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How does a startup business-model differ from a business model of an ordinary business? Which questions should it be able to answer and what should a startup pay attention to, while choosing a business model? Andrei Kuryan, the author of the startup’s business model evaluation methodology on the Rocket DAO platform answered Andrew Miroshnichenko’s questions about existing methods, used to describe business models, ways of product distribution and essential nuances, which a startup has to encounter.
We talk to startups and investors, you get the value.
Right after graduation from Belarusian State University of Informatics and Radioelectronics, I got involved in a project called “Inventive machine”. Laboratory of inventive machines was one of the first global successful startups, created in Belarus. I took part in the project from the very beginning and was developing the product — “Inventive machine” — for six years (1987–1993).
Thanks to this project, I got my first experience of working in a startup and developing a product. At the same time, I came across and was absorbed by Resolving Theories of an inventive task — it was directly connected to our product — an intelligent system to support solving inventive tasks based on TRIZ.
After that, for quite a long time I was working in a company called “Oriensoft” (the core team of the company was a team, which got together in the Laboratory of inventive machines): for some time, we were doing outsourcing and masterminding our products aimed to model business processes. During this period, I was genuinely interested in the topic of the business itself and how can the work of a company be organised. I realised that it can be contemplated as a certain engineering system. Having known TRIZ, the idea of developing business processes with the help of resolving inventive tasks appeared interesting to me.
After all, I worked as a business analyst, in this role I did several projects on the company’s work automatisation. During this period, I studied business and proposed improvements on the structural and business-process levels. Also, I was masterminding technical specifications for the creation of the company automatisation system.
Then I became convinced that TRIZ can be used as a method to improve business. At the same period (at the beginning of 2010) we, together with TRIZ Master Valerii Sushkov from the Netherlands, my colleague from Laboratory of inventive machines, have masterminded several tools. These tools help to formulate business tasks, challenges that can occur in the company’s work and help to find way outs and solutions to those challenges.
Next step — cooperative research on business models with TRIZ Master Michael Rubin.
We gathered a few hundreds of different business models and reconstructed initial contradictions, which were resolved with the help of these business models. Today, the results of our research are available online as “TRIZ — business model navigator” .
Over the course of the research, we found out a few interesting insights.
One of the insights is that a product is not only some kind of technology, packed in a particular way to be passed to consumers. Product is some kind of an artefact, which unites everything, or it is better to say, keeps everything in balance: interests of a great number of concerned parties: consumers, buyers, businessman, developers, investors, financial partners, business rivals, government, society, etc.
Another interesting insight: in our collection more than one third of models are not fixed to the company itself, but to the phenomena how company builds-in the whole business ecosystem (how interacts with other companies, partners, employees, business rivals, etc.); and how it is possible to reduce your own efforts and minimise time if you delegate part of the tasks to partners on mutually interesting conditions. I believe it is crucial, as the majority of people who do business, focus on the company, but not on the business ecosystem. Moreover, if the company is correctly integrated into the business ecosystem, you can use all the resources more efficiently — solve more problems, save time and money.
Nowadays, there are several methods used to describe business models:
“Business Cube” method. It represents business-system in three dimensions: product, market and company organisation. “Business Cube” is based on the evolutionary principle to business system (one of the essentials in TRIZ): it helps to understand how the product evolves and when the product’s technology reaches its engineering limits; how the market develops and when it will be saturated; also, how the organisational structure of the company develops and when is it necessary to change it in order to meet the conditions of market growth and technology development.
A method, which was presented by Oliver Gassmann in his book “The Business Model Navigator: 55 models that will revolutionise your business”. In our research, we used 55 Gossmann business models and reconstructed tasks, which they were resolving. This method highlights the product and value proposition, which company offers to the market, and introduces such concept as value replication engine (how the company and its business processes should be arranged to produce and deliver the product to its customers in the right quantities). The third aspect, revealed by Gossmann is an income generation mechanism.
Alexander Osterwalder’s method is one of the most popular nowadays. The template of this method contains 9 components, which detail what Oliver Gossmann presented in his method. In particular, the Osterwald’s 9 components detail how the value chain is formed within the company: key activities, key resources, key partners, delivery channels of value propositions to consumers. Osterwalder’s template elements focus our attention on how the company earns revenues and how it spends financial resources.
Honestly, I would not discuss drawbacks of the mentioned above methods, they do help people. In our approach, we proceeded from the problems that this or that business model solves.
When a new business model is presented, it does resolve some initial problem regarding our approach. The difference between is we were looking for and reconstructing very this initial problem, which business model solves. In other words, according to TRIZ, we look at the evolution of the business model as on the sequence of solving problems, that business has faced.
One of the insights of our research is that a significant number of tasks is solved not within the company, but by building the company’s connections with other participants in the business ecosystem. In the existing and popular methods, the attention focus is on how to change something within the company.
In the Osterwald’s template, there is an element called “Partners”, but the presence of this block does not provide an understanding of what methods exist for building relationships with business partners. During our research on business models, we found a lot of ready to go solutions: formats for building relationships with partners, organisational forms, income distribution systems, and much more.
First of all, you need to clearly understand that the business model is an answer to the question “How to replicate the product and the benefits that the company wants to bring to its consumers?”. It is not about the value proposition itself, but about the production of the product in the quantity that will be in demand, its delivery to consumers and payment collection. The business model solves the problem of scaling benefits.
Any startup focuses on the product and benefits creation — it is the Item №1. The item of replication is the second most important. It all depends on the goal that the startup has set for itself, and how it plans to grow: for example, it may not seek to grow into a big business, but only checks the hypothesis associated with the product and works out the technology that underlies it to sell it to the finished business.
The business model has to answer these questions:
How to replicate a product?
How to deliver it?
How to collect money?
If a startup does not plan to become a business, it may not focus on the business model. In other cases, you need to think about it.
The first thing a startup, which plans to grow, should pay attention to is the path when the company itself creates everything from scratch is very long and not always effective. However, a path, when a company integrates correctly into a business ecosystem, is more productive and faster.
The second thing is how correctly, a startup chooses a method of product replication. There are several methods:
a method that is used in service companies, when they are not copying a typical product, but providing a service that solves customers’ problem (for example, Auto Repair Shop — it is not a conveyer where the cars are serviced, but a service, which helps to solve a particular problem in a vehicle);
the third method is a platform creation business with the goal of connecting suppliers and consumers, acting as a moderator. Such a business model is typical for banks, mobile operators, and is widespread in the IT-sphere.
The three methods listed above have fundamentally different replication engines. Being at the top level, it is important for a startup to understand what type of replication it will use. Depending on this, the company will be evolving differently. In addition, the replication method may present additional requirements to the product so that it can scale more efficiently.
A business model is based on the platforms as it provides a fast and easy way of replication (especially, if the products are totally IT). In this case, the platform is not only the meeting place but also a distribution channel. Back in old times, Google Play and AppStore have almost turned the whole industry (IT and mobile apps), and have become a multi-billion industries from simple startups.
Today we can see new perspectives opening to the platforms when they make it possible to distribute not only software but also hardware products. For instance, an AppStore-like platform and 3D printers, being located in different places of the globe, allow delivering the hardware-product to the end customer quickly.
Another interesting component is the community presence. One of the typical problems that business solves is creating contacts with consumers. Traditional business models take the hard path when the connections are established with each individual client. However, if consumers are a community with the same or similar needs, the number of contacts can be significantly reduced while maintaining customer reach.
In such a way, the most attractive business model is products in which at the other end of the platform are not individual consumers, but a whole community, with the help of which you can get colossal coverage and speed of replication of your product.
Follow the right sequence. At first, concentrate on the user problem which your products solve. Then, provide a resolution to this problem in a form of the right product and only then proceed with the replication model selection.