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3
Starting a New Venture
Learning Objectives
• Convert a business idea into a business
• Use the business model canvas as a tool
• Define and apply the lean start-up approach
• Identify unique characteristics of an online business
• Apply entrepreneurship skills to social ventures
The Oxford English Dictionary defines a business model as “a plan for the
successful operation of a business, identifying sources of revenue, the intended
customer base, products, and details of financing” (OED 2019). It is tempting to
assume that an entrepreneur can describe her business model, but unfortunately
this is not always true. Often an entrepreneur is passionate about a product or
service but does not have a clear plan to turn the product or service into a viable
business. While neglecting the financial aspect of a business is fatal, it is equally
important to stay true to the entrepreneur’s vision and passion. It is natural for
a business model to evolve as the venture grows and as the environment changes.
This chapter addresses the key factors an entrepreneur needs to consider when
developing a business model.
At the heart of a business model are the customers, suppliers, competitors
and their values and behaviors, embedded in the current regulatory, economic,
and technological environment. Ideally, a customer values what an entrepre-
neur has to offer, and their core values align with each other. For example,
an entrepreneur passionate about cooking and the environment wanted to
open a restaurant specializing in organic, locally-sourced ingredients. She
found a location in an upper-income neighborhood and made connections
with nearby small farms. She easily attracted a clientele who valued good food
and was willing and able to pay a premium for sustainably-sourced organic
ingredients.
Given that 75 percent of all venture-backed start-ups fail, the odds of having
such a fairy tale start-up story are not good (Gage 2012). However, just because
failures are more common than successes in the start-up world does not mean
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38 Getting Money and Getting Going
that failures signify the end of an entrepreneur’s career. Many venture capitalists
prefer entrepreneurs to have experienced both successes and failures, provided
that they learned valuable lessons from their failures.
Some basic questions that every entrepreneur needs to answer at the start of
each venture include:
1 Who is the customer?
2 What does the customer value?
3 How do we make money in this business?
4 What enables us to deliver value to customers at an acceptable cost?
Customer and Customer Value
It is important for an entrepreneur to identify her potential customers and
what they value clearly. Let us use the restaurant example to illustrate this
process of customer identification. In the most general sense, all humans
need to eat so everyone is a potential customer. Unfortunately, such a broad
definition is not useful at all. A more meaningful target customer may be
someone in the 35–54 age group, who spends the highest amount on food
away from home (Kiersz 2018). What do these customers value? Your answer
may be “a dining experience.” This definition includes not just the food, but
also the décor and the service. Given the entrepreneur’s passion about the
environment, she would want to target customers who value the impact their
consumption choices have on the environment. She would want to find out
what other attributes of a dining experience this target group values. Perhaps
they want a sense of community. Customers value more than one attribute,
and listing out as many of them as possible will enable an entrepreneur to
match her values with theirs. Industry trade groups often conduct surveys
and tabulate information on customer demographics and their preferences.
Your library is a good resource for this type of secondary data from trade
groups and government agencies. Primary data through market surveys and
first-person interviews are more expensive to obtain but can give you informa-
tion more directly relevant to your venture.
The process of identifying the customer and what he values is further
complicated if the end user is not the same person who makes the purchase
decision. Toys offer a good example. The end user of toys is a child, but the
purchase decision is made by parents. It is not surprising that there are a
lot more educational toys targeted at the pre-school age group than at older
youths, since children increase their influence on toy purchase decisions as
they age. Satisfying the needs of both the end user and the decision-maker,
especially in a business-to-business relationship, can be challenging. The cor-
porate decision-maker may emphasize price over features compared to the
end user. A successful entrepreneur will convert challenges into opportunities
by tapping into unmet needs in the market. The end users may be your best
advocate.
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Starting a New Venture 39
Making Sure the Story and the Numbers Work
How do movie theaters make money? If you answered “ticket sales,” you would
be half wrong. In general, revenues of ticket sales from the first week or two
are mostly absorbed by the studios. The percentage of revenues distributed to
the theaters themselves increases the longer a film stays in the theaters (Udland
2015). The real money comes from popcorn and drinks. The annual report from
AMC Theaters showed that over 30 percent of their revenues were from food
and beverages, while ticket sales accounted for more than 60 percent. However,
the cost to studios accounted for more than 50 percent of ticket sales, whereas
food and beverage costs averaged only 16 percent of food and beverage revenues.
As a result, food and beverages contributed almost half of the gross profit of
the theaters.
Let’s try another question: How do gas stations make money? And you
guessed it, the answer is not “gasoline.” Gas stations make more money selling
bottled water and chips than gasoline (Rehagen 2017).
Your Challenge
As you flesh out the business model for your venture be sure to consider these
factors:
1 Your business’ position in the value creation chain –i.e. are you the creator
of a product or service, or are you enabling the delivery of the product or
service. As the creator, you should be able to describe how your product or
service fulfills an unmet need in the market. If you are the reseller or dis-
tributor of the product or service, describe how you are extending a product
or service to groups or locations that were not accessible previously due to
geographic, legal, or financial reasons.
2 Business development –how will you attract customers? Will your customers
be repeat buyers or will you have to constantly acquire new ones?
3 Sustainability –can you deliver what your customers value at a cost that
leads to a viable business? Understanding the financial aspects of entrepre-
neurship is the focus of this book, and we will cover this last topic in depth
in the remaining chapters.
Creating a business model is similar to writing a story. There are universal
themes that underlay all stories, and all new business models are variations on the
generic value chain that underlays all businesses. Joan Magretta (2002) proposed
two critical tests for business models. She believed that when business models do
not work, it is because they fail either the narrative test or the numbers test. The
remaining chapters of this book will explore the numbers tests for a business and
the financial criteria for a viable business.
This chapter explores the narrative of a business’ story. An example of a
business model failing the narrative test is movie subscription services such
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40 Getting Money and Getting Going
as MoviePass. The subscription business model has become very popular in
the 2010s, following the example of Netflix and of gym franchises. One main
advantage of this model is the receipt of stable and recurring revenues. The
Netflix model works because Netflix was able to negotiate low royalty fees on
old TV shows and old movies and, after they developed the software to stream
videos, future digital delivery costs were low. As its customer base grew and
revenues increased, Netflix’s costs did not go up proportionally, enabling
profits to increase significantly. The gym model works because people are
reluctant to cancel gym memberships even if they do not use them, allowing
gyms to vastly oversell the number of memberships relative to the facility’s
capacity.
The movie subscription service does not have the advantages of either model.
When MoviePass launched they charged subscribers less than $10 per month to
watch an unlimited number of movies when the average movie cost was $8 to
$10 per ticket. MoviePass was paying full price to theaters so they would lose
money if their customers watched more than one movie per month. MoviePass
was losing a lot of money and their hope was to build up a significant number of
subscribers to enable them to bargain with theaters and movie studios. Instead,
theaters decided to launch their own subscription services to compete. Theaters
have a cost advantage over third-party subscription services. To reduce losses,
MoviePass changed their term of service and put limits on the number of movies
subscribers could watch. It turned out people are much more willing to cancel
movie memberships than gym memberships, perhaps because movies are seen as
entertainment and gyms are seen as a means to health. MoviePass lost a lot of
subscribers. Their stock was delisted from the stock market. Most business models
fail the narrative test because they are built on faulty assumptions about customer
and/or competitor behavior. MoviePass wrongly assumed the number of movies
their members would watch and underestimated their losses. They overestimated
their members’ loyalty who left MoviePass when they changed their terms of ser-
vice. They also wrongly assumed they could bargain with theaters, who they saw
as suppliers. But the theaters turned out to be formidable competitors.
Lean Start-Up
The lean start-up approach favors experimentation over elaborate planning, cus-
tomer feedback over entrepreneurial intuition, and iterative design over detailed
up-front planning. The central theme behind lean start-up is to develop a “min-
imum viable product” and deploy it as soon as possible to get customer feedback
and make changes continuously. One of the motivations behind the lean start-up
approach is the large number of unknowns in a start-up environment. There is
no single, set-in-stone business plan to be completed. Instead, the plan is con-
tinually evolving.
The first step in the lean start-up approach is to sketch out the hypotheses
of the business. Steve Blank (2013) suggested a business model canvas as a
format to summarize these hypotheses. A business model canvas describes the
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Starting a New Venture 41
Table 3.1 Business Model Canvas
1 Value Propositions
• What value do we deliver to our customers?
• What problems are we helping to solve or which needs are we satisfying for our
customers?
• What is the minimum viable product?
5 Revenues 9 Costs
• What do our customers value and how • What are the most important costs
much are they willing to pay? inherent in our business model?
• What do they currently pay now? • Which activities are most expensive?
• What is the revenue model and • Which resources are most expensive?
pricing strategy of current
competitors?
4 Customer Relationships 8 Key Partners
• How do we get, keep, and grow our • Who are our key suppliers?
customer base? • Who are our other key partners?
• How much does it cost to get new • Which activities do our key partners
customers? perform?
• Which customer relationships have we
already established?
2 Customer Segments 7 Key Activities
• Who are our most important • What key activities are required to deliver
customers? the minimum viable product? To develop
• What are the characteristics of our customer relationships? To establish and
customers? maintain revenue streams?
3 Channels 6 Key Resource
• How do we reach our most important • What key resources are required to
customers? deliver the minimum viable product?
• How do our competitors reach them To develop customer relationships?
now? To establish and maintain revenue
streams?
narrative part of your story. Table 3.1 outlines the key factors to include in your
narrative.
The lean start-up approach emphasizes making direct contact with poten-
tial customers and key partners as early as possible. In the second step,
entrepreneurs get feedback from potential users, purchasers, suppliers, and
other partners on all elements of the business model and use these inputs to
revise their assumptions, including product features, pricing, and key activ-
ities. They repeat the cycle rapidly, testing redesigned products and processes
and making further adjustments until they establish a proven business
model. Lean start-up borrowed this iterative design approach from agile
development, a software engineering concept. The last step in lean start-
up, once the business model is proven viable, is to scale up. The iterative
approach of getting customer feedback and making changes continues as the
business grows.
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42 Getting Money and Getting Going
Box 3.1 Dropbox –A Lean Start-Up Example
A notable example of a successful lean start-up is Dropbox. Drew Houston,
co-founder of Dropbox, got the idea of an easy online file system in 2007
when he kept forgetting his thumb drive and could not access the files he
needed. Arash Ferdowsi, the other co-founder of Dropbox, reached out
to Houston and joined the company after seeing a demo video. At that
time, Houston only had a prototype and not a version that could be sold
as a product. The company’s only expenses were the living costs of the co-
founders, Internet access, and servers. Houston and Ferdowski were able
to raise funding from a venture capital firm with their prototype, and they
launched the service a year later.
One potential downside of the lean start- up approach is the risk of
competitors stealing your ideas and executing them before you have the
resources to scale up. That was a risk faced by Dropbox whose competitors
ranged from Google and Microsoft to Carbonite. Blank (2013) argued that cus-
tomer feedback matters more than secrecy and that constant feedback yields
better results. The advantage of the lean start-up approach is that it requires
fewer resources because you only need resources to develop a minimum viable
product before getting customer feedback. Once you find a proven business
model, it is easier to raise additional money to scale up. We will explore in depth
how to obtain financing for a business in the next chapter. Lastly, lean start-up
does not mean zero planning. You still have to list detailed assumptions in the
business model canvas and the numbers still have to work out.
Online Start-Up
An online start-up differs from a traditional start-up in that many of its key
activities occur online and do not require a fixed physical location. Recent
technological developments have made online start-up cheaper and accessible
to entrepreneurs who are not software engineers. The first step of any start-up
is to identify an unmet need in a market that matches what you have to offer.
This step is the same whether a business is online or brick-and-mortar. However,
since many key activities take place online, fewer resources are needed to get
the business up and running. For example, designing the layout of a webpage
is usually a lot cheaper and faster than remodeling a store front. Changes and
revisions or reboots are also less costly. It is not surprising that the lean start-up
approach is particularly popular among online start-ups.
Platforms
If you decide to start your venture as an online business, the next step is
to review your key activities and decide which ones will be done online.
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Starting a New Venture 43
Amazon.com is the number one US online retailer, and it dominates the
online marketplace (Loeb 2018). Amazon.com provides key activities such
as payment acceptance, inventory management and delivery, and advertising,
allowing entrepreneurs to focus on creating and producing products or ser-
vices. Unfortunately, the size of Amazon is also its shortcoming because size
gives Amazon tremendous bargaining power over the terms and prices that
entrepreneurs must adhere to.
In addition to providing a platform, Amazon also sells its own products and
is therefore a potential competitor. The distant second online retailer is eBay,
which though a lot smaller does not offer its own products for sale. There are
other general online ecommerce platforms, such as Facebook Marketplace and
Google Express, as well as platforms that cater to special segments, such as Etsy
and Pinterest, which attract customers looking for unique, artistic items. Similar
online platforms exist for service providers, from home repair to lawyers and
online marketers. If you want to have your own website, then platforms such
as Squarespace, Wix, Weebly, or GoDaddy, will better suit your needs. Since
the online marketplace changes rapidly, it is important to do your research to
identify the platform that is popular with your target customers and that offers
the services you need. If you cannot find what you are looking for, you just
discovered an opportunity for a new venture!
Here are some factors you should consider when selecting an online platform:
1 Ease of use
• Do they have ready to use templates?
• Can you update and edit contents without any tech know-how?
2 Help and support
• Can you get help anytime?
3 Design flexibility, customization
• Can you customize their templates?
• Can you add blog posts? Videos? Other features?
• Do they have search functions that help your customers find the
products they want?
4 Scalability
• Can they handle an unexpected increase in volume?
5 Security
• Are their sales and payment processes protected by encryption?
6 Marketing
• Can you build customer email lists?
• Can you integrate social media marketing?
The advantages of an online start-up are that entry is easy and relatively inex-
pensive. An entrepreneur does not have to raise money to open a physical store
or convince the buyer of established retail chains to carry her products. The
disadvantages are that such low barriers to entry mean a lot of competition, and
it can be difficult for an entrepreneur to stand out in a crowded market.
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44 Getting Money and Getting Going
Marketing
Marketing is a key activity for online start-ups. Six out of the seven steps
recommended by Moon (2019) to start a small business online relate to
marketing. To address marketing strategies in detail is beyond the scope of this
book, however, in general, you need to do the following:
1 Cast your products or services in a good story.
a Many entrepreneurs are great storytellers and they are telling a story
they are passionate about.
2 Invest in your online store front.
a Keep it simple. Make it customer friendly.
b If you want to develop your own website instead of using an online
platform, hire a professional.
3 Actively manage customer relationships.
a This means being responsive to customer inquiries and complaints.
b It also means proactively reaching out to your customers via emails,
blogs, or videos to provide valuable information beyond just selling
your products and services. You want to establish an expert reputation
for yourself.
c Create an online community around your product or service.
4 Get your story and your products/services out to the customers.
a This is an activity you may want to outsource to a marketing profes-
sional. The specific marketing strategy depends on your products/ser-
vices and market segments you are targeting. Key tasks may include
pay-per-click advertising, search engine optimization, email marketing,
or others.
b You can also use social media by becoming an active participant in
forums popular with your target customers.
Box 3.2 Glossier –An Online Start-Up
Glossier was a $1 billion beauty product company that started as a blog:
Into The Gloss. Emily Weiss, founder of Glossier, launched the blog while
interning at Teen Vogue, a popular style and beauty magazine. After
building a relationship with her blog readers and her Instagram followers,
Weiss decided that she could create the beauty products that her followers
truly wanted. She wrote out the things she needed to launch the business:
“Website. Chemist. Office space.” The company started with just four
products. Even as the company became successful, Glossier maintained
its direct-to-consumer business approach. Weiss used the blog as a focus
group to find out exactly what her followers want by asking questions as
such “Which fragrance do you like?”
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Starting a New Venture 45
Whether your start-up is online or on the ground, you will be successful if
you have a good product or service that enables you to generate word-of-mouth
recommendations from customers.
Social Venture
Social ventures incorporate business skills and techniques to provide innovative
solutions to persisting societal problems. J. Gregory Dees (2017) defined social
entrepreneurship to include innovative not-for-profit ventures, social purpose
for-profit business ventures, and hybrid organizations mixing not-for-profit and
for-profit elements.
• One of the most well-known innovative social entrepreneurs is Muhammad
Yunus, the 2006 Nobel Peace Prize winner, who pioneered microloans at the
Grameen Bank. Instead of charity, Grameen Bank gave very small (micro)
loans to individuals who would not otherwise qualify to enable them to start
their own businesses to alleviate poverty.
• Among for-profit companies the mission statement of Patagonia stands out.
It reads “We’re in business to save our home planet.” Patagonia is an out-
door clothing and equipment company with strong social values and has
been a certified B Corp since 2011.
• Greyston is a hybrid social enterprise. Its parent entity, Greyston Foundation
Inc., is a not-for-profit public charity. It owns a for-profit commercial bakery,
Greyston Bakery Inc., and a system of not-for-profit organizations, including
Greyston Health Services Inc. As a purpose-driver company, the profits of
Greyston Bakery are either directed back into Greyston Foundation or
reinvested into the Bakery. Greyston’s mission is to “create thriving communi-
ties through the practice and promotion of Open HiringTM.” Their employees
are hired without interviews, resumes, background checks, or applications.
The key defining feature of a social venture is the focus on social values
instead of solely private values and it strives to be financially self-sustaining
instead of solely relying on grants and donations. Social entrepreneurs recog-
nize deficiencies in the market’s ability to allocate resources. The causes for these
deficiencies vary. Examples include public goods and public harms. Clean air is
a public good. Everyone benefits from clean air but planting trees or reducing
pollution is a private cost to individuals and businesses. The benefit of clean air
to one individual or one business may not be sufficient for him to plant a tree or
the business to install pollution control systems. However, the benefit of clean
air to the population of a city or state or country may very well outweigh the
costs. Traffic congestion is a public harm. Everyone suffers from traffic jams
but few people want to carpool because it takes longer and is less convenient.
As a result, insufficient resources are often allocated to improve society in gen-
eral and there are too few public goods and too many public harms. If there
is a way for a population to act collectively they may opt to pay for cleaner
air and reduce traffic jams. The traditional vehicle to accomplish public goods
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46 Getting Money and Getting Going
and reduce public harms is through the ballot box at elections and govern-
ment regulations. A social entrepreneur seeks an innovative approach outside
of politics. Recently a start-up, SilviaTerra, developed an artificial intelligence-
powered algorithm to provide an up-to-date map of US forests to improve
environmental management.
Social entrepreneurship has steadily gained popularity, especially since the
2008 financial crisis, which led to decrease in trust in the free market system.
A poll by GlobeScan in 2010 reported that only 50 percent of Americans said they
believed in the free market system, down from 80 percent in 2002 (Forum 2013).
Social entrepreneurs address deficiencies of the free market system head-on. They
develop innovative business models that blend traditional capitalism with solutions
that tackle long-term social problems. Workers and consumers are also becoming
more socially conscious. Among millennials, 94 percent said they were interested
in using their skills to benefit a cause and 57 percent said they wished there were
more company-wide service days according to a survey (Horowitz & Horowitz
2017). Another study reported that two-thirds of consumers said it was important
for brands to take public stands on social and political issues (Brown 2018).
A unique challenge facing social ventures is their dual goals, sometimes
referred to as “double bottom-line.” Corner and Ho (2010) found that the pro-
cess of identifying an opportunity through developing a viable venture is more
complex for a social enterprise, perhaps due to their dual goals. In addition to
articulating what value they deliver to their customers, social entrepreneurs must
also define what social value they deliver to the community or society.
Measuring their social impact is as important as measuring their profits.
A venture does not have to register as a benefit corporation to have a social
mission. Registering as a benefit corporation makes measuring and reporting
social impact a requirement.
At the same time, social ventures must be financially viable. Fox (2016)
proposed five reasons why social entrepreneurship is worthwhile:
1 It connects you to your life purpose.
2 It keeps you motivated.
3 It brings you lasting happiness.
4 It helps you help others discover their life purpose.
5 It is what today’s consumers want.
At its best, social entrepreneurship allows entrepreneurs to balance their
personal, social, and economic values while still satisfying consumer demand.
Having multiple goals can be challenging especially in situations when the goals
conflict with each other. If the entrepreneur has clearly articulated her values, it
is easier for her to prioritize her goals when stressful situations arise.
References
AMC Theaters. “10- k Annual Report for 2018.” https://Investor.amctheaters.com
(accessed June 18, 2019).
