The Startup Business Model

So, you want to create a startup, but don't know the first steps? Before you go out and create your business, you need to have a course of action. While writing a business plan will help you get investors, an adaptable business model will help guide you toward startup success.

Business Model vs. Business Plan

According to the Startup Owner's Manual, "the difference between a static business plan and a dynamic model could well be the difference between flameout and success." But what is the difference between a business plan and a business model?

A business plan is a document, usually created for the sake of investors, that allows entrepreneurs to list hypotheses about their business including:

• The size of opportunity

• Targeted customers

• Distribution channels

• Demand Creation

• Revenue/Expenses/Profit

While a business plan is needed in order to get financing, the content is based purely on speculation. That's why it shouldn't be used as a playbook on how to run a business.

Unlike the list format of a business plan, a business model is a diagram that looks at the flow between the different building blocks for a startup. A business model is flexible and dynamic -- it adjusts with the changes in the major components of your company.

Elements of a Business Model

Here are the nine startup building blocks addressed in a business model:

• Value proposition - the products and services that create value for your customers

• Customer segments - who will be using and/or paying for your product or service

• Distribution channels - how you will reach customers and offer them your value proposition

• Customer relationships - the type of relationship you plan to establish with your customers

• Revenue streams - what people will pay for your product and how they will pay for it (transaction fee, subscription, etc.)

• Resources - what you need in order to deliver on your business proposition

• Activities - what you need to do to implement your business model

• Partners - who will participate in the business and why

• Cost structure - the costs involved in delivering on your business model

You can keep track of these nine building blocks by using a business model canvas.

The Business Model Canvas: A Tool for Building Your Startup

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A business model canvas is a visual overview of the nine building blocks of a business model, all laid out on the same page. Instead of just listing the components that you need to keep track of, a business model canvas is a tool that allows you to map out, discuss and discuss your business model.

The first version of your business model canvas will be a starting point where you list the guesses about your business -- assumptions that need to be proven through interaction with your customers. As customers respond to your product, the business model canvas becomes a scorecard. Instead of just posting the guesses about your business like you would in a business plan, a business model canvas allows you to revise the guesses as you gather facts about your product and customers. Customers will probably reject parts of your business model, and the business model can be changed to meet the needs of the customer.

A business model canvas helps you figure out how to make those changes, since you can keep track of alternatives to your current business model and how your business model needs to change. Every time a change is required, you can draw a new canvas that shows the changes. Over time, the startup model canvas will become a "flip book" that shows how your startup has evolved.