Startup business plan is useless - try this tool

Each of the entrepreneurs who came up with a new idea for a business dreams of growing a “unicorn” out of it that will change the world. But according to statistics, only 1 out of 10 projects takes off, the rest fail. Why is this happening and what can be done at the start of the project to minimize the risk of its failure - said Vladimir Lysikov, investment analyst at Capital Times.

— In the practice of investment banking, we have to deal with ideas and projects that are generated by entrepreneurs. Often they think they have come up with a unique technology or solution. And the longer they bear their invention in themselves, the more they fall in love with it and sometimes lose the sense of reality in which this solution should work and make a profit.

Often, a huge amount of money, time, energy has already been invested in these ideas to develop and promote their solution to a market that is essentially non-existent. This happens when the entrepreneur jealously guards his territory, not allowing the hypothesis that he is going the wrong way.

Even 30 years ago, the development cycle of a new solution took 5-10-15 years, and even in the event of a design error, users still had no other choice but to use the proposed product.

Now the development and launch cycle has been reduced to several months.

I'll give you an example. Software version 1.0 is considered to be a key development milestone. As a rule, it is from the moment the first version is released that the product is ready and can be sold to a wide range of users. Wargaming presented the version of World of tanks 1.0 only on March 20, 2018, although the online release took place back in 2011. Since that time, the developer has released 45 client updates, full of settings, additions, improvements. At the same time, the monetization of the project actually began in the beta version of the product.

If Wargaming had spent more than 7 years developing the product internally, without getting feedback from users participating in battles on a daily basis, the market would have received a product that did not meet the expectations of gamers, and would hardly have been able to win its audience.

Why startups fail

In my opinion, there are three main reasons why startups fail:

1. Blind love of the founders for their project.

2. Failure to focus on the problem the project is supposed to solve.

3. Unwillingness to carefully work out the viability of ideas.

And if almost nothing can be done about the love of an entrepreneur for his offspring, then the rest of the reasons (concentration on the problem and a comprehensive study of the viability of the idea) are not so difficult to figure out.

Traditionally, businesses have used tools such as economic modeling and the design of a detailed roadmap in the form of a business plan to assess viability. But for start-ups, this form of valuation is not justified in terms of either cost or value. And the business plan itself is not so much a reflection of reality as a reflection of the "fantasies and expectations" of the author. It is for this reason that even a perfectly balanced business plan on paper with excellent performance may not be implemented.

Large cell instead of a business plan

An alternative to the traditional business plan in this case can be a kind of “screenshot” of the main concepts of the future business in the form of a concept developed using the Business Model Canvas or Lean Canvas technology.

Business Modeling Technology Business Model Canvas (authors - Alexander Osterwalder, Yves Pignet) is a template for a stable structure of any business, consisting of 9 main elements.

1. Consumers. In this block, you need to determine which groups of people and organizations you expect to attract and serve. In order to better meet the needs of customers, it is desirable to break them into groups according to needs, behaviors or other characteristics.

2. Products (value proposition). Here you should describe why customers should choose your product over a competitor's product.

3. Relationships with clients. In this block, you need to clearly define what type of relationship you want to establish with consumers. They can range from personal to automated.

4. Sales channels. This is a system of interaction between a company and a consumer, a point of contact between a seller and a client.

5. Income. You have to ask yourself: what will your customers be willing to pay for? The correct answer to this question will allow you to create one or more revenue streams, and each stream can have its own pricing mechanism.

6. Key activity. The actions a company needs to implement its business model. So, among the key activities of Microsoft - software development. And Dell's core business includes supplier relationship management.

7. Key partners. Network of suppliers and partners and types of relationships with them, such as strategic collaboration or co-competition.

8. Key resources. Key resources can be material, financial, intellectual or human (personnel). The company may own these resources, hire them or receive them from key partners. Different types of business models require different resources. A chip manufacturer needs capital-intensive production facilities, and a chip designer needs human resources.

9. Costs. In this block, it is necessary to describe the most significant costs of the project and their types.

The described technology allows you to combine and see the internal relationships and semantic chains in the process of creating profit. For example, what tools (resources) must be used in order to carry out activities for the production of a product, how much these resources cost and how they can be made cheaper.

This requires studying the strengths and weaknesses of the key blocks of the model, evaluating and adapting the solution for consumers and under the influence of changes in the external environment, and most importantly, to ensure that all blocks of the model are coordinated with each other.

As a result, we get a one-page clearly structured business idea. However, the Business Model Canvas can be difficult to use for startups, as some cells have nothing to write in (the project may not have partners or the future distribution channels are completely unclear).

Entrepreneur Ash Sea rethought the Business Model Canvas technology and proposed his own technology - Lean Canvas.

Click on the image to enlarge it

You need to fill in the blocks in the sequence indicated on the diagram.

1. Determine the target audience - who is the client. First, we define the target audience. The more precisely this is done, the better it is possible to understand and solve customer problems. Accordingly, the more successful the product will be.

2. What problem of the client are we solving. Often an entrepreneur proceeds from what he can do, what capabilities he has to produce a product. But you have to go the other way. You need to understand the client's problem, and then - how the entrepreneur can solve it.

3. Sources of income. The product is created not for the sake of implementing an entrepreneurial idea, but to generate cash flow. It is necessary to determine how this will happen, whether customers are ready to pay for the solution of their problem. At this stage, you should make a model and test it for realism.

4. Description of the solution. You should focus on the key features of your solution, but taking into account the description of the mechanism for solving these problems.

5. Unique offer. In this block, it is important to formulate in a short form, maximum 140 characters, the uniqueness of our product, the difference between the product and competitive solutions.

6. Sales channels. Here it is necessary to determine the ways in which the customer will learn about the product.

7. Key project metrics. In this block, you should write down the criteria by which you are going to monitor the project: what will the product be like on the horizon up to 3 years, what financial result will the product generate, growth rates.

8. Cost structure. Costs should be divided into two categories: initial product costs and recurring development costs.

9. Hidden Advantage. In this block, you need to immediately provide for measures to protect the product, for example, a huge customer base, patents, licenses, brand, high cost of entry.

Most start-up entrepreneurs, when they first try to draw up an outline of the future business in any variant, cannot even approximately fill in all the blocks. So, in our practice, the most frequent and critical mistakes occur when analyzing the target audience.

I'll give you an example. A group of entrepreneurs from Uzbekistan developed an Internet portal that collected up-to-date information on the availability and cost of medicines in pharmacies. The project was launched, however, contrary to the expectations of the founders, it could not generate profit only because pharmacies themselves were identified as the target audience, and not ordinary people, the site users.

As a summary

In any case, drawing a canvas helps the founder to determine the goal, the prospects for the business, its risks, and the main financial parameters of development. Of course, drawing up a startup business model using the described technologies is not a panacea and is not a guarantee of success, but the founders and investors, looking at the completed blocks, instantly understand both the prospects of the project and the degree of development of the business idea.