Start-ups and business model discovery: A talk by Mike Maples

In a talk about ‘thunder lizards’ and ‘pivots,’ Mike Maples discusses the topic of business model discovery. In his view a start-up exists for one reason only: to find a business model that turns its innovation into economic value.

Mike Maples pictures a business model as flows between the company and the customer (see example). Red flows go towards the customer and represents what costs the company money. Green flows come back to the company and represent what the company gets paid for. The more the green is larger than the red, the better the business model. While this is straight forward, most start-ups are not able to draw their business model.

Business models matter according to Mike Maples because there are maybe 20 to 30 flows and every flow is a strategic hypothesis that the company has to validate. If these hypotheses do not hold then the company has to ‘pivot’ and make a discontinuous change to the business model. Therefore, start-ups need to be dynamic and in a discovery mode.

The ultimate goal of business model discovery is to get product/market fit, meaning that the product can be offered to the market in a scalable and profitable way. Alter a start-up has discovered its business model it transitions to a real company. So a start-up is not a small version of the large company, it exists to discover the business model with the highest potential. Mike Maples discussed three forms of pivots and an example for each: pricing pivot (ngmoco), product pivot (Chegg), and an entire company pivot (Odeo/Twitter).

The start-up needs the tactical ability to iterate and the strategic ability to pivot. The dangerous is that start-ups get stuck in iteration after iteration and do not take aggressive, creative pivots. However, taking pivots should not be underestimated, it can be hard and painful, requiring to throw away what has cost a lot of effort and sacrifices. This means letting go of some things that are precious, like a product, a group of customers, a website, revenues, a strategy, etc.

These ideas have a strong relation with innovation theory. However, where innovation theory often discusses the inability of established companies to change radically, Mike Maples stresses that this problem is as relevant for a start-up who run the risk of iterating instead of pivoting. In addition, it shows that next to tools and techniques for product and process design and innovation, there is a strong need to support business model innovation, both for the content and for the process.

See also an earlier post on Business model shift.