The Launch Path: Main article, step 4

Business Models

How we create, deliver, and capture value

What is a business model, exactly? If you ask five people you’ll probably get six or seven different answers, but the definition I like to use is very straightforward: 

A business model describes the rationale by which an organization creates, delivers, and captures value.

We create value by solving a problem customers have, we deliver that value to customers in some way, and we capture the value in the form of economic profit.

Some business models are simple. A baker knows that people value fresh bread, so she delivers that value to them via a convenient shop location, and she captures the value by selling a loaf of bread for more than it costs her to make it. Easy peasy.

Some business models are more complex. Social media companies need to provide value to both users and to advertisers, banks have an elaborate set of products and risk factors, and medical devices have to deal with unique complications, including the fact that the customer and the payer are different. Fundamentally, however, every venture has to create, deliver, and capture value in order to succeed.

Your business model is your venture’s engine of growth, one that, once it gets going, attracts customers and delivers value to them over and over again. Miraculously, it’s also an engine that eventually creates its own fuel (money) to keep itself running. Many moving parts have to work together for the whole operation to work. If you remove one part, the whole engine can stop running, even though all the other parts are working fine. Some engines work fine at 250 RPM but are inherently difficult to throttle up to twenty-five thousand RPM. Others can run at any speed you want. 

Business model innovation—new ways of creating and delivering value—has transformed many sectors in recent years. Amazon’s AWS has been wildly successful by offering a completely different way to “buy” servers and infrastructure. Stitch Fix offers consumers a completely different way to buy clothing, as does Rent the Runway. Rolls Royce has applied the pay-for-use model to jet engines; instead of buying them, airlines can now just pay by the hour—thrust as a service, if you will.

All of these examples of innovation that is not product innovation, per se, it’s business model innovation. A new way to sell established products. An innovative new way of creating, delivering, and capturing value for customers.

Back in 2005, a PhD student by the name of Alexander Osterwalder developed the Business Model Canvas as a way of expressing the business model of any business. Since then, it’s been used by many in the startup community, and a few variations exist, including the Lean Canvas, developed by Ash Maurya, which maps Eric Reis’s book, The Lean Startup, a little more closely. 

A lot has changed since Osterwalder’s original work was published, so I’ve developed the Launch Path Canvas to go with this book. It includes several aspects of the original Business Model Canvas, plus some updates, and I’ve designed it to align with the Launch Path process presented in this book. 

Once you fill it out, you will have a representation of all your particular business model’s elements and how they fit together. I find this visual representation helpful in several ways:

Filling it out helps ensure you consider all the different elements of your business model. Sometimes entrepreneurs can be so deep in the weeds about one aspect of their venture that they forget about some of the other components they will need in order for the engine to work properly. 

Every entrepreneur begins with a set of assumptions, most of which turn out to be wrong. As you fill out your Launch Path Canvas, think of everything you write as being a hypothesis, and then think of ways in which you can test, validate, and refine those hypotheses. Using the Launch Path Canvas (and writing everything in pencil!) provides a good framework for making sure you are testing your assumptions as you go along. 

Every startup has risk elements that lie in different places depending on the nature of your particular startup venture. For some startups, the risk is on the market side (Will people buy this?); for others, the risk is on the product side (Can we successfully make this?). This is how an investor will look at your startup—Where is the risk?—so that’s exactly how you should look at it as well. Filling out the Launch Path Canvas is a good way to visualize all the different aspects of your venture that will need to work together, so that you can think about where the risk is hidden. 

For startup success, you will need everyone on the team—founders and employees alike—to have a clear understanding of what makes your engine run. Successfully running Target requires a different set of engine components than running Nordstrom, even though they are both retailers. The Launch Path Canvas can be a great collaboration tool for working with your team to achieve clarity and consensus. 

Every venture has a business model, and each is a little different. You almost certainly will end up with a slightly different model than you started out with, but ultimately to be successful you need to create, deliver, and capture value for customers. Using the Launch Path Canvas in an iterative way will help you get to a sustainable and scalable engine of growth for your venture.  

Boxes on the launch path canvas:

Each box on the Launch Path Canvas represents an aspect of your venture’s business model. They are cogs in the wheel that creates, delivers, and captures value, and once that wheel gets spinning it’s a beautiful thing. Here is a description of each, and how they map to chapters in this book: 

Problem. 

As Charles Kettering said, “A problem well-stated is a problem well-solved.” Write down, in one concise sentence, what problem your startup will solve. 

Solution. 

How does your product or service solve this problem? Be specific, without hyperbole (you aren’t writing a marketing plan). 

Why it matters. 

Startups fail when the problem they solve isn’t really a problem that anyone cares much about. Avoid that by making sure you can articulate why your startup is working on a problem worth solving. 

Alternatives. 

This is your competitive landscape. As customers look at alternative ways they could solve the problem your startup addresses, what will they see? Link to a document that provides more detail on your landscape of competitors and alternatives. 

Positioning.

As customers look at the landscape of your competitors and alternatives, how do you fit in? What is your startup’s unique value proposition? 

Defensibility.

Once your startup is successful, others will try to copy what you are doing. What do you have that’s defensible? Patents? Trademarks? Exclusive distribution agreements? 

Customer.

Startup success is all about understanding customers. What are your various customer segments? Sometimes it’s demographic groups, e.g., teenagers, adults, or seniors. Sometimes it’s usage, e.g., professionals or hobbyists.Sometimes the economic buyer for a product differs from the consumer. For example, kids’ cereal is consumed by the kid (brightly colored packaging), but it is purchased by the parent (healthy and wholesome). If this is the case for your venture, then write both down.Circle which customer segment you expect to be early adopters. Within your customer segments, which one do you think will be the easiest to sell to? Let’s sell to them first, especially if they will be influential in some way.

Distribution.

Products and services can be delivered through different distribution channels. A venture can, for example, sell to its customers directly (through their own website or their own stores), through partner retailers, or through a combination of both. A software company might sell via a direct salesforce or through resellers. Which channels will you use to sell your product or service? 

Path to Product-Market Fit.

What is your path to product-market fit? What will your MVPs look like, and how will you learn from them?  

Top three benefits.

Engineers develop features, but customers buy benefits. What are the top three benefits your product/service provides to customers? 

(The ones they will pay for!) 

Economics.

Ultimately, the economics of your venture will need to work out. List the three key elements: (1) Initial capital needs; (2) Estimated time to profitability; and (3) Your best guess on CAC:LTV. Then link to your full economic model. 

Team.

In the land of startups, nothing matters more than the team. Write some thoughts on the sort of team you think this venture will need to grow and succeed. 

Remember that your first pass at filling out the Launch Path Canvas will mostly be writing down guesses since you won’t know any of these things for sure yet. Think of them as hypotheses that can be tested, validated, and refined as you go along. You’ll be revisiting your Launch Path Canvas regularly, so fill it out in a way that makes it easy to update and revise over and over again. 

That’s how great ventures are built: they begin as a set of assumptions that then, through an iterative process of hypothesis-testing, will be refined into a fully functioning business model that creates, delivers, and captures value as a sustainable and profitable engine.