In favor of “Old School” business Models

A great business idea is a good start. But in today’s economy, you need a solid business model to give it wings. Two years ago, business models that are based on “let’s get millions of users first, and later we’ll think of how to get money out of them…” worked fine. Today investors are looking to see something more solid.

How solid is your business model? From a financing or investing point of view, the viability of a business model comes down to basic mathematics.

Your business is sustainable if the difference between your cash inflows and outflows exceed your costs of financing...

Once upon a time, in a pre-dot-com era, business models used to be simple. Anyone could look at them and figure out how a company’s business model made ‘business sense’.

But, the dot-com crash changed that once and for all.

In the height of the dotcom boom, many investors, including venture capitalists, got caught up in what Alan Greenspan, then chairman of the Fed, termed ‘irrational exuberance’.

As a result, a lot of dotcom startups got high marks for the creativity of their business models. They had financing and investors lining up behind them.

Online businesses were the thing then. Not many people dared to question the validity of business models that clearly made little sense.

No one wanted to rain on the dotcom parade. And this is why only a small number of companies from that period survived the dot com crash and went onto become global businesses.

The companies who made it, were those who eventually figured out a sensible business model where someone is actually paying them more than they spend!

Dollars, cents and common sense

Today most investors and VCs have been cured of irrational exuberance, and with visible and painful scars to show for it. Today’s startups will rarely get marks for creative business models. Instead investors look for clarity and ease of monitizing.

Yes. There are a number of companies you can point to that have gone the route of gathering critical mass in user terms first before coming up with a viable way to revenue. If you’re thinking of companies like Waze, which was acquired by Google last year for $1.1 billion despite the fact that their monitization was not yet clear, don’t fool yourself. 2014/15 is not like 2013.

If you cannot point to a clear path to profit, it will be almost impossible to convince investors to come forward.

Investors today are very careful with investments in vague business models. There is a huge “inflation” in the number of free applications looking to gather traffic, and investors much prefer a solid mathematical business pitch where income will eventually exceed costs.

If you can show this, you’re in the right game.