assume that customers want to pay for their product and scale before knowing their business model works. The ‘Growth at any cost’ approach encouraged in Silicon Valley has led to some spectacular collapses when a company’s business model has not been adequately tested before it scales. 

The most dramatic recent example of a startup scaling before it has a solid business model is WeWork. The office space startup launched in 2010, and by 2019, the company had an estimated value of $47 billion, helped by an $8 billion investment from Softbank. The company never made a profit but instead focused on a massive expansion of locations without learning if their model worked. The collapse came when they attempted to transition from startup to established company with an IPO in 2019. Potential investors got to look at its finances and compare WeWork to established and profitable real estate companies such as IWG.

A startup is not just a smaller company. Traditional product development ‘Waterfall’ methodologies work for existing companies with a known market and low tolerance for failure. A startup model with ‘agile’ product development is needed when you are unsure about what you’re selling and who you are selling to and need to repeat the design and development process many times until you find something that works.

Startup: A temporary organisation in search of a scalable, repeatable, profitable business model. Steve Blank

A startup is a company in search of a customer, product, and business model. The Customer Development Model can be used to make this search systematic and reduce the risk of failure.

The Customer Development Model

  1. Search Mode
    1. Customer Discovery – translate the startup’s vision into a testable business model hypothesis.
    2. Customer Validation – Test the business model for repeatability and scalability.
  2. Execution Mode
    1. Customer Creation – Establish the market, product position, and demand. 
    2. Company Building – grow the organisation to support executing the business model.

The Build-Measure-Learn Loop can be used in the Search Mode to learn from customer feedback when developing products and services. The build phase of the first iteration of the loop creates the simplest customer-ready product known as a Minimum Viable Product (MVP).

Minimum Viable Product: The version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort. Eric Ries

The Build Measure Learn Loop

  1. Build a product from a plan
  2. Measure the product to generate data
  3. Learn from the data to create the next plan

A company should validate their business model and customer before any significant money is spent in the Execution Mode. If the business model hypothesis fails, the startup can pivot to a new idea until a scalable business model is found.