Musings of a VC in NYC

MBA Mondays: Revenue Models

A revenue model is "the system design by which a business monetizes its services". That comes from Wikipedia. I like that definition. Short, sweet, and to the point.

I am going to spend the next couple months talking about revenue models for online businesses. We've started off this series by crowdsourcing a list of the various business models that online businesses use. I will use that list as an outline for this series:

Here is the outline:

- Advertising - the service is free to use, marketers pay to reach your users via advertising

- Commerce - sell something to your users, keep some or all of the proceeds

- Subscription - charge your users monhtly or annually for the opportunity to use your service

- Peer to Peer - connect people together in a network, take a small piece of the activity that ensues

- Transaction Processing - settle transactions and take a small piece of the transaction for doing so

- Licensing - charge users once upfront for the opportunity to use your technology

- Data - sell the data your service generates

- Mobile - Mobile is not a revenue model, but we will discuss how mobile presents some unique challenges and opportunities for monetization

- Gaming - Gaming is not a revenue model, but we will discuss how gaming presents some unique challenges and opportunities for monetization

Of course these categories are not mutually exclusive. Many web/mobile services will use multiple revenue models. Freemium, for example is a combination of advertising and subscription.

I will kick off this series by making an important point about focus. I strongly believe that entrepreneurs should pick one revenue model to start with and focus 100% on making that work before rolling out another one. It is very hard to execute two or more revenue models at the same time. Better to nail the first one before rolling out the second.

I am a fan of starting with the most native and easiest to execute revenue model first. Ideally it will be one that improves the user experience or at least in no way harms it.

I am looking forward to writing this series. We'll start next week with advertising.

MBA Mondays: The Revenue Model Hackpad, Take Two

So I messed up bigtime yesterday.  I created a "final version" of the revenue model hackpad and locked it down so hard that nobody could even see it. 

What happened is I am using a product, hackpad, that I don't really know how to use correctly. I am learning how to use it in real-time. Which is how I learn to use everything. Screw the manual. Just turn it on and get going. That can work, but it results in fails like we had yesterday. The truth is I still don't know exactly what I am doing with this product, but I am figuring it out.

The "final version" is now fully public but locked down for moderation. Whatever that means. I think it means is we can continue to edit this "final version" but I get to approve all edits.

Anyway, here's a link to the final version. There were some edits to the initial version yesterday that I like a lot. The transaction processing section was re-organized in a nice way. And a few more revenue models were listed. I will work to merge the two but don't have time to do that this morning.

Again, I want to thank everyone who has been working on this list. Crowdsourcing information is messy but together we have built something that is way better than I could do on my own.

MBA Mondays: The Revenue Model Hackpad

The idea of peer producing a comprehensive web/mobile revenue model list was a success. The hackpad I created and linked to last week got a ton of contributions. I took the time this morning to clean it up a good deal. I will outline the high level changes I made in a bit. But since that hackpad is still wide open, I also made a final version and I have made it invitation only so I can control the edits this one gets. There may be a way in hackpad for the initial author to lock down a hackpad but I couldn't find it, so I did it this way.

So what edits did I make to the wide open hackpad? Well first, I tried to clean up the examples and make them as definitive as I could. The more well known a company/service is, the better example it is. I also took out many of the multiple examples. I think one is generally sufficient. I also took out the revenue models I thought were duplicative or slight variants of other revenue models. And there were a number of sections at the end that I would call "business models" as opposed to revenue models. So I took them out. Finally, there were a few entrepreneurs who were using this hackpad as a way to promote their companies. In effect, they were spamming the hackpad. I took out everything that felt like spam to me.

We are left with nine categories:

I think six of them are truly definitive revenue model categories (advertising, commerce, subscription, transactions, licensing, and data). The other three (peer to peer, mobile, and gaming) could be folded into the first six since they mostly map to existing models (mobile ads are ads). But these three categoris are unique in many ways and so I felt like leaving them in even though it's not as clean this way.

The "final" hackpad still needs work. There are some entries that are missing examples. I noted them with (??). There also may still be important or emerging business models we are missing. If you would like an invite to help fix the final version, please leave a comment to this post and I will invite you if I think your edit is useful.

My hope is by next week, we will have a truly definitive list of mobile and web revenue models and then I can use the list as a template for the MBA Mondays series on Revenue Models. Thanks for everyone's help on this.

MBA Mondays: Revenue Models

We are kicking off our next series on MBA Mondays with an assignment. We are going to peer produce an exhaustive list of revenue models for web and mobile businesses. Then I will publish that list and use it as a template to do this series. I am not going to write a post on each revenue model but I am going to write posts on the top ones as well as discuss the pros and cons of each.

I've created a hackpad that we will use to do this assignment. I've filled in a few of the most obvious revenue models and have started grouping them into the big categories (advertising, commerce, subscriptions). There are certainly more revenue models and additional big categories that aren't on the list yet. So please go take a look and add anything that you think is missing.

I will publish the comprehensive list next monday and use that to kick off this series.

MBA Mondays: Next Topics

Back at the end of April I wrote a post asking for ideas for the next few topics for MBA Mondays. Out of that came the series on People which I followed with a series on Sustainability. It's time for a new series and I want to check in with everyone to see where you'd like me to go next.

The Disqus thread from that post in late April are full of suggestions so you might wade into them and see which suggestions interest you most. Or simply leave a comment with a topic you'd like to see me do a series on.

MBA Mondays: One More Thing On Sustainability Before We Move On

I'd like to tie together two posts and make a final point on Sustainability.

In my first post for the Sustainability class, I wrote:

Clay Christensen talks about this kind of thing all the time. Big company executives are asked to calculate an return on investment (ROI) on the investments they want to make. If the ROI isn't greater than some minimum hurdle, the company doesn't make the investment. And so along comes a smaller competitor who makes the investment and they eat the big company's lunch.

ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don't use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business.

And then the man himself, Clay Christensen, went and wrote a post for the NY Times yesterday which I highlighted in yesterday's What I Am Reading post. Clay wrote:

So we taught our students how to magnify every dollar put into a company, to get the most revenue and profit per dollar of capital deployed. To measure the efficiency of doing this, we redefined profit not as dollars, yen or renminbi, but as ratios like RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).

Since this is called MBA Mondays and we are supposedly teaching a MBA style curriculum, I want to emphasize this point. Do not use Wall Street tools to evaluate investment decisions in your companies. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business forever.

But Clay's post for the NY Times yesterday makes a broader point. If the folks who allocate capital in our society - venture capitalists, hedge fund managers, mutual fund managers, etc - are using IRR, ROCE, RONA, then they are going to allocate capital to companies that are making efficiency oriented investments, not empowering investments. And our society will continue to be awash in capital with no game changing  empowering investments that create new industries.

Clay suggests that we measure our returns in "dollars in dollars out" and forget about time, " profit as dollars, yen or renminbi". That's they way I was taught the venture capital business back in the 80s. Cash on cash, dollars in dollars out. That's what matters. If it takes a decade or more, who cares? The slow capital approach.

So if MBA Mondays is a school of business, then I hereby outlaw IRR, RONA, ROCE, from our lips. We aren't going to teach those tools and we aren't going to talk about them either. We are going to talk about making money the old fashioned way. In gobs and gobs, but slowly over time, with our survival instincts fully engaged. Let's hope others do the same.

MBA Mondays: Sustainability Class Wrapup

I've enjoyed teaching the Skillshare class on Sustainability. I've learned a few things about the hybrid class model and I have shared them with the Skillshare folks. It's tantalizing to think about the power of teaching a class to 2,731 people at one time. But when I compare that to the power of teaching 75 people in person, the hybrid model shows it's weaknesses.

I need the real-time feedback from the students in the class. I need to see if folks are getting what I am saying or if eyes are glazing over. I need to know if I need to take another tack on the material before moving on. And I don't get that with a massively open online approach.

So my next class is going to combine the in person dynamic with the power of a massively online approach. The best thing to come from the hybrid class model is the idea of using google hangouts/youtube to broadcast the class to everyone. I am going to do that from now on.

I also like the idea of teaching a four part class with a blog post each week. I can build on that model too.

I am less happy with the discussions on Skillshare and that they did not tie into the discussions that happened on AVC. I need to figure out how to make all of that work better. It's obvious that a teacher (me) can't give real time feedback to 2,731 students. And I think leveraging the students to give feedback to each other (the disqus model), is right. So it's worth working on this model to perfect it.

I want to thank Michael from Skillshare for prompting me to write about Sustainability this month. As I said in my first blog post on the topic, I think Sustainability is a great model for business owners and leaders to take in thinking about the highest objectives of the company. If I have contributed anything to the way business leaders think about Sustainability, then I have accomplished my goals with this class.

I am going to postpone my final office hours which were scheduled for this evening at 6pm eastern time. Hurricane Sandy looks to be coming through NYC at that time and I don't know what that may cause me and my family to be doing at that time. We live right on the Hudson, at the border of Zone A. So I've got a few things on my mind today that fit right into this Sustainability theme. I will report back on a new date and time for my final office hours.

Stay safe everyone on the east coast today. Let's hope the hype is overblown. And let's prepare as if it isn't.

How To Be In Business Forever: Week Four

This is the final post for my Skillshare class on Sustainability.

I will not do office hours this evening but I will do one final office hours next Monday, Oct 29th, from 6pm to 6:30pm. The link to attend that office hours is here.

For this final post, I want to focus on the Business Model Canvas and how to think about sustainability in the context of creating your business model. In order to talk about that, I went ahead and created a Business Model Canvas of my own using bmfiddle.com.

My Business Model Canvas is for a Bitcoin Bank.

If you think about banks in the real world, they are high cost affairs, with huge fixed costs including large branch networks. I am always shocked by how many bank branches I pass in a five to six block walk in NYC. The way these banks sustain these high costs is with large fees for depositors and high spreads between their cost of funds and the interest rates they charge borrowers.

So in thinking about how to create a sustainable Bitcoin Bank, I focused on a few key things:

1) keep the operating costs super low except in areas where there is a unique and important consumer value proposition

2) make it easy to access the bank and your balances within the context of low operating costs

3) keep the fees charged to customers as low as possible

4) allow third parties to build busineses on top of our business

The result is a super simple business model. My Bitcoin Bank would charge a very low monthly fee per Bitcoin deposited and nothing else other than pass alongs for any costs incurred in moving bitcoins in and out of the bank on behalf of our customers. We would not have any branches. We would operate via simple, easy to use mobile and web interfaces. We would keep our operating costs super low with the exception of one area where we would make a large and ongoing investment - in hiring and retaining a top notch and super experienced security team. We would allow third parties to create related businesses on top of our API. Services like lending, investing, etc would not be provided by our bank but by third parties who access our customers via our API.

I believe this business would be highly sustainable because it would focus on one very simple value proposition - security. And in return it would charge the lowest fees possible in order to make and sustain a profit. It would make it very difficult for others to price lower fees for storage and security. And it would benefit from the ecosystem of third party value added service providers operating on top of its API.

Here are some decisions I made in order to increase the sustainability of the business:

1) A focus on very low fees to our customers so that it will be difficult for competitors to undercut our offering.

2) A decision to focus on only one thing, security, and allow others to build additional services for our customers. This allows us to be best in class at the one thing we choose to do and it means our customers can choose to pay for additional services or not, and always on their own terms.

3) A cost model that keeps operating costs as low as possible in all areas other than security, which is our key consumer value proposition.

So when you are finalizing your Business Model Canvas for your final project for this course, think about what your key value proposition is and who is your primary customer and focus on that. And think about what you can do in your revenue model to make it so that it will be hard for others to come in and undercut you. And think about your cost model and how to keep it as low as possible while allowing your company to be best in class at what it does.

Please submit your final Business Model Canvas project here by Thursday, Oct 25th, 11pm EDT. I will pick out a bunch that I like and review them next week on office hours.

That will be the final event in this course. I hope you have enjoyed this class/series. I think sustainability is an important and overlooked aspect of business and it needs to built more tightly into business thinking.

How To Be In Business Forever: Week Three

It is week three of my Skillshare class on Sustainability in Business.

I will be doing office hours today at 6pm eastern. You can watch them here on this link. If you want to submit questions for office hours, you can do that here. Just like last week, I will review a few business model canvas projects and then will answer questions for the rest of the office hours.

This week I'd like to talk about company culture and how it impacts sustainability. If you want to be in business forever, you need to build a culture that sustains the business. I talked a lot about this in a post on culture a while back. You should give that a read as part of the assigned reading for this course. Here is the money quote from that post:

Companies are not people. But they are comprised of people. And the people side of the business is harder and way more complicated than building a product is. You have to start with culture, values, and a committment to creating a fantastic workplace. You can't fake these things. They have to come from the top. They are not bullshit. They are everything. There will be things that happen in the course of building a business that will challenge the belief in the leadership and the future of the company. If everyone is a mercenary and there is no shared culture and values, the team will blow apart. But if there is a meaningful culture that the entire team buys into, the team will stick together, double down, and get through those challenging situations.

I bumped into a friend last week who works at a company that is going through a difficult time right now. I asked him about the "talent drain" that is going on in his company. He said "the ones who were in it for only the money are long gone, the doubters are gone now too, and we are left with the true believers now."

I thought to myself that the mistake the CEO of that company made was bringing the mercenaries and doubters into the company in the first place and allowing them to stay.

Mercenaries have no place in your company and your culture. Doubters are a bit different. You certainly don't want to create a culture of "yes maam" in your company. So some doubting is healthy. But it should be out in the open. The doubts should be expressed upfront and they should be discussed and debated. But once the decisions have been made, everyone needs to get behind them. Ongoing doubting is not helpful to a culture.

True believers are required to get through the hard parts. And you need to be the leader who inspires the true believers. Watch this short video where @dens described what he did when Facebook launched a competing product to Foursquare.

You get true believers in your company by giving them something to believe in and someone to believe in. That is you. Even if you are scared shitless or bummed out, you can't show that to the team. You have to lead if you want the team to follow.

The thing that you give them to believe in is called a vision. Make it a long one, a very long one. I like Bill Gates' vision for Microsoft:

When Paul Allen and I started Microsoft over 30 years ago, we had big dreams about software,” recalls Gates. “We had dreams about the impact it could have. We talked about a computer on every desk and in every home.

A computer on every desk and in every home. That was a big hairy audacious goal in the late 70s. And it is exactly what happened, at least in the developed world.

The cool thing about that vision is it is drop dead simple to understand but took decades to execute. That's a long vision that your team can buy into and stick with for the long haul. That's what you need.

So if you want to build a business that lasts, you need a big and long vision and you need to be a leader who can inspire the team to believe in the vision and to believe in you. You need to hire folks who will stick around for the long haul and you need to be open to the doubts and doubters. But if they keep doubting, you need to part company with them. Don't hire mercanaries. They won't work no matter how hard you try.

Building a culture that can sustain the business is the most important investment you can make in your company. Once you've gotten a product into the market and proven product market fit, there is nothing that is more important than team, culture, and values. It is the glue that holds the whole thing together for the long haul.

How To Be In Business Forever: Week Two

First we'll take care of some logistics and then we'll get to the post of the week in my Skillshare Class on sustainability in business.

Office hours will take place at 6pm eastern today. The link to the hangout is here. I don't like the way office hours worked last week and so I am changing them up. I will start by asking people to post questions in this discussions section. Then I will review a few business model canvas projects live for everyone to see. Then I'll finish up the 30 minute session by answering as many questions as possible while time lasts.

There are roughly 80 business model canvas projects posted so far. You can see them here. Since I will only be able to review a few of them today in office hours, it would be great for anyone who is taking this class to stop by and pick a few to give comments on.

If you are looking for a web-based tool to build and share your business model canvas, this thread mentions several of them.

OK. Now that we are done with the logistics, I will move on to my second post in this series.

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Last week we talked about long term thinking vs short term thinking. But sometimes, no matter how long term you are thinking, things happen that you didn't plan for and they can impact your business. Actually, this always happens. And that is when you need to adapt.

You will not stay in business forever if you don't adapt to changing market conditions. This doesn't mean adopting the "business model of the hour" model and this doesn't mean pivoting either. What I am talking about is the once every few years "oh shit moment" when you realize that the path you are on isn't going to work in a year or two and that you need to make some changes.

This is a frustrating realization. I have a good friend who has been running a business for more than a decade. He told me a few weeks ago that he thinks the market he has been operating in is changing and it is starting to impact his business. And just when he had everything firing on all cylinders.

That's how it is in business. Just as you are taking the victory lap for the kickass execution you and the team have delivered, the track takes a tilt and things start getting harder. Businesses don't operate in a vacuum. They operate in a dynamic ever changing market that is going to make things difficult for you, especially if you want to be in business forever.

I think some examples will help. The one that comes to mind front and center is Microsoft. By the middle of the 1990s, Microsoft had it all. They had a dominant share in desktop operating systems and a dominant share in desktop apps. They were literally printing money. Then the commerical internet happened. Netscape showed up. And Microsoft's market changed, forever.

Microsoft did adapt. They built Internet Explorer in reaction to Netscape and then used their desktop dominance to push it into the market, hurting Netscape so badly that it had to sell to AOL. That got Microsoft into trouble with the Justice Department and they were investigated as a result.

But what Microsoft didn't see in 1995 was Google because it didn't exist. And they didn't see the emergence of cloud based productivity apps because they didn't exist. In hindsight, it is pretty easy to see how fundamentally transformed Microsoft's business has been by the Internet and it is also pretty easy to see that they have not been able to adapt sufficiently to maintain any semblance of the dominance they had in the mid 90s. This stock chart tells you everything you need to know about what the Internet did to Microsoft. They may be surviving but they are certainly not thriving.

Another great example is RIM. I don't even need to tell this story. Everyone knows that the dismissive tone and stance that RIM's management took toward the iPhone and what it represented was essentially the death knell of a great company. I suspect they wish their stock chart looked like Microsoft's.

But let's look at a more positive example. As Ron Ashkenas points out in this HBR article, IBM saw that the hardware market was changing and their competitive position in it was changing with it. They sold their PC hardware business in 2005 to Lenovo and doubled down on consulting and related services. Their stock chart tells the rest of this story.

Adapting doesn't always mean exiting a business that you decide has issues. You can also retool, reshape, and refocus the business. A company that I've worked with for more than a decade saw the industry it services go through some painful transitions in the 2008/2009 downturn. They built an entirely new line of products that service the growth part of the industry while working to maintain the older products through an orderly and gradual decline. It's been a difficult transition because it has meant that the company's top line hasn't grown during this transition. But the company is still in business and the new products are growing quite nicely.

Every situation is different and I don't have some "silver bullet" to help you all think about how to figure out when to adapt and when to stay the course. But I do have some observations. The comfort of a strong balance sheet (and a nice looking stock chart) is often your enemy not your friend in these situations. The most agressive CEOs I've seen in these situations are often the ones with less than a year of cash in the bank and survival instinct in full on mode.

Another observation is that getting your organization to adapt is harder than you might think. Organizations have inertia. The bigger they are the more inertia they have. If you think you need to adapt your business quickly, you will need to figure who is in the boat with you and who is not and make the changes you need, particularly on your senior team, to align the team with mission and get going.

Finally, you cannot be in adaptation mode all the time. If you map out long living successful businesses, you will see they go through periods of great stability followed by periods of great change and then move back into stability mode. You have to know when to get into which mode and you need to see each one through to its logical conclusion.

Given how hard all of this is, you might wonder if you really want to stay in business forever. The answer may be no. But even if it is no, you had better plan for and act like you do. Because I am certain that if you don't, you won't.