Angel Investing

Kevin Learned: A better way than a business plan

Director of the Venture College at Boise State and an experienced angel investor.January 15, 2014 

I have been discussing the Lean Startup movement in my recent columns. The movement says that business ideas are based in testable assumptions, and that the first task of the entrepreneur is to test and refine the assumptions — not to write a business plan. This is somewhat heretical. For the last 50 years, we thought that the business plan was the first step on the journey to launching a business.

How might we organize these assumptions and test them if we are going to do this rather than craft a business plan? Alexander Osterwalder and Yves Pigneur suggest an answer in their book “Business Model Generation.” According to them, “a business model describes … how an organization creates, delivers, and captures value.”

Their research revealed nine building blocks to describe the business model. These definitions are quoted from the book:

1. Customer Segments. The different groups of people or organizations an enterprise aims to reach and serve.

2. Value Proposition. The bundle of products and services that create value for specific Customer Segments.

3. Channels. How a company communicates with and reaches its Customer Segments to deliver a Value Proposition.

4. Customer Relationships. The type of relationships a company establishes with specific Customer Segments.

5. Revenue Streams. The cash a company generates from each Customer Segment.

6. Key Resources. The most important assets required to make the business model work.

7. Key Activities. The most important things a company must do to make its business model work.

8. Key Partners. The network of suppliers and partners that make the business model work.

9. Cost Structure. Describes all the costs incurred to operate the business model.

Osterwalder and Pigneur combine these nine building blocks into what they call the Business Model Canvas. They put the canvas in the public domain. You can download it at www.businessmodelgeneration.com/downloads/business_model_canvas_poster.pdf.

The directors and entrepreneurs at the new Venture College at Boise State University have found this model incredibly helpful as a way to organize our thinking about a particular venture. Over a period of several months, the entrepreneurs tackle each building block by writing down their assumptions and then testing them, primarily by interviewing prospective customers.

To date, our entrepreneurs in the first cohort of Venture College have generated 480 assumptions about their business models. They have conducted 121 customer interviews and rejected more than half of their assumptions as invalid.

For example, one of our entrepreneurs believed that there would be a profitable market for an insectarium in Boise. In the language of the Business Model Canvas, she believed there existed Customer Segments that would Value a visit to an insectarium — an insect zoo — sufficiently to allow her to make a profit. What she learned through talking with prospective customers in the various segments is lots of people thought it was a cool idea but very few were willing to pay the entrance fee (Revenue Stream) so that revenues would be higher than costs (Cost Structure).

Rather than write a lengthy business plan discussing all the segments, she was able to quickly talk with people in enough possible segments to learn her idea wouldn’t work. And, finding this out before she raised the million dollars it would take to create the insectarium saved her from huge losses.

The Screening Committee chair for the Boise Angel Alliance is considering modifying the application process to ask the entrepreneurs to use the Business Model Canvas as a way of applying for funding. The angels know there are no sure things in startups. But if an entrepreneur could lay out his or her assumptions and then present the evidence he or she has accumulated to validate those assumptions, it might help the angels improve their investment decision-making.

Take a look at the Business Model Canvas as an alternative to writing an exhaustive (and likely very wrong) business plan. Search online for “Business Model Canvas” and you’ll find a great deal of information about this new way of planning for startups.

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kevinlearned@boisestate.edu, kevinlearned.blogspot.com, 426-5540

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