Understanding the Startup Business Model | Startup Mentor Gary Jinks

Never. Okay, anyway, so you do need a business plan. The business plan is really for yourself. What I like to say is if you haven't written a business plan and kicked the rocks over 1,000 times and you haven't thought about everything enough and you don't have the answers, and it becomes apparently obvious when companies come in and pitch to us and we start asking them questions, they should have the answer right now, right off the top of their head. They should know exactly what it is and they don't. And so usually what happens in a situation like that is you get the standard answer, you're too young, you're too early for us. Now you may have showed up with an MVP, your product's running great, but they don't mean your product's too early, they mean that you as a company are too early, and come back when you're ready to act like a real company. So you need to have a business plan for yourself. At some point someone's going to ask you for one if you get into a deep dive. Now if you do your pitch deck right, your pitch deck should be a summary of your business plan. But let's go back to where we're going. So now in the bootstrapping phase, in today's modern investment world, when you come out of the bootstrap phase and get to the first bar, which is your first gate to get through as a small company, then you need to have a strategy, a plan, and an MVP. Now when I launched my very first startup, which was in 1999, the world was a lot different. Yeah. We went in with barely what would qualify as an MVP. It kind of sort of worked. We gave one pitch and we walked out with a $25 million check. Those days are gone. So the bar, like anything, any market matures, the customer gets more sophisticated, and that happens in this environment. We'll talk a little bit about that as we go along down the road. So in the first stages of bootstrapping, you're expected to pay for all that and show up to the door with a A good plan, a reasonable team, and an MVP. Then you're going to go and get your angel money. From that point on, you're going to go into what's market entry. So traditionally, your first round of funding will be your angel funding, and what they're really paying you for is market entry, to go into market entry. Now, a lot of people get confused in the market entry phase. The market entry phase really doesn't have anything to do with generating revenue, although you probably will generate some revenue. But that's not its purpose in life. Its purpose in life is to validate your product and to validate your business model to ensure that you have exactly what a customer is going to buy, that the price point is where it's at, you're not leaving any money on the table and selling it too cheap, you're not putting it up too high that people aren't going to buy into it, and that your product works. So during your market entry phase, you really want that phase to probably be 6 to 12 months long, and you need to get enough people and early adopters in that phase to use your product, try to crash it if it's software, give you feedback, good quality feedback, because that's— in that phase what you're gonna do is you're gonna be tweaking your product to get it out the door so that you can go into the next phase and go for your VC funding where they're gonna expect some revenue, which will come inherent out of the early adopter phase, but depending sometimes in the market you're in and what you're trying to do, again, it's only partially about revenue. All the revenue does is validate that somebody out there likes what you're doing and they're willing to spend money on it. And in some markets, depending on what you're doing, the revenue is not necessarily as critical as long as you have enough people in there to show that there's interest and they're not losing. You're not losing folks out of that. So once you've got your product tweaked and you know it's exactly what the customers are looking for, you've got feedback from that, you know that your pricing model is accurate, you know that people will spend money on that, then the VCs will come back, look at that, and say, great, you have what it is. You can't leave the market entry until you've truly validated what you have, and the VCs will know if you're Validated, or you told them you're validating, and there is a difference because everybody tells me it's validated. Okay, now once you get through the VC and that phase, now you're really looking at having a real product and a little bit of revenue. And again, that's— revenue is the ultimate validation. If somebody's willing to write you a check, then there's probably another person willing to write you a check. Okay, so now once you get the VC funding, now you're gonna go into the growth phase, and this phase is probably gonna be any Probably could be anywhere from 2 years, maybe 3 years. The VC would like it to be as short as possible. Right now, the stats I see is the average VC exit is about 8 years. So it doesn't happen as quickly as VCs would like. Back when we started, the exits were between 3 and 5 years. But now they keep stretching out, particularly if you're going to go IPO, then you can get hung up in market conditions and things that are completely outside of your control. Which is why more than 90% of funded projects are actually an acquisition strategy, because that's more— that's much easier to control, and you have a little more, you know, options on that. So then you've heard the Series A and then the institutional funding, and VC funding and institutional funding are intermixable. They're really kind of the same thing. So they'll feed you to go through growth. Now, if you've done— if you played your cards right, if you're an acquisition, you're probably going to get acquired somewhere in that growth phase is more likely what's gonna happen there. Now, if that's not the case and you go around to your B round, C round, D round, and that keeps on going— a couple years ago, I was in a meeting with a company that was on their N round. And I'm not convinced that company had a business plan other than to raise funding, and they were very, very good at it. So, and I think that's partially where this business model's broke. I think in this valley, people get too wrapped up around getting the next round of funding rather than building a sustainable company. and either getting it acquired or becoming profitable. But that's just my place on there. A lot of my VC buddies would argue with me because they're in the money to give out, you know, they're in the business to give out money. So if they're giving out money, then the system is obviously not broke. Anyway, so that takes you there and then you're going to either go IPO, acquisition, support your company and run it on forever. So that's the fundamental business model. So I just wanted to set the stage on that. Okay, now let's talk about this. So There are things that make the startup business model unique to everything else. If you look at a traditional business model, you're going to come out of the garage and it feels very much like a startup, but the fundamentals are different. In a traditional business model, it tends to be based on long-term debt, controlled growth, and 7, 8, 9, 10 years down the road, you now have a nice profitable business and everybody's doing well. But that's not how this business works, and because of that, the entire philosophy of this space is different. So the first thing, the startup model is based on explosive growth, fast explosive growth. It's looking for 3 to 8 year return on investment for all the investors involved in the deal. And it's not— has nothing to do with debt. So the difference is in the traditional business model, you're playing— let's look at football. You're playing the entire game. In the startup business model, you're in the 2-minute drill. It's not about playing the game. It's about getting from point A to point B, which is, in the investor's perspective, his exit. Let's talk about exit a little bit. That word's kind of been abused over the years. When I ask people about exit, they say, oh, well, here's our exit. As an investor, I really don't care about your exit. I care about my exit. We may, if we get an acquisition, we're all going to exit at the same time. But if you're going IPO, you're going to run that business down the road. You're going to do your thing, and I'm going to leave. So exit has nothing to do with you. It's all about us. But it seems that exit has been that, oh yeah, it's an exit strategy, everybody's gonna exit. Anyway, it's gonna clear that up just a little bit. Okay, so now the idea of explosive growth has some real fundamental differences on how you run your business. In a debt, you've gotta put money away a little bit, save it for a rainy day in case there's a hiccup, there's a problem. That's not the way this model works. So let's take a look at a couple of the challenges in this model. So the first thing you have in this model is loss of control. It's designed into the process. Every time you get around to funding, you lose control. In fact, you may lose so much control that the VCs replace you as CEO. Happens all the time. The other problem is dilution that goes along with that. And the other problem that most of you are going to struggle with is actually getting funded. Now, all these are part of the game, and if you understand them and know how to play them, there's nothing different. Loss of control is accepted because you're playing the 2-minute warning, you're— 2-minute drill. You're not looking to keep this company and run it forever unless you're going IPO. So losing control is not a big deal. Dilution. A lot of people get really wrapped up and concerned about dilution. Again, dilution is not a big deal. It's the way the model works. 100% of nothing isn't worth nearly as much as 5% of a billion-dollar company. So dilution is how you play the game. It comes along. What's important is to understand how the dilution is happening to you and control the way that dilution is happening through the process. And then getting funded, well, that's always tough because it's just, it's like looking for a job. The difference is when you're trying to get funded, you're generally looking, it's like looking for a job in a downturn. Everybody's looking for one and there's only a limited amount out there. So right now, I would say that there are more entrepreneurs on the road looking for money than there has ever been in the history of this valley. So if you're looking for a job or looking for money, that's a bad thing. But the good thing is there's also more money and more options available to you than there ever has been. In my early days of startups, there weren't things like AngelList, there weren't Kickstarters, there weren't Indiegogos, there weren't, you know, NetEquity, all these companies and all these places you can go to get money. You basically had to go to Page Mill or Sand Hill Road, and that was it. That was all you had. And they sat in their ivory towers, and you had to be honored that they allowed you in their lobby. Now they still kind of think that way, but the times are changing. So there's a lot more options out there than before. So those are the primary differences in this model. The advantages to this model is unlike the traditional business model where you've got to sort of take your time and work and manage your debt, you're going to go tell an investor how much you need to do what you have to do, and he's going to give you that amount of money and you're going to do it. So on day 1, you've got a full budget. You can hire your full team. You can do what you gotta do. You move down the road and you make it happen. And that's what creates the explosive growth. Explosive growth doesn't happen when you're managing debt and trying to make sure you're ready for a rainy day, and if there's a hiccup, you can afford it. If you've done your job right, you've incorporated hiccup possibilities, this, that, and the other. And when you come up and do your financials— I understand you guys are in the middle of financials right now. That is probably one of the biggest areas that most startups get dinged on, is they don't really have quality financials and they don't really know what it's gonna cost. They sort of said, I need $500,000 for my angel investment and I need $3 million for my VC round without actually truly doing a bottoms-up approach and truly understanding what that is. That's another one of those areas where we'll look at it and say, hey, you're just too early for us. Go back, do some real models. I worked with a company yesterday, great product rolling down the road. It's going off. He's never done a cost model at all, ever. He has no clue. He just pulled numbers out of the air and he's now submitted it to a company last night for $100,000 in funding. You know, so he's going to, he's going to struggle a little bit. So, so that's, that's the fundamental differences on this business model. And so keep those things in mind as you're doing it. OK, now let's start with step 1. So now you're going to go and get ready to launch your startup. You're getting moved down the road. There's a couple of key things that I see in trends. How many people in here are game-changing, have a game-changing idea? OK, not bad. I expected almost everybody to raise their hand. Almost every entrepreneur I talk to has a game-changing idea. Well, the reality— you need to understand where you belong. Most people don't have a game-changing idea. They have a better, faster, cheaper. And there's nothing wrong with that. The reality is better, faster, cheaper is easier to launch. There's less risk involved with it. You're building— you're basically a better mousetrap. So one of the biggest trends that came along with that was the SaaS model. In most SaaS models, what they're doing is they're taking usually an enterprise type of a product or something like that, putting it on the cloud and charging you $9.99 a month to have the same tools that I may have needed if I was buying SAP or something like that, for example. So better, faster, lower cost is really the primary bucket that most people fall into. Now, some are game-changing. Game-changing can be a little more difficult to get funded sometimes. Sometimes it's a lot riskier because you are literally changing the way things are done and not everybody's going to recognize that you're going to be able to do this or how this is all going to work. So there's a lot more unknown. In better, faster, cheaper, pretty much everybody can pretty much look at an idea and say, oh yeah, that's going to save 50% time, reduce costs by 90%, all these good things. And that's easier to see. Game-changing is much more difficult to see. So make sure you understand because— A lot of the companies I work with think they're game-changing and therefore their strategies and what they're trying to do are all wrong. It's not getting them there and they can't figure out why they're not getting any traction. Okay. The next thing I want to talk about, and this is a great one because my— a lot of folks, we like to argue this one over the water cooler. But I'm going to say in my— understand the intent of this model. The intent of this model is to give an investor 10 times his return on investment. Now, a lot of folks will say, oh no, no, the intent of the model is to build a sustainable company, get revenues quickly, and all these kind of things. And I would argue that if you do all those things right, you'll be able to give the investor his 10 times return on investment. If you do those things wrong, you won't be able to give your investor his 10 times investment. And if you take a look at the way the business works, Odds are your first significant paying customer is your investor. He's the first customer that's going to actually write you a sizable check. So in Business 101, keep your customer happy. If you keep your investor happy, then you're probably doing all the right things. So it's kind of a backwards way of looking at things, but the reality, if you peel back the onion, this is actually what makes the startup model work. Investment money, investors getting their money back, investing in other companies, or reinvesting in you and helping you to grow. So it's a philosophical way of kind of looking at it a little different. If your investor's happy, you're doing everything right. And we're hard to keep happy, because rarely are you doing everything right. In fact, we generally know, particularly in the angel stage, that about 3 months before your launch or your next round event, you're probably going to come knock on the door and say, you know, I'm just a little short on cash. I need just a little bit more. That happens probably 9 out of 10 times, and we expect that. Doesn't make any sense. You're happier when it happens, but we know it's, it's gonna happen. Okay, understand the model. Again, it's about explosive growth, so it's not about trickling things around. So if you need $500,000 to get through the go-to-market phase that the angels are investing in, let's say, and let's say during that phase you happen to raise $500,000 in revenue, well, you're not gonna put that revenue in the bank and save it. for a rainy day. You're going to pump it back in the company so you explode and grow faster, which is what makes the model different. So keep those things in mind. Getting your investors' money back and doing everything you can for the explosive growth. And my favorite, have a plan. It is interesting how many software companies I work with and I say, so what's your plan? Well, we finished the alpha. We're going to do a beta. We're going to launch an MVP and then we're going to go. And it's like, that is so not a plan. And, you know, in the early days, in a lot of startups, particularly when I was doing the dot-coms, everybody shoots from their hip, and your plan doesn't mean that you've got an 85-page business plan. In fact, if you have an 85-page business plan, you have done something horribly wrong. Most of you in here probably have nothing more than a 10-page business plan that covers everything that a person needs to know and you need to think about. Even when you become fairly mature, a 20-page business plan. None of you are Lockheed Martin or Boeing. You don't have an 85-page business plan. And on the business plan, do not download a template off the internet and fill in the blanks. What we really want to know is what your plan is. What are you going to do? How are you going to do it? Why are you doing what you're doing? And that's critical. But having a plan is so important.