Every new entrepreneur wants to know how to create a successful business model. Entrepreneurs believe they know how to develop the new product or service, but wrapping the business model around this new idea is unclear and troublesome to them. Most often their solution is to simply copy what other businesses are doing. One of the biggest problems is not realizing that they have to create the business model with as much intention and thought as they do the product itself.
Let?s take a slight detour for a minute. The most common reason touted for business failure is a myth. It?s undercapitalization and it?s a convenient scapegoat. The venture capital community has conducted an industry-wide business experiment over decades. These venture capitalists have access to billions of dollars. For their portfolio start-ups, capital is not a problem. Yet, most of their start-ups fail. In fact, over the past 10 years, they have funded 30,000 start-ups. How many companies like Facebook, Google, eBay, and Amazon.com can you name? I would guess not many. That?s because few of their start-ups ever reach this lofty goal.
So, if not capital then what is the cause of new business failures? After working with many entrepreneurs over the years, I?ve concluded that failures are more a combination of the lack of resourcefulness and an incorrect mindset about what a new business really is.
Let me give you an example. In my town, there was an Indian restaurant that started. They rented out a 3,000 square foot space and spent lots of money doing tenant improvements. I rarely ever saw a customer enter the restaurant and within a year, the restaurant closed. Contrast this to another new restaurant, the owner recently graduated from culinary school. He convinced a local gourmet food store chain to let him have space in a store for a small booth. It became very popular, not only did he test out what customers liked, but he brought people into the gourmet stores. Then he opened a very small restaurant (1,000 square foot restaurant), which was quite popular too. It was always packed. Next, he opened several other larger restaurants.
What?s the difference? The first new business expected to open like a large, established business and expected the crowds would flock to them. They acted as though they knew exactly what they were doing and what would work ? the result was wasted capital. And when it didn?t work as expected, they closed. The entrepreneur became depressed. In the second case, the entrepreneur experimented with his idea, taking small steps, constantly improving and determining a winning formula.
Most new businesses fail because they don?t realize that they are really conducting new business experiments. They don?t want to admit that they haven?t figured out the formula for success. They write a business plan which further gives them the illusion of a proven path for creating something successful from nothing. Yet, most entrepreneurs have little direct experience with their business, the customers, or the market.
Let?s go back to the example of the two restaurants. The entrepreneur of the failed restaurant had access to capital, while the second one didn?t. In the case of the successful restaurant, the culinary graduate didn?t have the availability to just open a big restaurant and was resourceful. Just because you have the ability to spend, doesn?t mean you should. Ask yourself, are you just conducting a bigger business experiment than you need to?
The mindset missing from most new entrepreneurs is not realizing their new business is an experimental start-up. Just by thinking about it as a series of business experiments creates a thinking path that about trying new things and expecting different avenues to fail. It?s about creating a series of business experiments to discover the secret to your success. Instead of writing that business plan, write a concept plan and then create a strategy business experiments. The key to crafting a killer business model is using a systematic process for prioritizing, designing, and conducting business experiments.
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