StartupCafe

Wisdom from John Mullins, author of Getting to Plan B and The New Business Road Test. Keynote speech at Stanford REE – by guest blogger Jill Robertson.

Most successful businesses result from the evolution of an idea over time from original concept of plan A, through multiple iterations to B, C ,D or more, rather than true execution of the original vision. How do you fast-track this process to reach a viable business model by stress testing the process of business plan formulation and factor in the ability to change course and adapt to changing market conditions and reaction to your product?

What’s needed is a fluid evolutionary model with qualitative insights to see if the economics work and to tweak as necessary. Above all use real data, real assumptions and real customers as soon as possible rather than a SWAG! Ensure that the business will make real money by considering the 5 elements that determine any business model’s economic viability: its revenue, gross margin, operating, working capital and investment model to significantly reduce the risk of failure.

Compare your idea with existing models to steal what works, avoid what doesn’t and add improvements; identify leaps of faith the as yet untested questions you are basing your business on; conducting fast, inexpensive, data driven experiments to support or refute those questions and using this data to make smart strategic changes and course to correct before it’s too late.(Analogs, antilogs, leaps of faith and hypotheses.)

Apple identified that the music industry and artists were losing money and by solving their problem they would generate a decent return for themselves and the industry. Their solution was to create a portable device to that paid tunes could be downloaded onto. Evidence from 21 million Napster users demonstrated the demand for downloading music; the portable walkman music device sold over 3oo million and the early stage mp3 player diamond reel technology gave Apple the confidence to proceed. Apple broke even on selling the tunes and the revenue was from the sale of the device

Zynga, offer free online games but make their income using a gross margin model from selling character to go in the games. Ryanair uses an Operating model simplifies all the processes. Travel agents, boarding cards, checking-in were eliminated; planes models streamlined, removing unnecessary fittings, cabin crews doubled up on responsibilities to include cleaning and to reduce accommodation costs they start and return to their base daily. Costco run their working capital from a membership subscription that is responsible for 2/3 of their income. Goods can then be sold almost at cost. Skypes investment model of disruptive technology for the telecoms industry involved only software on the pc and calls were free. Each of the examples only focus on one of the 5 elements and do it in a different way.

Moving from A to B to C to D, etc many of the major household names started on a different track at the outset but through observation of real data which they analysed as they went along enabled them to change so Starbucks who started selling packets of coffee moved into coffee bars after observation in Italy and Paypal’s 7^th stage evolution worked after a web demo worked for ebay payments.

Conclusion and thoughts from the floor: don’t lose sight of the bigger picture. Focus on the model and the opportunity rather than the nitty gritty. Consider if we can explore this further learning from design training and the NESTA tool kit for creative industries plan 74b. We need to consider the dashboard distillation incorporating sensitivity analyses, methodologies, what if close loops and feedback mechanisms that factor in the need for a plan b so that they are not an accident or a surprise.