Is Your Business Model Sound?

December 17, 2015

“If it’s a penny for your thoughts and you put in your two cents worth, then someone, somewhere is making a penny.”  – quote from Steven Wright.

I love to listen to entrepreneurs and advisors talk about the value of a new venture. Even more enlightening to me is the discussion that centers around the proposed business model. Of particular interest is when the conversation moves to potential funding and the steps one must take to be successful at this difficult task. One slant I have heard a number of times is a common theme about the difference in approach between West Coast and East Coast investors. There seems to be a pretty consistent “myth” which goes something along the lines of “West Coast investors are more likely to invest in an idea / concept whereas those on the East Coast want to see models and projections.” It almost comes across as requiring you to develop a viable business model for those on the Business ModelEast Coast but you can “coalesce the vapors of human experience into a viable and meaningful comprehension” to win over West Coast money. (My thanks to Mel Brook’s character Comicus from History of the World; Part I for this quote.)

 

Well I hate to bust this myth but I believe nothing can be further from the truth. Trust me, unless an investor is totally in love with either your management team or the social cause you are touting, you need a viable business model to obtain meaningful financing. Now some of the models I hear touted sound a bit like this quote from Stephen Wright – – they appear to be based on the belief that “there has to be money in there somewhere.” While this might be true, investors look for you to show them the map and tell them where.

When some talk about their model, I still hear about the number of “eyeballs” a site will attract and the resulting impact of generating advertising revenue. This isn’t Warby Parker – – I am not discouraging this approach but you have to consider how many users Facebook had to get before it could generate meaningful ad revenue. Though they may convey it at different times in the evolution of an early stage company, the message from investors from both Coasts is always the same – – the more pain your product / service eases and the easier it is to use, the more people will pay; and it is better yet if that payment happens at the time of a purchase (like a transaction fee.) They invest in aspirins not vitamins.

 

So a word to the wise; while I would certainly agree that I have seen some West Coast investors fund companies earlier in their life cycle, I would not extend this to include the concept that there was not a solid business model behind that decision. Earlier involvement does not translate into the fact that they will fund a concept without a business model. Stay focused on that solid business model no matter where your target investors reside.


Written by: Bernie Leone
Partner, WithumSmith+Brown
https://www.withum.com/partner/bernard-leone/

Bernie is an accounting and consulting partner in our New York City and Morristown, NJ, offices. He is a licensed certified public accountant and has over 35 years of experience working with a diverse group of entrepreneurial companies, CEOs and business owners in a broad range of industries. Bernie has provided these companies and their owners with assistance on such matters as strategic and transaction advice, financing, cost control, productivity and profitability improvement, management succession and IPOs.

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