FOUNDER DUE DILIGENCE--The Business Model

Simply put, the business model describes how the company intends to make money and become sustainably profitable. It could also be said that the business model describes how the company will develop and deliver value to its customers, employees, and investors. Eventually, the full description of the business model will reside in the various elements of the business plan. The business model need not be fully expanded or given a label[1] during the formative period of the company; however, the founders need to have an understanding of how their particular technology and products are going to be developed and sold into their selected markets.

For instance, founders should have a sense of how they think their company and its products will compete; for instance, the company can provide value and compete on the basis of providing products and services that are in one of the following value-proposition categories:

1. Lowest price (with acceptable customer benefits)
2. Highest performance (with highest price)
3. Greatest value (based on a combination of benefits)
4. Newest technology (performance advantages)
5. Most attractive design (colors and appearance)

Deciding on which value proposition to offer points the company to certain characteristics of the market segments to be chosen; for instance, the value proposition offered by the categories above would be correlated to, and expected to have, customers who are:

1. Price-conscious commodity buyers
2. Leading-edge and affluent buyers
3. Middle-income buyers
4. Buyers of any age who can be influenced by technology
5. Buyers of any age, perhaps, but certainly kids and children

These value propositions and customer targets lead the company to consider related issues as to how the company is organized to provide products and make a profit; for instance, for the categories outlined above (and matched to the value propositions stated earlier), organizational emphasis may be based on:

1. Focus on low-cost manufacturing, sourcing, and advertising, with technology least important
2. Increased R&D, engineering, and manufacturing costs, with advertising in high-end status magazines and on TV, etc.
3. Balanced organizational details related to technology, design, manufacturing, marketing, and sales, all efficiently organized
4. Leading-edge technology, heavily protected with IP, appealing to both younger and more affluent customers
5. Emphasis on superior design and marketing to younger customers

Competitors exist in any market targeted by the new venture. By studying competitor models, entrepreneurs can gain an appreciation of how organizational details are deployed by other companies to enable them to create revenue, profit, and satisfied customers. While more in-depth competitor analysis occurs later as described in Chapter 5.2, founders need to understand within the time and resource constraints of the formative stage the competitive landscape.

The analysis of the competitive landscape, along with the SWOT analysis (Chapter 2.5), prepares the founders to define the business model and identify the major elements of the strategic plan, starting with a delineation of the envisioned company’s unique competitive advantage (UCA) that the founders believe will enable their new venture to become successful (e.g., outperform their competitors). A UCA is simply that unique advantage the new venture has in comparison to competitors in the market. Of course, the UCA, along with other strategic actions that may be created, can only be anticipated during the early stages of the new venture; however, a proper business model and strategic plan enable the founders to develop a convincing message that will be read and heard by investors in the near future.

Once the UCA is identified, it is a valuable exercise to consider the other organizational functions of the business and how they will be designed and implemented to support a sustainable UCA.[2] A sustainable UCA, as it implies, provides a rational basis for presuming the new venture can become a lasting and valuable company.

Sustainability, as it applies to a business and it’s UCA, involves supporting strategies and plans for the functional departments consisting of:

1. Technology (and R&D)
2. Engineering
3. Manufacturing
4. Marketing
5. Sales (and Distribution)

The details needed for functional departments are determined as a part of the planning that goes into developing the marketing plan (Chapter 5) and business plan (Chapter 8). For founder due diligence, it is sufficient to become aware of the future needs for planning.

The goal of founder due diligence, as mentioned in various ways before, is for founders to assure themselves that they have discovered all the important issues (and hopefully none of them are showstoppers), resolve them to their satisfaction, and develop the well-founded confidence to proceed to next step of forming the corporation (Chapter 3).

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[1] An interesting and relevant article by Sangeet Paul Choudary, “Why Business Models Fail: Pipes vs. Platforms” can be found at Wired magazine, October 21, 2013. Also found at http://www.wired.com/insights/2013/10/why-business-models-fail-pipes-vs-platforms/.

[2] While more than one UCA is possible, it would not be expected.

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Rocky Richard Arnold provides strategic corporate and capital acquisition advice to early-stage companies founded by entrepreneurs wishing to successfully commercialize high-value-creation opportunities, ideas, and/or technologies. More information about Rocky can be found at www.rockyrichardarnold.com. His book, The Smart Entrepreneur: The book investors don’t want you to read, is available as paperback or Kindle ebook for purchase on Amazon at http://tinyurl.com/pv248qq. Financial software for use by startups can be purchased on Amazon at http://www.amazon.com/gp/product/B00K2KPSI2. He posts articles about entrepreneurship on his blog at http://thesmartentrepreneur.blogspot.com. Connect with Rocky on Twitter @Rocky_R_Arnold; Facebook at www.facebook.com/rocky.r.arnold; Google+ at www.google.com/+RockyArnold01.