Eight ways to design a better start-up
By Alastair Dryburgh Wednesday, 01 September 2010
Alastair Dryburgh explains how getting your model right, first time, can pay major dividends.
Business design is an overlooked discipline. Every entrepreneur coaxing a precious start-up idea into life worries at some point about the importance of other kinds of design - graphic design, product design, job design, even of designing the 'customer experience'. But not many - especially not the first-timers - will lose much sleep over business design.
Which is a pity, because it's easily the most important of the lot, particularly for start-ups, which have a one-off chance to tackle everything from first principles.
Contrary to popular belief, outwardly similar businesses can and do have very different business models. A bookshop is not just a bookshop, nor is a software firm just a software firm. Any idea for a business, whether new or a development of an existing one, can be exploited and executed in many different ways. You can do it with a lot of capital or a little, you can decide which parts of the process you actually do yourself and which you get others to do and you can, within wide limits, create exactly the business you want.
The decisions you take at the start determine how much cash you will need, how much management capacity you need, how many mistakes and false starts you can afford without running out of money and who else (investors, staff, suppliers) you need to get on board: decisions, in short, that define your chances of success.
Time spent thinking about the detailed design of your business at the conceptual stage, before anything has been invested beyond your own time and effort, will pay rich rewards later on in terms of sustainability, scalability, profitability, your prospects for growth and, eventually, exit. Just as with any other discipline, business design has its core tenets and techniques. This is the MT guide to getting your business design right, first time.
Be wary of planning. This may sound heretical, but don't have a detailed business plan. Plans are dangerous because you can become wedded to them, even if it is soon clear they won't work. Rigid adherence to a single plan can also lead to missed opportunities: you need to be flexible to make it. PayPal, for instance, succeeded neither on Plan A nor on Plan B but on Plan G: having failed to interest the market in software for secure communication on mobile devices, it built a demo site for online payments. People started to use it to pay for items on eBay - but only after many customers insisted did PayPal realise that there might be a business there. The rest, as they say, is history.
But how, you may ask, do I do without a plan? How do I decide what to do today? That's a good question and my answer is this: set yourself an impossible goal, something that you will never reach, but that will set a direction. For example, my own professional goal is to be the 21st century's Peter Drucker. Will I achieve it? No. Does that bother me? Not really. Does it set my direction, clarify every decision I need to make? Yes, absolutely.
Beware of imitation. Don't use rivals as role models, particularly if they are well established - and no matter how much you admire them. Life for an incumbent is very different than it is for an insurgent. Take the big four accounting firms. Simply being one of the big four is now a significant part of their success. If you are a FTSE 100 company or a company of any size with private equity backing, you pretty much have to use one of the big four.
They of course take full advantage of this captive market, but as a start-up you can't compete with that, so you need to offer something different. What could that be? It could be a law firm that doesn't use billable hours but charges by the project, or a marketing agency that insists on measuring the effectiveness of its work - or anybody who has the guts to come out and say, 'this is why this industry doesn't work, and this is what we are changing'.
Think about how you describe your business. This may sound trivial, but is actually fundamental. Describing your firm in a way that makes it sound like loads of rivals is not likely to catch a prospect's eye. Give people answers to their two key questions: 'What do you do? What can you do for me that someone else can't?' This is what customers care about.
Being clear about what you are for also helps you follow the money when markets shift and revenues migrate as change dictates that they will, sooner or later.
Don't rely on raising money. Forget Dragons' Den. Do not plan on getting venture capital. Here are some rough stats from a venture capital firm I work with:
- Business plans seen in a year: thousands
- Management teams met with: around 250
- Investments made: about a dozen
- Fees involved in making each investment: around £100k
These are not good odds. The less you need external capital, the better your chances of getting started. The truth is that the only time you will get a good deal on external investment is when you really don't need it. That leads neatly to the next principle:
Start with cash. Rather than plan the business and work out how much capital it will need, start with the capital you have and design a business which works with that. There are many ways of doing this. First, recognise the 80/20 rule: 80% of most businesses could run with 20% of their capital. Find that 80%.
If you want to end up with a product, start with a consultancy. Many software businesses begin this way. I know of one, sold a couple of years ago for ú200m, that started out thanks to a product developed by its consultants as a pet project in their spare time.
Ask for money in advance. I once worked for a firm that routinely asked for 50% of its fee before starting work - and usually got it. At one point, it had cash representing a third of a year's revenue in the bank for work not yet done. If your business involves annual maintenance contracts, for example, offer discounts on three years' payments upfront. It beats going to the bank.
Those are some of the principles of good business design. Now here are some techniques for finding the best way to play in any given industry:
Look up and down the value chain. Work out who has the power and who is making the money. As an example, let's take the food business. This comprises:
- The farmer who grows the wheat;
- The miller who makes the flour;
- The baker who bakes the bread;
- The supermarket that sells the bread.
In this chain, it is the supermarket which has the power. The others get squeezed and have to work very hard to make a living. So if you want to be a small food producer, you need to come up with a model that doesn't involve selling through supermarkets.
Decompose and recompose. Take the business apart and look at all the bits. Evaluate them. The local bike shop, for example. Even this apparently simple study turns out to be four businesses in one: sale of new bikes; sale of accessories with new bikes; sale of accessories for old bikes; repairs and maintenance. These have very different characteristics.
Sale of new bikes is price-sensitive due to internet comparisons. It's capital intensive because of the stock required. And it's cyclical - people postpone getting a new bike when times are hard.
Sale of accessories is still cyclical when they go with a new bike, but less so for existing bikes. This business doesn't tie up so much cash in stock and is probably less price-sensitive. There's more scope for unusual products, impulse buys and those not so subject to price comparison. For example, I just bought a rear light in the shape of a green alien head with flashing red eyes: irresistible, even though I had a perfectly good rear light already.
Maintenance and repairs looks like a nice business. It's not cyclical, although it might be seasonal. It's less price-sensitive than new bikes: when someone needs a repair, they need it urgently. And it's not capital-intensive.
The conclusion? A successful bike shop needs a large maintenance and repair business, with a strategy for keeping it as busy as possible all year round. Sales of new bikes don't generate much money in themselves, but create customers later for repairs and maintenance and accessories. Accessories deserve a lot of effort on the part of the owner - to keep presenting cool new gear to tempt the folk who thought they already had everything.
To sum up: incumbents in a market have many advantages - brand, reputation, customer base. As a new entrant, you can't compete directly against those, so base your strategy on what the incumbents can't do. You have flexibility, you can subtly redefine the market, you can innovate and you can be very selective about where you choose to compete.
BUSINESS DESIGN MUST-HAVES
- Have an insanely ambitious long-term goal that you may never achieve.
- Create a short-term financial plan for achieving positive cash flow as soon as possible.
- Find a way of testing out new products, services or markets quickly and cheaply.
- Be different. Like natural selection, develop your own successful mutation, rather than be someone else's clone.
- Ensure you understand what your business actually does for its customers.
- Know where you are in the ecosystem. A wheat farmer may never meet a supermarket bread buyer, but the latter probably has a greater impact on the former than anybody else.
- Redesign your business to use less cash. Then carefully redesign it again to use even less.