Innovation in Startup Business Models
In our industry, it’s not uncommon for entrepreneurs to become so mono-focused on the novelty of product innovation that they forget to innovate equally around their business model.
In my estimation, a disruptive business model is at least as important as disruptive technology.
As an investor, the perfect scenario for me is a disruptive technology wrapped in a disruptive business model, targeting a new market opportunity or underserved target segment. That’s the perfect storm.
But too often, the business model is left to the end, as an afterthought. Of course, as market observers, we’ve heard countless examples of superior products that failed to capitalize on the market opportunity that was their due. We’re almost conditioned to understand the implications of this. Still, the problem persists as business models fail to generate the attention they deserve.
As a continuation of my series of lectures at the Harvard Innovation Lab, I explored this topic with a roomful of aspiring entrepreneurs. I offered the following recommendations:
1. Be disruptive, create a dilemma
Don’t simply recycle someone else’s business model. That’s squandering an opportunity to change the game by defining new rules in your favor. In redefining a category, your overarching goal should be to cause someone else to have an innovator’s dilemma. Take the conventional and look at its inverse. Turn established business models inside out. You rarely win by following the pack, so figure out where the incumbents are vulnerable and exploit that as the basis for taking market leadership. For example Google gives away tools with powerful utility because their interest isn’t selling technology; it’s collecting data as the basis for an advertising business model. This has been highly disruptive to players like Microsoft whose original business model was licensing software. Facebook is repeating this model, disrupting other online players who can’t compete with “free” and even “better” as they collect rich data profiles to monetize.
2. Identify your C.O.R.E. differentiation
As you think through how you can disrupt the status quo, do so by identifying your Capabilities Of Really Exceptional value. What is it is that makes you exceptionally valuable? Think hard about this one. It’s the foundation upon which you’ll build your business model. Is it software? Services? Or perhaps it’s data or content generated by your community or even a process you’ve crafted? For Facebook, it’s data. For Yelp, it’s user-generated content. Perhaps like Red Hat or Acquia, which is one of my portfolio companies, you’re selling services on top of open source software. Identify your core value, why it’s profoundly better than incumbents or alternatives and, finally, how you’ll monetize and use it as a competitive weapon for unfair advantage.
Once you’ve defined your core, identify multipliers and levers to help accelerate and economize the proliferation of your value proposition.
Multipliers for rapid market expansion
Multipliers help you drive revenue, reach and coverage, which is vitally important when you consider amortizing and then profiting beyond the cost of customer acquisition. Take a close look at the P&L of a traditional software company and you’ll notice something potentially surprising: On average, sales and marketing expenses are 2X research and development in a steady state model.
That’s why it’s so important to find multipliers that will help you … Next Page »