I’ve long believed that every business has a model at its core and that model can be defined as a formula. As an entrepreneur or investor you then stress test that formula to decide if you have a viable business.
For example, my early stage streaming business, Narrowstep charged monthly platform fees and services payments, but the core formula was that we bought bandwidth for a lower price and sold it for a higher price.
Most such models are based on barter arbitrage.
I recently encountered a business that looked like it has great reseller margins, but nowhere in its business plan did it contemplate the cost of customer acquisition. You can negotiate a 20% margin with suppliers, but unless you can acquire customers for 10% of your sale price you are never going to realise a profit.
It’s basic, but what brings down 90% of startups in my experience.
There are two other pratfalls.
One is psychological, one is hoping that you can change the way people behave. The other is over-estimating market size, which will be the subject of the next blog.
So, now to a confession. Project Q does not have a business model (as yet). It has hundreds of business models and we’re going to work with many partners to see what sticks. Or the ‘throwing spaghetti at the wall and see what sticks’ strategy...