Business Models Are Not Business Plans
Ace Ventura: [to Lt. Einhorn] Whew… now I feel better. ‘Course, that might not do any good; you see nobody’s missing a porpoise. It’s a dolphin that’s been taken. The common harbor porpoise has an abrupt snout, pointed teeth and a triangular thoracic fin. While the bottlenose dolphin, or Tursiops truncatus, has an elongated beak, round cone shaped teeth and a serrated dorsal appendage. But, I’m sure you already knew that. – Ace Ventura – Pet Detective.
So, I had the opportunity to attend a Demo Day this week which was outstanding but I was struck by the conversation in our little group about what was needed to get funded. All of the conversation (and advice) centered around the plan and the deck – how many pages; what colors to use; how much to disclose in the financials; how to convey what you were going to do. There was an absence of discussion on what, I thought, was the far more important issue – the why. I have previously blogged on the concept of why (another simple but powerful concept) and thought it worthwhile to expand on an article I wrote last year on the difference between a business model (the why) and a business plan (the how). I was a bit concerned about revisiting this subject, so I invoked one of my favorites Ace Ventura (rrreeeeeaaaallllyyyy) to help me through it.
A business model defines the underlying need for your product or service in a market. It defines the way your product or service solves a problem or alleviates a “pain” and is the premise you need to justify in establishing the true worth of your business. A couple of examples may help clarify this point.
Zappos realized that, for years, people had been buying shoes in the same size and that buying and returning shoes was inefficient and time-consuming for you and me. Thus their business model was to move the shoe store from the mall to our homes with a no-hassle return, thus alleviating the normal “pain ” of shopping for shoes.
LinkedIn observed that when a company was looking to hire someone, most used “job boards” like Monster and other resume collecting tools. But, many companies realized that perhaps some of the best candidates were probably gainfully employed and there was no effective way to get to them. Contributing to this was the fact that most who worked were concerned about “floating their resume” for fear superiors would find out and perhaps dismiss them, so their resume was not “in the market.” LinkedIn made placing your “resume” in public an acceptable practice via social media and accordingly, opened up the world of currently employed candidates to recruiters. Obviously, LinkedIn can charge a premium for access to this information which solves the problem.
A business plan on the other hand, is more of a “how you are going to do it.” nIn addition to the business model, it covers the three elements required to succeed; people, time and money. It indicates the people you have or who you will need, how long it will take until profitability can be achieved and the funds needed to get you there. Though most concentrate on the Financial Model in the business plan (there are many packages around that can help with this), it is the business model that contains the key to success.
So, please make sure to focus on the why, because without it, the how is just another unfulfilled dream.
