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March 23, 2008

Beware of Business Models: They can drain the Creative Energy of ANY Startup

When meeting with an early-stage startup looking for funding, if I am interested in the company, I look to connect with the founders and find out the inspiration behind the company they are creating. I try to understand the problem they are solving and the opportunity they are seeing. I also look to see how as a team they get along, work off each other and I try to get a feel of their creative energies. I look for teams where each member is watching each other’s back and a core team whom I feel will be together for the long term. I look for people who are both smart and creative who can be focused when necessary and whose personality allow themselves to be open to change directions and re-map themselves when needed. I invest in people first and ideas second. I am not a fan of structure but I appreciate the need for it…sometimes.

While startups should have a clue as to the business they are entering and the markets they plan on serving and /or disrupting, I have learned from experience that forcing a business model on a company too early can have the effect of draining their creative energies. In reality some business models only appear years after the business is established (i.e. Google with Adwords) and sometimes the real business models were never obvious in the beginning. Yes, business models matter. However, in many cases where a startup is doing something “non-traditional” I am someone who believes in letting the entrepreneurs explore their ideas and for them to walk the paths they create. It is only by exploring and stumbling and exploring does one sometimes by accident discover the business they are really in or the real opportunity in front of them.

So in practice, when meeting a startup for the first time, if during the first 15 minutes of our meeting more time is spent by them talking about their business model than anything else, my track record is that this is a company I am not going to end up getting involved with.

From my vantage point, if the company I’m meeting with is a software company, the goal is simple. Once the product is developed, get millions of people to download and use their software. If they are successful in getting millions of downloads, there are a number of business models that can be applied. If they fail in getting millions of downloads, very few business models will work. And when meeting with people developing destination sites, the same rules apply. If the startup is able to get to a metric of millions of page views per month, there are a number of business models that can be applied. If the startup is not able to build up and maintain the necessary traffic, very few business models will work.

What I am more interested when meeting with companies isn’t so much what is their business model, but the approach they plan on taking to get to their stated goals. I want to know their social media strategy. I want to understand their approach to “bottom up” marketing. I want to know who on their team is driving the buzz and how they will be empowering their friends to help get them another step closer to their success.

The only time I will lead with “what is your business model” when meeting an early stage company for the first time is in situations where I don’t understand the market space they are going after or have a full appreciation for the opportunity they are seeing. And if they tell me they don’t know their business model yet, that is a fine answer for me. :)


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Posted by jeff on March 23, 2008 10:02 AM | Permalink

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Comments

Posted by: Photoshop CS4 at June 24, 2009 04:12 AM

That is refreshing and encouraging that you take this stance-- as do I.

I can think of plenty of VC's who are quoted saying, "If you don't have a business model, you don't have a business".

Posted by: Ken Berger at March 25, 2008 12:04 PM

Nice post Jeff.

Posted by: steve Garfield at March 24, 2008 09:03 AM

Yo jeff
Great food for thought - paul nurse nobel prize winner and head of rockefeller inst in nyc would agree with you in that we have to invest not in things or biz plans but in dreams and dreamers and people who are passionate not in research projects of constipated biz game-plans per-say but in the imagination that makes us imagine the impossible where all else that is too practical fails us in fulfilling us too

Geo (at) FoodForThoughtChannel.com

Posted by: geo at March 23, 2008 03:54 PM

This is a refreshing blog post. Although I will say that I think that it helps to have some sort of a business model at least sketched out initially. That way as the team develops the application there is a sense of where things will be headed in the future. We've had a bunch of ideas for revenue over the past couple of years, I think we've narrowed it down to a couple of relevant ones. We've never really considered advertising revenues (banner/text ads etc) as a real source of revenue.

Anyway, I wish there were more investors that think like you down here.

Posted by: Tola at March 23, 2008 11:59 AM

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