So, you’ve come up with a groundbreaking business idea. You’ve sat down with your friends, family, and mentors to pitch your idea and they loved it. You have a stellar name, a unique logo, a strong business model and a snappy pitch deck that puts others to shame. You’ve got some seed money, either your own or you found an angel investor. Now it is time to step on the gas, get funded and launch. At least that’s the way it works in theory.
What usually happens is that founders pitch and pitch and pitch some more but don’t get all the funding they need. In fact, on average, VCs actually fund less than 1 percent of all the proposals they see and angels only fund from 4 to 8 percent of the proposals submitted to them.
Services Performed in a Business Model Validation Analysis
A Business Model Validation Analysis is not only highly beneficial to attracting investors, funders and even customers—it can also be a necessary component to ensuring the success of a startup or early stage venture. Simply put, the analysis can help founders to understand the likelihood that their business will be successful. It may be jarring, you may learn a few disappointing things your potential business that are painful to hear, but overall it will allow you to pivot your business model or avoid making an off-target decision. And the time to learn about potential flaws in a business model is now, before it’s too late to pivot or make corrections.
A Business Model Validation Analysis is highly complex and rich in detail. The analysis reviews all possible scenarios from every conceivable angle. Make no mistake; the undertaking of a feasibility study is time consuming and money consuming. Nevertheless, it may very well be that not conducting a study would be more damning in the time and money spent trying to recover from a blunder.
Very similar to a Feasibility Study, a Business Model Validation Analysis may include the following individual analyses:
Depending on the company, developing innovative new technologies may be an integral component of the business model. These systems may be developed internally, or externally contracted. A thorough, third-party analysis can assure potential stakeholders that the proposed technology is valid and based on sound assumptions. The level of analysis will vary depending on the complexity of the technology.
It is important to determine whether or not there are opportunities in the existing market for the proposed product, technology or service. The external, third-party analysis can validate factors such as market size in terms of dollars and volume (total addressable market), key customer segments, market demand, key competitors, potential external market influences, economic factors, regulatory factors and more. This analysis may also provide recommendations for additional market segments or target customers.
Competitive Position Analysis
This component of the analysis validates the company’s competitive position. This includes factors such as value proposition, competitive position, innovation and intellectual property protection (in some cases, intellectual property and protection of this property is covered as a stand-alone component of the analysis). Additionally, this analysis explores the competitive position from the perspective of Porter’s Five Forces of Competitive Position Analysis (Supplier Power, Buyer Power, Competitive Rivalry, Threat of Substitution and Threat of New Entry). This Analysis may include recommendations for strengthening the firm’s Competitive Position.
Validating traction is always a challenge for startups and early-stage firms. Through this component, we will evaluate the degree to which the firm’s traction is valid. This may include reviews of contracts or letters of interest, speaking with current or potential customers and comparative analyses to assess the true degree of traction the firm’s product, technology or service has gained.
This is one of the most important and fundamental elements of a thorough Business Model Validation Analysis. A strong, qualified team can overcome obstacles and in many cases, make an even mediocre product a tremendous success. But on the other hand, a weak team can lead even the most brilliantly-conceived startup or early-stage firm to disaster. This component will validate the background, strengths and experience of the leadership team, advisory board members or other key team members.
Marketing Strategy Analysis
This element will explore how the product, service or technology will be marketed to reach the targeted market. This component of the analysis can help demonstrate the degree to which the proposed marketing strategy and market channels are likely to be successful in achieving market penetration goals. The Analysis may include recommendations for additional marketing channels or strategies.
Work Plan Analysis
This element will explore the logic and rationale of the proposed work plan, schedule and milestones. This analysis will also look at the potential impact of delays or setbacks that inevitably occur during launch or scale-up.
Obstacles and Barriers Analysis
This is another vital element of the Business Model Validation Analysis. By their very nature, founders tend to be highly optimistic individuals. And while this is an admirable and important trait, it can also be a weakness because often times, they tend to overlook any potential downsides to their venture or plans. Through this analysis, we will explore potential barriers and obstacles that may inhibit progress. This will also include an examination of the likelihood of occurrence of each, along with an exploration of potential strategies for avoiding, overcoming or mitigating the potential barriers or obstacles.
This is an emerging area of importance for startups and growing early-stage firms. In recent years, there have been a number of well-documented implosions among some high profile startups and early-stage firms. In many of these cases, a weak or faulty organizational culture was at the heart of the implosion. This component of the analysis will examine the firm’s organizational culture, identify potential weaknesses and outline suggested corrections as appropriate.
This section of the analysis assesses the firm’s identified metrics, providing an objective evaluation of their appropriateness to the firm’s Business Model. Recommendations for adaptations or changes may be provided as appropriate.
Sustainability is an increasingly important area of focus for both new and existing firms. The Sustainability Analysis evaluates the degree to which the firm addresses environmental sustainability. Items in this analysis may include an exploration of carbon footprint, the firm’s overall environmental impact, sustainability-related market opportunities and recommendations for improving sustainability, among others.
This component will explore the financial aspects of the business model from various perspectives. Specifically, this analysis will include four components—Revenue Projections; Financial Needs; Valuation; and Exit Strategies:
- Revenue Projections: Sale and revenue projections are almost always a contentious topics of discussion between founders and investors or funders. This component will explore the company’s revenue model and financial projections from a variety of perspectives utilizing best- and worst-case scenarios and financial modeling.
- Financial Needs: This element explores the firm’s financial needs and looks at the degree to which the financial ask is appropriate to the revenue projections, staffing model, resource needs, valuation and other financial considerations. It may also include a Funding Stream Analysis, which explores the degree to which the proposed funding streams are appropriate to the Business Model. This analysis may also include recommendations regarding possible alternative funding streams (e.g., government grants, incentives, etc.).
- Valuation Analysis: Using various industry-standard models, this component of the analysis will evaluate the degree to which the firm’s proposed pre- and post-money valuation projections are valid.
- Exit Strategy: This component of the analysis assesses the degree to which the proposed return on investment (ROI) is appropriate, valid and likely to be realized. It also looks at the firm’s proposed exit strategy and may provide commentary and analysis of possible alternatives.
This is the most valuable aspect of the completed Business Model Validation Analysis. The final report summarizes the outcomes of each section of the analysis. In addition, it includes a comprehensive Asset Map, which outlines the key assets of the Business Model and the firm, along with a Resource Gaps Analysis and Recommendations for moving forward:
- Asset Map: A Asset Map provides information about the strengths and resources of a startup or early-stage venture. It includes a summary of the firm’s key assets (e.g., intellectual property, competitive position, untapped market potential, team, advisory board, innovation, contracts or customer agreements, etc.).
- Resource Gaps Analysis: This section provides a summary of any potential resources (e.g., staffing, skills, technical expertise, background, capital assets, etc.) that the firm may be lacking.
- Recommendations: The final component of the Analysis provides executive-level recommendations for moving forward. The recommendations summarize the study and weigh the positives and negatives of the findings uncovered through the discovery process. Recommendations for monitoring, assessing and reporting progress may also be included (depending on the Business Model). The evaluation also includes a numerical risk assessment to help founders, investors, funders and other stakeholders better understand the likelihood that the business model will be successful. Ideally, founders expect that the recommendations provided here are favorable towards the firm and the investment. However, sometimes this is not the case. Nonetheless, even if the Analysis identifies significant weaknesses, shortcomings or pitfalls, founders can utilize the document to pivot their business model and position it for success.