Build On Your Passion With A Basic Model And Numbers

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, skmurphy

What follows is a chat transcript from an hour long  conversation I had with a  entrepreneur recently. I have cleaned up all of our typos and removed or modified some identifying information. The basic business was for a website to arrange services for travelers. I wanted the entrepreneur to move beyond his passion for the idea and come up with basic model and some numbers.

I am sharing it because I think it’s representative of a number of issues that an early stage team has to wrestle with as they translate their passion into plans for product and customer development. In particular:

  • The founders have a vision for a complete and fully functional service that has a critical mass of users, but they are having trouble mapping the path from a standing start to their end vision.
  • In particular they are having trouble putting numbers around a basic first step or viable initial configuration.
  • They see potential competitors using models that are difficult to bootstrap and are worried that they are in the wrong market or taking the wrong approach.
  • They know that a problem exists because they have experienced it personally: they are scratching their own itch. But they are having trouble determining who else may have this same problem and how to find them.

Chat Transcript (Edited)

Entrepreneur: Hey Sean – how are you doing?

Me: Good and yourself?

Entrepreneur: I’m OK – I need some advice. It’s about the business idea we had had exchanged a few emails about. I recently got to know about another company which works on the same business model in Germany.

Me: OK

Entrepreneur: For the longest time I thought that being first to market was key but after I learned about this German company I’m unsure how will the venture sustain itself initially.

I have some ideas about how to make money once I reach critical mass but the service is being offered free by that company in Germany. I was planning to have a transaction fee on the service.

Selling Ads Or Sponsorships

A friend suggested that advertising could be a source of revenue but I’m not sure that my small amount of traffic in the beginning will bring in anything substantial.

Me: With an advertising business your customer is the advertiser. It’s difficult to sell ads until you have a well characterized audience that someone wants to reach with their message. If you are bootstrapping you need a business model that requires few customers to reach break even or whose cost can be sustained by consulting as you continue to explore the market.

Entrepreneur: Does that mean there are no other options? I do not understand how the German company is supporting itself. They do not charge any money to the user to use their service. Can sponsorships be used a source to support the venture till it achieves the critical mass?

Me: Sure if you can find someone who wants to sponsor you.

Entrepreneur: That’s also a difficult sale.

Me: What did you expect?

Am I Being Foolish?

Entrepreneur: I can’t tell if I am being foolish. Aside from this company in Germany I cannot find anyone in North America offering this service. Should I persist? The only way that this will see the light of day is if I decide to just go ahead but I am not able to see a scalable business model.

Me: I never tell an entrepreneur that they cannot make something happen. But you have to have a clear step by step plan that is feasible at each step. I don’t understand how you bootstrap your business and I don’t understand how you find funding for it. This does not mean that you cannot accomplish either, just that your plan, as you have explained it to me, needs to be based on where you are. What evidence of need are you looking at? What have you
already accomplished in the past that you are building on? What unique (or rare) skill or expertise do you bring to this venture?

Entrepreneur: I am not building on anything that I have achieved in the past. Nor do I bring anything rare to the venture – it’s just an idea which I know are dime a dozen

What Drives your Passion For This Business Idea?

Me: What drives your passion for this business idea?

Entrepreneur: My own issues actually. I felt the need for this service when I was traveling.

Me: How many folks are there like you? What are they willing to pay? How do you find them? This is at least something you can build on.

Entrepreneur: This is where I am stuck, trying to find other people like me who would use this service. I have tried many things but I am having real difficulty figuring out how to find people who would use it.

Me: So building it won’t help, you have to find proof of need before you start building it. And you have to figure out how to find prospects for the service. Your likely price point is such that you will not be able to fund this on just one or two customers, or even a dozen or two, you are going to need hundreds.

Entrepreneur: Yes, I agree that I need a proof of need. So that’s why I have not started to build anything as of now. But I am getting cold feet when I try and imagine how to sustain the business initially!

What is Basic Model–Your Minimum Sustainable Configuration?

Me: What’s the minimum sustainable size or configuration for your basic operation?

Entrepreneur: I don’t have an answer to that.

Build On Passion by Putting Some Numbers In a Basic Model

Me: So you have to move beyond your passion and start putting some numbers on it. The idea is necessary but not sufficient. Please understand me, I am not saying that you cannot make this happen, just that you have not done your homework enough yet to demonstrate you have a viable business model

Entrepreneur: Honestly I’m not aware of a way to calculate these numbers. I do see the need to have answers to these questions just that I do not know to get them.

Me: You have to make some estimates or talk to folks with similar businesses. You need a simple model of what the smallest configuration would look like, don’t worry about scale.

Entrepreneur: I guess my partner and I should figure what the two of us could do: how many customers we could service. But I am still worried that the German company is offering this service for free.

Me: I guess you have to give up then. Or run it as a hobby. Or figure out how to add more value than the German operation so that you can charge.

Entrepreneur: Hmmm… I get the gist, I need to plan out the basic moving parts before I even try to change any or all of them. I need to sit down with my partner and give this some more thought.

Three Basic Questions: Customer, Channel, Minimum Sustainable Business Configuration

Me: It seems to me you have three basic questions to address:

  1. Who is the customer: how to you identify them?
  2. How do you reach your customers?
  3. What does your initial business configuration look like: in particular how much time will you need to spend on different functions.

 

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