A VC in Vacationland

The first question I ask myself when reviewing a start-up investment is whether they are "crashing the business model party".  By crashing the business model party, I refer to the ability of the proposed solution, software, network, or whatever to challenge conventional wisdom and create a new way of doing business.

Picture in your mind for a moment the business model party.  Perhaps it is in a huge penthouse overlooking Central Park in New York. All the established players in an industry are present, murmuring in low tones about how great business is, all cozy in their understanding of how to compete with each other in a market.  Strategies are set, marketing is focused on each other(think Bud and Miller)–and sometimes the consumer–and most everyone feels that they understand how to succeed and be profitable.

Then you, the upstart entrepreneur, walks in the room.  Just a kid perhaps, looking like a Williamsburg nerd.  But with a new idea on how to do their business in a whole new way.  Do you think they are going to listen to you? Get excited?  Invite you to stay?  Most likely, a large gentleman with a bulge under his coat will escort you to the door. No one is particularly interested in rocking the business model boat.

But it happens every day in the real world, so there must be ways to make it happen.  Cracking the code and developing a new business model is the most difficult task for the budding entrepreneur.  And almost every entrepreneur I speak with believes that they have the better model.  Trust me, it only happens, at least in my experience, in about 5 out of every 100 business plans I see.

Here are a few of the things I tell entrepreneurs who are not quite there yet:

1. You idea must be quickly understood by your audience–the venture guys. Previous Blogs of mine have stressed the importance of a good elevator pitch–being able to quickly communicate what you want to do and why it will be successful. Long explanations mean that you have not thought through your business model in sufficient detail to express the key points succinctly.  Sometimes, I am able to see through the mass of information and find the kernel of truth.  Most often, I am left with the feeling that you do not know enough to be successful. Disruptive business models have an "intuitively obvious" aspect to them.  The simpler the idea, the better the business model.  On-demand software is a good example of a disruptive business model. Although I am not sure that all software needs to be on-demand, all software entrepreneurs must decide if the SaaS model will be the one that is most profitable and successful in their space.
2. You must be able to monetize the business model. Again, I have posted before on this subject in two separate Blogs–a short one and a longer one.  Just having a disruptive business model won’t do it.  I see lots of "business network" start-ups that focus on ad revenue to fund their successes.  Although there will be lots of ad money spent on the web in future years, what’s your plan to get a big piece of it? That’s just as important as having the great idea for the next Linkedin.
3. You must have the right connectivity to make it happen. I often see great business models, with disruptive potential and even intelligent monetization, that have no hope of succeeding. Why?  Their entrepreneur has no connection to or network in the industry.  What, you say?  Some of the world’s most famous entrepreneurs, like Gates or the Google boys, had little connection into the worlds they were about to invade.  Wrong.  Bill was well connected in the fledgling software industry and the Google boys had their top-of-the-line venture capital guys who made any introduction they needed.  All successful people have a network they can exploit to help them sell their ideas.

So spend some more time making sure that you can answer these three fundemantal questions before you start sending out those business plans. It will save you a lot of rejections and increase your chances of success.