How to Outline Your Startup’s Business Model Slide

So at the most simple level, a business model is an articulation of essentially how are you going to capture value for the product or service that you are delivering to your customer. So it's essentially how do you make money? And so that is the way that you should think about a business model, is you are offering a product or a service to a customer, they are going to pay you in some respect for that value. And one of the mechanics behind that is that's what fundamentally creates your business model. So one of the realities of seed stage, both investing and company building, is that we know that a lot is going to change. That's part of the reason why we put so much emphasis on team, because that's going to be the constant in terms of building this business. We know that market dynamics will change, we know that a product will change, and we know that a business model will change. So at seed stage, it's not expected that you have a perfect business model mapped out, perfect packaging and pricing, which is something that's actually pretty difficult and we know will take some finagling along the way. But what I'm looking for, and again, it's actually a way that I'm assessing a founder, is what do you think is true about your business model? And whether it's the model itself, whether it's SaaS or usage base or transaction fee, what are your hypotheses about people's willingness to pay? What have you learned so far about what your customer's willingness to pay might be? So what experiments have you done? Who have you talked to? How many conversations have you had? What data have you gathered? So again, it doesn't need to be perfectly baked, but. But it needs to be thought through in a way that demonstrates your knowledge of the space that you're operating in, the knowledge of your market, the knowledge of the value that you're creating, and then also a thoughtful plan for learning and proving or disproving what these hypotheses and these assumptions are. So one of the things that I look for in a conversation with founders about their business model is where can they get leverage in the business model. When we talk about finding leverage in your business model, what we're really talking about is an understanding of where is the real value creation happening and what is the most appropriate place to capture that value. And it may not be obvious. So 10 years ago, 15 years ago, now, Google and Facebook recognized that the real value that they were creating was in the size of their user audience. It wasn't in the search itself or The Facebook content itself, but it was in building this audience. And they were then able to build their product primary business model around advertising because of that audience they had created. A more recent example is a company like Toast, which yes, they have hardware and they sell subscription, but what's really driven the value is the volume of restaurants they've been able to get on their platform. Now all of the transactions that are happening across their software, they are able to monetize a piece of that in a transaction fee. It's a payments business more than anything and that's been the largest driver of their revenue stream today. So. So it's not that they're trying to optimize or get the most value out of the hardware itself or even the subscription, but it's actually in the payments and the transactions going across that platform. I think at seed stage I see sort of a spectrum. I see some people not even acknowledge business model because they get so excited about their product and the problem that their product can solve, but they haven't thought about how am I actually going to generate value for my company out of this amazing product that I've built. So that's one big mistake that I see is sort of no acknowledgement of it. I think the other one that I see is if there is a business model applied that doesn't actually work for the value that you're creating, or it's very disconnected. So an example of that might be if you're trying to do a subscription fee model, but the business itself is actually a marketplace business and a take rate business is actually more appropriate there. So if there's a mismatch between how do the mechanics of the value creation work and then how you're thinking about monetizing, that can actually be a signal that the founder either hasn't fully thought this through or doesn't really understand where and how value gets exchanged. A common mistake that I see founders make when they're talking about their business model in a seed pitch is presenting a whole bunch of potential facts that do not have thoughtful underlying assumptions or clear plans for testing how those could come to life. So specifically what I mean is if a CSage founder has two customers live today and they're each paying 10k in terms of contract value, but on the slide I see something that says but we are positive that we can get to 500k in a contract value, but there's no articulation of how would you get there or what needs to be true from expanding your value proposition or new products that you would launch or how you would change your pricing and packaging. So if you're making these wild leaps between, well, I've gotten someone to pay 10k today, but don't worry, we're going to get to 500k and that's how we're going to become $100 million business. And there's not really a lot of thoughtful behind that. To me, that's a red flag that somebody either is overselling and sort of not being honest about what do we know and what we don't know at this stage of the business, or just hasn't thought through enough around what needs to be true and what hypotheses do you have to prove along the way? So a lot of people ask, how can I articulate a business model at seed stage that will really capture an investor's attention? I had an example recently of a company that I ended up sort of falling in love with the business model articulation and what made it so great is that the founder had a very clear view on where they would start. This was in an E commerce enablement space and they were able to start with a SaaS model. So there's a subscription fee. They had kind of validated how much they could charge for it and what that could look like over time. They had also validated from a subscription fee perspective how they could grow that both from product expansion opportunities and then from additional use cases within their existing customer. So there was a very compelling land and expand within the initial customer set and even the initial value prop of the company itself. But then what got me really excited is that beyond that, the founder had articulated how they could expand their business model to include a transaction component to it. So not only did they have sort of the core business model, but they had already identified and articulated and tested that they would be able to charge a transaction fee, which made the size of the opportunity that much greater. What really got me excited about it is that in the process of playing this role, they also had articulated how are they going to be able to capture some pretty proprietary data for from all of the both usage of their subscription product and from the payments product that they were attracting as well. So there was kind of three parts of the business model. There was the SaaS fee, there was a transaction component and then there was a data piece that they were able to articulate where and how that could become valuable as well. And they hadn't done all of those things. It was seed stage. But they had thought through what needs to be true to unlock each piece of that puzzle, and they were able to translate what that might mean into how big could this market opportunity get because of their business model expansion opportunity. And so those are some of the things that we love to see even at the early stages, recognizing that you're thinking about that, that you're starting to validate and test how this could expand over time, even if you're at the seed st.