I have been discussing the Lean Startup movement in my
recent columns. The movement says that business ideas are based in testable
assumptions, and that the first task of the entrepreneur is to test and refine
the assumptions; NOT to write a business plan. This is somewhat heretical as for the last fifty years we thought
that the business plan was the first step on the journey to launching a
business.
So, how might we organize these assumptions and test them if
we are going to do this rather than craft a business plan? Alexander Osterwalder and Yves Pigneur suggest
an answer in their book Business Model
Generation. According to them,
“a business model describes…how an organization creates, delivers, and captures value [emphasis mine].”
Their research revealed nine building blocks to describe the
business model (definitions are quoted from the book):
1. Customer Segments. The different
groups of people or organizations an enterprise aims to reach and serve.
2. Value Proposition. The bundle of
products and services that create value for specific Customer Segments.
3. Channels. How
a company communicates with and reaches its Customer Segments to deliver a
Value Proposition.
4. Customer
Relationships. The type of relationships a company establishes with
specific Customer Segments.
5. Revenue Streams.
The cash a company generates from each Customer Segment.
6. Key Resources. The most important assets required to
make the business model work.
7. Key Activities.
The most important things a company must do to make its business model work.
8. Key Partners.
The network of suppliers and partners that make the business model work.
9. Cost Structure.
Describes all the costs incurred to operate the business model.
Osterwalder and Pigneur combine these nine building blocks
into what they call the Business Model Canvas. They put the canvas in the public domain. You can download it at http://www.businessmodelgeneration.com/downloads/business_model_canvas_poster.pdf
The directors and entrepreneurs at Venture College have found
this model incredibly helpful as a way to organize our thinking about a
particular venture. Over a period
of several months the entrepreneurs tackle each building block by writing down
their assumptions, and then testing those assumptions, primarily by
interviewing prospective customers.
To date, our entrepreneurs in the first cohort of Venture
College have generated 480 assumptions about their business models. They have conducted 121 customer
interviews and rejected more than half of their assumptions as invalid.
For example, one of our entrepreneurs believed that there
would be a profitable market for an insectarium in Boise. In the language of the Business Model
Canvas, she believed there existed Customer
Segments that would Value a visit
to an insectarium sufficiently to allow her to make a profit. What she learned through talking with
prospective customers in the various segments is lots of people thought it was
a cool idea, but very few were willing to pay the entrance fee (Revenue Stream) such that revenues would
be higher than costs (Cost Structure).
Rather than write a lengthy business plan discussing all the
segments, she was able to quickly talk with enough possible segments to learn
her idea wouldn’t work. And,
finding this out before she raised the million dollars it would take to create
such a facility saved her from huge losses.
The Screening Committee chair for the Boise Angel Alliance is
considering modifying the application process to ask the entrepreneurs to use
the Business Model Canvas as a way of applying for funding. The angels know there are no sure
things in startups. But if an
entrepreneur could lay out his or her assumptions and then present the evidence
he or she has accumulated to validate those assumptions, it might help the
angels improve their investment decision making.
Take a look at the Business Model Canvas as an alternative
to writing an exhaustive (and likely very wrong) business plan. Search online
for “Business Model Canvas” and you’ll find a great deal of information about
this new way of planning for startups.
__________________________________
Kevin Learned is the Director of Venture College at Boise
State University (http://venturecollege.boisestate.edu/)
and a member of the Board of Directors of the Boise Angel Alliance (http://www.boiseangelalliance.org/).
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