ladies and gentlemen, what's your business model? Part #4

More on 'Extreme Business Modelling' - following #1, #2 and #3 and Hugh's here.

Investors, VCs - they'd really like a neat five year plan showing nice profits etc. so they can calculate a value today without too much hassle. Like what they do here.

And they're in good company, the templates, the blueprints for how your Business Plan should look like are much the same everywhere.

But if you're a start up: Those five year financial projections could just as well been written by the brothers Grimm.

And as you can imagine - 'Extreme Business Modelling' does not exactly correspond with their black-and-white template-and-blueprint driven 'reality' :-)

My first spreadsheet was Visicalc, on an Apple II. Neat stuff in those days, and I used it to do pro-forma P&Ls, balance sheets, cash flows and sources & uses of funds for banks when seeking funding for projects. The banks were much impressed.

Then we used it as a rough budget. Did not take long before map and reality diverged - but nothing that a small adjustment of margin, market-share or other in the map (spreadsheet) couldn't fix! Red numbers turning black in a jiffy.

Of course that led to no good. Dressing up the bride for the bank to extract funds was one thing, but using it to trick yourself was not so smart. You could end up with the wrong bride.

In conclusion:

"If you cannot make the case for real profit on the flip side of an envelope, without a calculator, then abandon the project!"

Start there. A quarter sheet of paper, all should go in there. Simplicity is beauty. Simplicity is always closer to the truth. Then see if the VC or investor gets it.

If yes, you have a potential partner - then make a proper five years from that - but be abundantly clear that it is only for illustrative purposes!

If no, be polite and say "thank you for your time" and move on :-)

Comments

[Diego]

Great advice -- words to live (and venture) by.

[MarkN]

The argument I have against back-of-the-envelope business cases is that they fail utterly in terms of transparency and accountability when it comes to large, capital intensive investments where shareholder interests can be severely negatively impacted.

The worst assumption is typically "all other things being equal". Back of the envelope analyses must by necessity ignore both the impact of capital intensive investments on the market/industry as a whole, but also the response of competitors.

And back of the envelope sensitivity analyses (how bad could it get if assumption XYZ is off by 5%) are exponentially worse in terms of deluding management and misleading shareholders because they are just another quick and dirty justification built on the foundation of other quick and dirty justifications.

The objective ought to be elevate the realism of decision analyses that the average or even below-average manager-schmuck is able to deliver while at the same time delivering transparency and accountability.

As a closing note with respect to VC's, I just love this comment I found here: http://paul.kedrosky.com/archives/001340.html

"Anyway: having worked in a VC firm, I can tell you it is sorta like seeing the inside of a slaughterhouse: first you throw up, then you turn vegan."

[sig]

Mark, do not disagree with most, but I think we've found a not-so-clear point in my post:

I'm thinking 'Business Model' (in particular at the beginning of its life, or even before) which is the broader idea of how to deliver a value to your customer and keep a good chunk for yourself.

A 'Business Case' is for me a separate step within an existing 'Business Model' - like when Intel shall decide to build a new multi billion dollar plant!

And there you are right of course, a slightly bigger sheet would be required, and less reality checking of the underlying strategy (even if that would be a good idea too) :-)