Business Models!

For a person who is far from having a strong business acumen, when I sit around dreaming about my future and refreshing my past, occasionally I end up thinking if at all I start a company of my own (which for my “free spirited day dreaming Piscean” nature is a remote possibility) what would be kind of strategy that I would adopt. Having worked in a highly volatile industry for just over a decade which includes a couple of startups, I guess I have been able to vaguely figure out, two distinct ways of achieving success!! To someone who raves about time pass, good ol days, cricket, fun and frolic, buzz words such as “strategy”, “business model” seem alien,  but for a while I just thought I could put my thinking hat on,  dish out a comparative studies about two of my perceived  business models which could probably succeed. 

Disclaimer: I am hard core Linux professional, and my only connection to business and management, is that my wife is an MBA graduate, and the connection ends there! All that is written below, is my take on going further in sticky matters of business, and probably a self-reference material if at all one day, I decide to call it a day for my 9 to 7 career and take the plunge!

Time to put the Blazer on, and say, “Hello and Welcome!!”

So what’s that ONE deciding factor that everyone who ever wishes to start a company, need to be absolutely certain about? Because that one decision affects everything else you do in aid of that budding company, your dream baby! You need to figure out whether the company is going to grow slowly, steadily, bit squeamish but profitably or whether the company is going to have a big bang with fast growth and lot of capital investment.  To keep up the reference further down; I would call the first model as a “Steady Model” and the second one as a “Land Grab Model”

The fundamental concept of the Steady model is to start small, with limited goals, and slowly build a business over a long period of time. The product that you would be trying launch in the market, would have lot of established competitors.

The second one, the “Land Grab Model” works on that one brilliant concept/idea which no one has thought about till date, and work on that idea to materialize it into a feasible product as quickly as if your life is depended on it, and release it to the market fast!!  This calls for raising a lot of capital and that’s where your Giorgio Armani clad technocrat image will come in handy in selling that brilliant idea into a feasible business proposal to the VC, that they would instantly invest the moolah, so that you don’t have to work for the next 25 years!!If you don’t have any real competition, because you are the first in the market, there is a pretty good chance that you succeed in the land grab, that is, get as many customers as possible, and establish a customer base as quickly as possible, so that later competitors will have a serious entry-barrier into that market. But if you're going into an industry where there is already a well-established set of competitors, the land-grab idea doesn't make sense. You need to create your customer base by getting customers to switch over from competitors. And that takes time!!!

What’s wrong in taking time? The problem is that you need to create a network of customers and create that network pretty fast and somehow make them stick to you, so that they have no other way of getting away! This is like a snow ball effect, because the more customers you have, the more customers you will get! eBay is a good example. Suppose you want to sell your vintage bike you're going to get a better price on eBay, because there are more buyers there. If you want to buy a vintage bike, you're going to look on eBay, because there are more sellers there!! 

Another extremely effective network effect is in proprietary chat systems like say for example, Skype. If many of your friends use Skype, then obviously you need to go to Skype, if you want to chat with them. Rather than asking all of them to come over to the chat system that you use, it would definitely make lot of sense for you to create an id on Skype, and start chatting. One more customer added to Skype, because of network effects, and nothing more! That’s where the customers are locked in!

But how do you throw the bait initially? That’s a simple thing, as giving free service for say around 6 months, and then when you have enough customers locked in, start a monthly subscription! Similar to all these banks offering various services such as paying all your bills from your account like an ECS or a standing instruction. After some months of very less service charge, you would be a bit grumpy if they increase the service charge, but still to avoid the hassles of changing the account for each and every payment that you have authorized the bank to pay for, you allow them to suck your pocket just that extra little bit!

Hence, there are certain businesses that have these natural network affects and if your business strategy is a brilliant one as that, you may as well set the stone rolling for the “land grab model” before anyone else do and make a fortune!

Steady model companies start with a limited capital amount! VC s isn’t interested in funding you, and hence break even as early as possible would be the Numero Uno goal initially. If you are lucky, and get profitable, reinvest the profit and hope to get bigger! If it fails, fair enough, it is very little investment that you lose and you lost the time, but you got valuable experience as to how not to do something you started! Steady models keep churning out little profits and ensure that they walk the banana skin carefully! Occasional huge profits should not blow the confidence through the roof, and prompt the employers to think that they have enough capital now, and hence go for the land grab model!! This is where the founders of the firm should instill corporate values, which would lay down ground rules about the acceptable growth rate at which that culture can be promulgated throughout the employees in the firm. The Corporate values are worth their weight in gold in such companies, and the whole bunch of guys working for the firm live and die by those values! 

Corporate values mean a little in a company that’s on the land grab mission! The tearing rush to get big fast, leaves little room for someone to sit and think about decisions that may change by the minute! Also, the employees working for these firms get the impression that things are really working out in this firm! When they see 50 odd guys joining the company every week, the employees get a feel (mind you only a feel) that they are a part of something really big!

As a rule of thumb, you can make a nice place to work, or you can promise people they'll get rich quick. But you have to do one of those, or you won't be able to hire.Some of your employees will be impressed by a company with a high chance of an IPO that gives out lots of stock options. Such people will be willing to put in three or four years at a company like this, even if they hate every minute of their working days, because they see the pot at the end of the rainbow.

If you're growing slowly and organically, the pot may be farther off. In that case, you have no choice but to make a work environment where the journey is the reward. It can't be hectic 80 hour workweeks. You have to give people decent vacations. People have to be friends with their co-workers, not just co-workers. Sociology and community at work matter. Managers have to be enlightened and get off people's backs, they can't be micro managers. If you do all this, you'll attract plenty of people who have been fooled too many times by dreams of becoming a millionaire in the next IPO; now they are just looking for something sustainable. If you're even reasonably smart company, you're going to succeed. It may be a bit of a struggle, there may be good years and bad years, but you're certainly not going to lose too much money, because you didn't put in too much to begin with.

To conclude if you are going into a market with no existing competition, lock-in, and network effects, you better use the land grab model and of course if you're going into an established market, getting big fast is a fantastic way of wasting tons of money. Your best hope is to do something sustainable and profitable, so that you have years to slowly take over your competition and this happens in a Steady Model.

The worst strategy is probably having a vision of a land grab model for your company, and work like a steady model company (However, denying it all the time!!!)

OK folks, the blazer is catching me short of breath, and someone like me to sustain even writing about business strategy for so long is making me sulk, time to head back to day dreaming!!

A[V]I