Business Model Innovation

An iterative development approach to business model innovation

August 19, 2021
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More than 5 million entrepreneurs have used the Business Model and Value Proposition Canvas both of which are excellent tools to define core functional areas of a startup. The vencortex team highly recommends using both along with some of our other favorite concepts such as The Golden Circle and the Lean Startup when developing a new venture. In order to further support entrepreneurs, our team developed a complementary tool that specifically supports digital ventures in establishing.

With the experience and support of business incubators, accelerators, VCs and corporate innovation arms, vencortex developed the Digital Disruption Design (D3) model that helps corporations, investors and entrepreneurs with concrete strategic decision-making and data-driven decisions. The model has been real-world tested in collaboration with the University of St. Gallen with over 200 participating digital ventures. D3 guides users through the use of data-driven methods for validating assumptions and iteratively grow their ventures. The framework is integrated into our vencortex platform and its decision framework.

WHY WE BUILT IT

Defining the value proposition for your customers and designing new innovative models are highly creative processes. However, when it comes to implementation and concrete strategic execution in digital ventures, a more structured, process-driven and decision-centric approach is required to succeed. While existing tools work well for the creative part, both startups and big companies struggle with making decisions for execution. We built on the idea of the Lean Startup for iterative development, testing, and learning in order to provide a process that helps entrepreneurs make decisions on how to act at any given point in time.

HOW IT WORKS

The D3 model is a stage-gate process with decision points at the end of each stage. Each stage is an iterative process of making decisions, testing hypotheses, validating assumptions, and learning. Therefore, we provide a set of decision possibilities for each dimension and metrics for making progress measurable.

The D3 model can be applied for various stakeholders, such as startups building their business or corporates trying to define their digital future. In addition, it can help incubators, accelerators, and investors monitor their startups progress.

THE D3 MODEL

STAGE 1: TEAM — SOLUTION FIT

It’s no coincidence that over 70% of Silicon Valley VCs mention the team as the most important determinant of whether they will invest in a startup. But what’s not often mentioned is that a great team is only as good to the eyes of an investor as the fit they have with a solution. That connection is the core of any innovation effort. You don’t need the perfect team or the perfect idea in the beginning but you do need to make sure your team and your solution have a strong fit.

1.1 VALUE PROPOSITION

Decisions on the value proposition are important for finding problem-solution fit. In the beginning, it is all about defining who is your user, what are her characteristics, what job does she try to do and what current approaches does she use for this, and finally what is the user´s pain point in this vein?

To solve this problem for a specific user, you have to decide what your solution is all about. Therefore, you need to define a set of features that are required to solve an existing pain point. Depending on the status of the solution (if you are in an idea phase, trying to build an MVP or have a working version of your solution), it is crucial to decide on the relevance of features for providing value to a user. Obviously, you can´t change the world in one day. So carefully test and decide on the most important features for offering a minimum viable product to the market.

Finally, entrepreneurs need to define and clearly state the value they provide to the user in both B2B and B2C settings. Thereby, keep in mind that value is all about people. That means although if you provide a B2B solution offering more efficiency in some business process, do not forget about the social side of the user and how you attract this.

1.2 TEAM

To make this solution work, you need an amazing team. The persons on the team are frequently seen as the most important element to define the success of a new venture by investors, corporates and entrepreneurs. Carefully assess if you have the right people on your team based on:

  • Domain experience: Covers the knowledge that your team has about a certain industry (for instance health care), a specific customer segment (for instance B2B) or a specific customer size (SMEs vs Huge Corporations vs Startups)
  • Technology experience: Defines the expertise your team has in solving the technological challenge required for making innovation happen. This becomes more and more relevant when we are talking about deep tech ventures such as AI, robotics or blockchain technology. In this case, it is crucial to have not just a tech guy that understands the technology well but also the whole team to have a general feeling of what is possible with it and what is just a buzz.
  • Venture experience: This includes for instance if any of the team members has been an entrepreneur before, was leading teams or understands what it takes to run a startup.
At this decision point we recommend you to measure how successful you are in the following dimensions:
1. Problem Solution Fit
2. Team Experience
3. Team Completeness
4. Team Capability to Execute

STAGE 2: PRODUCT MARKET FIT

Once accomplishing the first stage of D3 in the second phase your team needs to find product-market fit. This is one of the most central stages for every startup and one of the main reasons why innovations fail.

2.1 MARKET

The market defines your customers. Be aware of the fact that there might be a difference between your customer (the one paying for your solution) and your user (the one actually using it). In this you need to find out the customer you are addressing (B2B vs B2C vs B2G), the industry that you go for (e.g. health care), the special line of business (e.g. controlling) you attract in B2B settings, the segment of the market you are going after and its maturity, and the geographical niche you are marketing to (local vs global). Moreover, every investor will ask you for the size of the total market (TAM), the niche you address (SAM) and the potentially attractive market for your solution (SOM).

2.2 COMPETITION

After identifying your market, it is crucial to watch out for competitors. Many startups say they don’t have competitors, which is typically not the case. Although, competitors might to different things (comparables) they might still go after the same customer as you do. So be aware of them.

We highly recommend you to map your competitors’ size:

a market full of startups or huge incumbent players), their approximated market share and your specific unique selling proposition (USP). Your company might have different advantages for every single competitor. Therefore, there is probably not just one USP but many for each specific context.

2.3 STRATEGY

When you know about your market and your competitors, you need to define your strategy to get where you want to be. We divide between four dimensions of strategy: market strategy, tech strategy, platform strategy, and IP strategy.

The market strategy provides you guidance on how you acquire customers, sell your solution to them or retain them over time. Especially in the beginning having a precise go to market strategy is crucial to acquire, activate, retain, and gain revenue from your customers as well as ultimately get to a point where they love your solution so much that they will refer it to others.

Tech strategy defines your decisions on which technology to use or how mature this technology. Be aware that deep tech is a great thing (and we love it) but many investors might be resistant to accept the risk of heavy R&D investments and high tech uncertainty. Moreover, you need to decide what are your technological core competencies and what do you need to outsource to scale up development and how technologies are licensed. Using open-source technology can be a good strategy but you need to be aware of licensing issues that may arise.

Platform strategy is a central decision you need to make in most digital settings. The first decision is if you are developing your own technological platform or marketplace or you want to join existing ones. While using existing platforms can provide you great benefits related to tech resources, brand name or customer access it also can make your startup dependent on a certain technology or a certain platform provider thereby increasing switching costs. If you decide to join an existing platform you need to know which one to work with or if you want to do multihoming across several platforms.

Finally, IP strategy defines how you protect your IP or gain access to the required IP. In the digital age, we are not only talking about patents, copyrights or trademarks when it comes to IP but also data. Having access to data is a critical enabler for many digital ventures and many startups fail because they don´t have access to the data they would need to make their solution work. Therefore, you need to define where you get the data from and who controls or owns the data you use.

At the decision point we recommend you to measure how successful you are in the following dimensions:
1. Customer Value
2. Market Strategy
3. Market Timing
4. Protectability

STAGE 3: BUSINESS MODEL FIT

Now you have a great idea, an amazing team and a clear understanding of your market, competitors, and strategy. The next thing to figure out is your business model and a supportive ecosystem to capture value for your company and prove traction that this business model works.

3.1 BUSINESS MODEL

The business model in this case basically defines how you make money out of your company. This includes decisions on how to charge your customer, the pricing and what you charge your customer for.

Your revenue model basically defines how you charge your customer, for instance on the basis of a monthly subscription, one-time sale or usage-based. This decision then also defines how often the revenue from a customer recurs over time.

The monetization decision is related to what you actually charge your customers. While this sounds obvious in the good old days of selling a product, digital solutions allow various ways to monetize for instance the consumption of service, the access to a network of technology, the sales of data or even combinations out of those. Digital technology allows you to come up with creative decisions on how you monetize within your startup.

Finally, the pricing decision clarifies the amount of money you charge from your customer. The great thing is that in the digital age this doesn’t necessarily be fixed but can be assessed quite flexible based on the amount of usage, through auctions or even freemium.

3.2 ECOSYSTEM

A supportive ecosystem is crucial for every startup. This includes partners, supporters, and advisors that help your company grow. Decide on what kind of partners you need (for instance technology partners or sales partners) and how you related to them (for instance through contracts, strategic partnerships, etc.). You should be aware that digital technology requires a decent amount of openness and although companies might compete with you on certain things they still can be a great partner for other things.

Supporters are for instance universities, incubators, accelerators or corporate sponsors that help your company in the early stages with technological and business issues, access to the market or use of resources.

Finally, advisors are people that act as mentors and evangelists of your business. Decide wisely on which people you want to have on your board to increase your network and help your startup grow.

3.3 TRACTION

Early traction is one of the most truthful indicators for deciding if your company is on the right path. There are many metrics for measuring startup traction and there is no one size fit all approach. However, a data-informed approach to startup decision making is crucial.

Some clear indicators for the quality of your business model are how your users interact with your solution. Luckily, digital solutions make it much easier to track such data. Those metrics are for instance how many users show interest for your solution, how many find value and stickiness in there and are actively using it, and finally how many of your users actually pay for it and therefore create revenue for your company.

Moreover, monitoring trends in those metrics is a valuable signal for your business model fit. The total number might be not comparable in many settings. For instance, having 10 active B2B users might be a totally different signal than having 10 active B2C users for your solution. However, trends give you a clear signal of your progress over time and can be used to guide the decisions on your business model.

At the decision point we recommend you to measure how successful you are in the following dimensions:
1. Desirability of your Solution for the Customer and the User
2. Implementability of your Solution and Business Model
3. Scalability of your Business Model
4. Profitability of your Business Model

STAGE 4: DUE DILIGENCE

After having a validated business model, it goes right down to business, where numbers, especially financial numbers, play the defining role for decisions. You will always come at this point. No matter if you are a startup raising money and receiving duel diligence from a VC firm or if you are running a corporate innovation project and you need to define a clear business case to make executives invest in continuing the effort.

4.1 COMMITTED CAPITAL

The first dimension we see as critical is committed capital. That means how much money has already been spent to come to the point where you actually are. There are various philosophies on this dimension. While some investors might believe if entrepreneurs put some of their personal savings in there is a sign for having more skin in the game, others might be impressed if you were able to build an MVP just with your personal work (sweat equity). So depending on the decision you want to take you should take it either as an indicator for your commitment or for projecting how less money you could use in the worst case to go the next steps.

Besides the amount of capital committed, the source provides interesting insights for both your investors and yourself. While bootstrapping is a great thing, your friends and family providing money is not necessarily a good indicator for a valuable business opportunity as they are probably biased towards supporting you. On the other hand, receiving money from incubators, accelerators, grants or product crowdfunding can give you strong guidance if other people also believe in the viability of your business. Moreover, this also works as a positive signal for your value to potential investors.

4.2 FINANCIALS

Financials are probably the least liked work of entrepreneurs and the importance of financial projections in the good old days of business plans is shrinking. However, financials are still an important indicator for how realistically you make assumptions and they will keep you on track in the face of running out of money. We highly recommend you to do financial calculations for your revenue, COGS, operating, S&M and R&D costs as well as your profit on a monthly basis and continuously update those numbers. Those numbers give you a good indicator on your burn rate (how much you spend every month), your runway (when you will run out of money) and your break-even requirements (when you will make profits).

4.3 PROJECTIONS

The final part of having a solid due diligence analysis is your projections about the future. Those show that you have a clear game plan and realistic assumptions about your business.

Good projections require you to make you a precise plan for milestones you will hit along your journey. Moreover, setting such milestones allow you to make a more elaborated assumption about the amount of funding you need to get there. Remember you just want as much money as you need to hit your goals from investors, nothing more and nothing less.

Finally, detailed projections for your business case are required for guiding your decisions and getting investors to believe in the viability of your project. Depending on if you are an entrepreneur raising money or a manager for an innovation project at a corporate, you need to make sure that the business case is easily understood, logic and the assumptions are both reasonable and viable.

At the decision point we recommend you to assess how analysts will probably assess you along the following dimensions:
1. Market Potential
2. Market Risk
3. Tech Potential
4. Tech Risk
5. Operational Risk
6. Financial Risk
7. Legal Risk

STAGE 5: FUNDRAISING

After going through the stage of due diligence, you should have a good understanding of your business, and the process to succeed. Now it comes to getting money to make your vision reality. In this phase, you need to be clear about ownership in your company and the deal that you envision to happen between you and your investor.

5.1 OWNERSHIP STRUCTURE

The ownership structure is a crucial decision point for every startup as it defines who owns, and how much they own of the project. For most startups, these decisions tend to be straightforward initially (even split among the founders), although the implementation tends to be much more complex. Other considerations include, how much of the shares are kept as an option pool for employees and having clear vesting schemes for the team’s shares.

5.2 DEAL TERMS

Last but not least, the deal terms. Those are frequently negotiated after having a concrete investor at hand. However, we recommend you to have an idea of how your ideal deal terms look like. The most important decisions from your side as a founder is the amount of money you want to raise, the security you offer (debt, equity or convertibles like SAFE notes) and the valuation you have in mind. Have a clear rationale for this valuation because people will ask you how you came up with this number.

At the decision point we recommend you to assess how your potential investor will assess your fundraising deal along the following dimensions:

1. Deal Quality for Both Parties
2. ROI Potential of the Investment
3. Investment Risk