Good Business Models vs Good Business Opportunities

Whenever an organisation or institution takes an interest in creating a startup, they begin a deceptively complex process.
They will have to sift through an enormous amount of pros, cons and what-ifs.
Without structure, this can be an impossible process that rules out some good ideas, or irrationally commits to some awful ideas.
Each time I get to work with these teams, I like to work through two big questions:

1. Is this a good business model?
2. Is this right for us, right now?
If it’s not a good business model, we need to find an alternative option that stacks up on paper.
If the business works but it isn’t the right time or the right circumstances, we also need to find an alternative.
If the business works and the time is right, we can commit to the next level of investment.

This is the different between a data point, which is technically true, and an extrapolation, which is a subjective conclusion:
Data Point: “Some people have been scammed by online banking”
Extrapolation: “We can’t trust online banking”

Data Point: “I use some great apps in my daily life”
Extrapolation: “Our startup needs an app”

Data Point: “I read about a social enterprise car wash in Canada that is thriving”
Extrapolation: “We should start our own social enterprise car wash”

Data Point: “One of our managers loves fashion”
Extrapolation: “One of our managers should run a fashion startup”

These loose connections might be the basis of a good idea, but they need further investigation.
What works for someone else might not work for you, and what failed elsewhere might work in your unique circumstances.
By splitting the exploration process in two, you can bring the right people and the right attitudes for each section, boosting your chances of identifying a golden opportunity.
Here are the two question lists that can help you process your options.

Does It Work?
Our first task is to get an objective understanding of the business.
How does the model work?
What needs to happen for it to thrive?
How will we check if our assumptions are correct?

Let’s start with the model…

Desirability: Does anyone want what we sell?
Who are our customers and what are they looking for?
Can we find some of these customers and interview them?
How might we find more of them?
What entices them to find out more about the business?
How do we give them what they’re looking for?

Feasibility: Can we do what we say we do?
What does our business need to do behind the scenes?
What resources do we need to own?
Who are the people that make the business run smoothly?
What equipment or intellectual property enable the business to fulfil its promises?
What partners can make our work easier?
What needs to happen on a daily or weekly basis?
Which tasks are the most valuable?

Viability: Do the numbers stack up?
Where does our revenue come from?
How frequently does revenue come in?
Who pays what amount?
Where does our money go?
What are the variable costs and the fixed costs?
How much money is required to establish the business?
What are our margins?
When does the business break even?

What business are we in: What elements do we do best?
What might we be able to outsource to a partner?
Who can bring in valuable experience and expertise?
Can we solve a problem for other businesses?
Can we use our excess capacity to help other companies?
Can we use other companies to handle our excess orders?

Assets: Are we actually creating and maintaining assets?
What additional assets would make the business able to grow faster?
Are there tangible assets that could increase quality or capacity?
Are there intangible assets that could improve our reach and reputation?
Could we create digital assets to make the founders less of a bottleneck?

Tests: How can we be sure?
How will we know if these assumptions are true?
Can we conduct some more customer interviews?
Can we run a shadow test or pre-sale campaign?
Can we run a pilot?
What should be on our Test Card?

Timeframes: How long will things take?
How much time should we commit?
When would a business like this typically break even?
How might we speed up the testing/validation process?
How long will it take for us to know if the model is a winner?

Sensitivities: What small changes have disproportionately large effects?
What small additions will help us charge more or attract more customers?
What small reductions free up time or increase our margins?
Which assets are disproportionately valuable?
Who is hardest to replace (e.g. staff, partners or customers)?

Metrics: How will we measure performance?
What would be a good leading indicator?
What would be a good lagging indicator?
How might we measure our outcomes/impact?
How might we measure our financial performance?
How might we measure customer satisfaction?
How might we measure risk and reward?

You’re probably thinking “Isaac, that’s a heck of a list – how are we supposed to answer all of that?”.
Firstly, if you can’t answer those questions, this isn’t the business model for you.
Secondly, I tend to find that most groups can answer 80% of those questions off the top of their head.
That means we need to research 20% of the list, and validate the 80% we think we know.
By breaking these down into small tasks, they become easy to address in a matter of weeks, and the whole team has clarity over the immediate priorities.
My suggestion is to find the questions that scare you, and work through them bit by bit.

Is It Right For Us, Right Now?
Once we have an objective understanding of the business, the next task is to understand our context.
Your circumstances are different to the case studies you’ve read, for better and for worse.
We want to understand the unique advantages, quirks and drawbacks, so that we can make well informed decisions.

Impact: What constitutes positive change?
Are we trying to create beneficial products, jobs or profits?
How will we measure social outcomes?
Do we want to transform the lives of a few, or nudge thousands of people at a time?
How much change is “enough”?

Cohort Of Beneficiaries: Who are we committed to serving?
Is our heart set on helping a particular group of people, or will we switch if we can get more leverage elsewhere?
Do we already know our beneficiaries?
Do our beneficiaries have any interest in this business?
Are our beneficiaries able to participate in this opportunity in a meaningful way?

Current Team: Who are we working with?
Do we have the right people on our team to make the most of this opportunity?
Can we upskill our team in a short space of time?
Do we need to bring in an outside hire?
Are we only considering this business opportunity because of one team member?

Free Kicks: Where do we have an unfair advantage?
Do we have access to assets that others don’t?
Do we have subsidised costs that others don’t?
Do we have prior experience in this industry?
Do we have an existing reputation that gives us a competitive edge?

Opportunity Costs: What else could we do?
What are we saying “no” to in order to say “yes” to this?
What would be our next best option?
How much uncosted time and energy will go into this business?
Will this still be possible to start in 12 months’ time?
Could we do two smaller specialised projects instead of one major project?

Excellence vs Inclusion: What do we want be known for?
Is the priority to have the happiest customers, or the most beneficiaries?
Are we willing to lower some requirements in order to be more inclusive?
Where are we unwilling to compromise on quality?
Where are we unwilling to compromise on how we treat people?

Dependence On Other Business Units: Is the model genuinely strong?
Are we reliant on our other businesses in order for this idea to be viable?
Would a startup take on this challenge?
If we had to sell all our other assets, what would we create instead?
Are we relying on unpaid assistance from other parts of our business?
Would this still be a good business if we had to open in in another state?

Are We Happy At Small Scale: Does it need to be big?
Is this an all-or-nothing opportunity?
How big does this need to get in order to be considered successful?
If this remains a small business, will it have fulfilled its mission?

Will Our Community Embrace It: How much support can we expect?
Do we have customers who will try out the new brand?
Do we have partners who can send us referrals?
Do we have suppliers who will help us through our teething issues?
Will our supporters/donors feel connected to the new venture?

Should We Do This Now Or In The Future: When is the right time?
Does it get easier or harder?
Will we have more competitors emerge in the near future?
Will we have significantly more assets in the future?
How does this fit with our current and future commitments?

Are We Pushing This Uphill Or Downhill: Will it ever get easier?
Do we think this will generate momentum?
Does it get easier to find customers after the first six months?
Will we have constantly encounter resistance?
Can we start a different business that we can push downhill?

The Right People In The Right Room
Now that we’ve identified the two questions lists, it’s worth looking at who should be involved in each discussion.
The business model discussion is all about options and evidence.
You want people who are either bringing evidence with them, or who are happy to hunt for evidence, or who are happy to compare different options without becoming emotional.
These might be people like outside experts, practitioners who run a similar business, facilitators, members of your team and maybe some of your board.
These are people who can walk through the “Does it work?” questions without falling in love or being overwhelmed by complexity.

The business opportunity discussion is all about opinions and tradeoffs.
You want people who can articulate their gut feelings and preferences, and who can engage in debate without taking things personally.
These might be your team members, board members, trusted advisors, and a facilitator.
These are people who have skin in the game, a deep understanding of your business, and pre-existing trusted relationships amongst each other.

The two conversations need to start separately.
The business model conversation needs to be protected from bias or emotion, be it irrational optimism or irrational fear.
The business opportunity conversation is about honest decisions by leaders, and while all voices should be heard, the decision should be made by a select few.

I hope both of your conversations go well, and that you use them to design a remarkable business.
I hope you approach risk and uncertainty the right way; without fear and without ego.
I hope you bring lots of ideas, and trust that the good ones will survive these questions and rise to the surface.