Why the Startup with the Superior Business Model Wins

In the original newsletter, I put forth the “Venture Investing Expression” below:

✅ Depth of market problem ∝ solution fit ∝ non-obvious insight ∝ traction ∝ business model ∝ market size ∝ go-to-market strategy ∝ team execution potential ∝ status of fundraise ∝ valuation ∝ stage of business ✅

This week’s item is Business Model. 

I will share with you an insight that I’ve observed on business models in the last nine years being in startups. 

But first, when I refer to business models, what do I mean? 

According to Alexander O, author of the Business Model Canvas, a business model is a “a representation of how an organization makes (or intends to make) money.” Link is here.

What types of business models exist? 

Y Combinator lays out that there are 9 types of business models that 99% of startups fit into. Discovering this content was one of the most helpful “a ha” moments in startups as it brought tight organization to the business model discussion. Link is here.  

It is these nine types of business models that are the artist’s palate of innovation. As you can imagine, with a high number of startup inputs, investors see so many different applications of business models across industries, customers, price points, etc. like the number of permutations of a Rubix cube.

To be honest, some of these thoughts I have held within a mental model for years but have never articulated before until now. So here we go. 😀

✅ Here is what I have found - the startup with the superior business model wins. 

Yet, I will go out on a limb and say that I believe that business models are one of the most underutilized opportunities in startups. ✅

Most of the time, startups attack the market problem head on. Suppose a FinTech startup has identified a market problem for financial advisors. Thus, the logic might go, “We build a product for financial advisors, and we sell to financial advisors.”

👉 What startups often don’t realize is that there are other ways to address the market problem than just head on. 👈

Astute founders look at the problem from all angles. They ask themselves the questions such as:

1. Who are other parties in this transaction, both upstream and downstream?

2. What problems are those parties facing?

3. For the problem that I have currently identified…

   1. Does it catalyze any of the problems that these other parties are facing

   2. Or, is it a consequence of more upstream problems from other parties?

Market tension doesn’t exist just for your single customer. Market tension is almost never felt in isolation. It exists on a horizontal plane. Choosing the optimal business model is about seeing beyond just the direct customer that is facing the market problem. Many times, there are leverage points in the market that can be uncovered and exploited. 

Specifically, often there are leverage points both upstream and downstream from the actual problem dynamic. Startups can find a wedge and look to manipulate circumstances, align incentives, etc. of the actual problem dynamic. In short, business models are the tools to exploit leverage points in the market.