Business Models for High-Growth Companies
Business models are not a one-size fits all; considerations vary based on the industry, the validated markets, and the value proposition that the startup offers its customers.
Rev1’s venture services team has extensive first-hand experience (as investors, company founders, and advisors) in the details of constructing business models.
Business modeling is an iterative process. Exercising disciplined of thinking up front, entrepreneurs can avoid the extra and costly work and potentially missed opportunities from going down the wrong path.
This article discusses business model considerations for Concept Stage firms exploiting opportunities in Information Technology, Advanced Materials, Manufacturing, and Energy, and biotechnology/pharmaceutical companies. It’s a thought-starter for any entrepreneur in these high-growth industries.
High-Growth Software Companies
Bob Wiggins, SVP – Venture Acceleration, Information Technologies
Software business models are fairly well-defined. There is an abundance of marketplace information on best and worst practices.
Once you’ve validated your concept with real customers in the marketplace, build a more effective business model by considering and addressing these areas in your business plan.
- Who controls the decision at a customer to purchase your software?
How will you reach the people with purchasing authority? How will you sell the software? Through direct salespeople? Through channel partners? On the web? These various approaches to sales have significantly different costs, and requires significantly different pricing for the software to make the business model work.
- Is the software core to the customer’s business operations?
If so, are integration services or feature modifications or customization required? How about legacy or customized data base interfaces? Who pays for such customized work? Does the startup keep these new objects for resale to other customers?
- Does the solution require a hardware and software sale?
If so, is it a bundled sale? If not, who provides the hardware and under what terms?
- How do you get people to try the software?
Some products are good for trials, particularly if they are easy to use. However, if there’s much of a learning curve, a 30- or 60-day trial won’t provide adequate time. If trials based on a minimal feature set, will it be free with a transition to a paid model?
- Where will the software reside? In the cloud? Behind a customer firewall? On a private site?
These options have very different economic implications.
- What level of customer support is necessary for customers to use the product successfully?
Successful companies have the right mix of online documentation and support from human beings, where via chat, over the phone, or on-site. Map the problem escalation process as you expect it to be. Then test it with early customers.
- How will the software be offered?
In software, there are three basic business models: Subscription-based (software as a service or SaaS), licensed, or direct purchase as a consumer app.
Subscription: The software provider hosts applications and makes them available to customers over the Internet. This pay-as-you-go model generally makes it easy for customers to start (and stop) using the software and to increase (or decrease) the number of users without relying on in-house IT to manage the software or technical support. SaaS applications frequently support core business functions, such as email, human resources, sales management, customer relationship management (CRM), collaboration, or financial and billing.
License: The customer makes a one-time purchase upfront of the number of licenses required and then owns them in perpetuity. Licensed software is often self-hosted by the customer. Annual support and release agreements are available at additional fees, and this recurring revenue is a critical part of the economic value of licensed software sales.
Direct purchase: This is the iTunes, app store model that we are all familiar with.
- How will the software be priced?
Pricing is a persistently difficult challenge for every software start-up. What is it worth to a customer? How are competitive solutions priced? Is there a good opportunity to have tiered pricing, based on features, customer type or some other variable? Is there a good reason to publicly disclose your pricing? Even relatively mature software companies seem to continuously test their pricing.
Not every question can or must be completely answered at the Concept Stage. Entrepreneurs can draw on business models that companies are already using. The most important thing to remember is that even when you have built a fantastic product, if you can’t cost effectively get customers to pay for it, the startup is out of business before it starts.
Advanced Manufacturing Companies
David Bergeron, SVP – Venture Acceleration and Development
Business plan considerations for the founders of advanced manufacturing startups include competition, full cost of ownership, supply chain agreements, cyclicality, and strategic partnerships. While significant revenue potential often exists in such startups, initial go-to-market strategies are quite varied and sometimes complex.
- What’s the A to Z analysis of your competitors?
Specifically, the product feature/function/value analysis is critical. Rarely is a cost advantage an investable or acceptable business model. Facing those competitors, what are the company’s strengths, weaknesses, opportunities, and threats? (SWOT)
Entrepreneurs must systematically perform competitive diligence repeatedly and consistently every six months –more frequently when there are startling developments: it’s never one-and-done. The competitive environment for a startup is always changing. The firm’s technology advantages may be tested by a new overseas manufacturer. The escalating price of raw materials may necessitate offsetting labor costs. A key supplier may face shortages necessitating a change in the bill of materials. A competitor’s quality or delivery issues may create new market opportunities. Never underestimate the power possessed by the incumbents. The status quo is a very difficult barrier to cross in many industries.
- What’s the full cost of ownership of the manufacturing process and how is it impacted by the firm’s Supply Chain Agreements?
Whether it’s 30 or 330 steps every discrete point in the manufacturing process has a tool, and each tool or process has a cost of ownership. Calculate to the penny every bit of cost to operate that tool—utilities, space, raw materials, etc., and then aggregate to analyze the full cost of ownership.
This typically results in detailing a strategy of how to go to market: Make it yourself, partner with a customer or supplier, or outsource to an existing manufacturer. The strategy you choose determines the likely go-to-market capital requirements.
Supply chain management is an extremely important element in this calculation. It’s so critical that early on, even though the startup’s resources are limited, the company must find access to supply chain management expertise.
This is an area where the inventors of technologies who start businesses often just don’t know what they don’t know. From inspections and quality measures, to terms and conditions to a myriad of other considerations including IT infrastructure, agreements with suppliers can take weeks and months and many hours of an expert’s time. There simply is no substitute.
- What’s the cyclicality?
Almost every manufacturing company is cyclical. The causes are varied—from market conditions to sourcing raw materials, to technology obsolescence or innovation. Unlike software companies, manufacturing businesses have significant fixed costs. You can’t turn off the lights in the factory, but you can create a flexible workforce. Many startups don’t fully understand this reality and hire too many employees too quickly or fail to realize the benefit in outsourcing key but non-essential core business elements. Balancing the cyclicality with outsourcing or subcontracting allows the company to better manage costs during cyclical downturns.
- Which strategic partnerships will contribute to effective operations and exits?
Many startups can create an R&D version of a machine required for manufacturing, but most don’t have the on-board skills to design the infrastructure that is effective for production manufacturing.
After a startup has validated the business concept by investing in a research and development manufacturing process model, the company can strike a strategic partnership (either a supply chain or licensing agreement) with a complimentary business that has most of the manufacturing steps in place. Overtime, such relationships can play significantly in the startup’s exit strategy.
In summary, advanced manufacturing startups have significant product revenue potential. The initial go-to-market strategy is often iterated upon many times to balance the required capital and available engineering resources. The resulting business plan often benefits from interactions with experienced advisors and relationships with key supply chain partners and customers.
Biotechnology and Pharmaceutical Businesses
Margaret E. Groh, SVP -Venture Acceleration, Life Sciences
Scientific founders of biotechnology/pharmaceutical businesses are passionate about their research and about developing therapies that will improve people’s lives. To go into an endeavor that is as long-term and high-risk as these startup ventures are, you must really believe and be passionate about the potential.
Biotech/pharma startups are different from any other types of startups. They usually do not have traditional customers. A variety of stakeholders will define the revenue model and business strategy. Capital requirements can exceed millions of dollars over many years. Timeframes are long. These companies will not have revenue for a very long time.
A business model that ensures that all parties (stakeholders) involved are highly motivated and aligned around the company’s success is the foundation for Concept Stage biotechnology/pharmaceutical companies. Increasingly, academic and research institutions are offering education and assistance to scientists who want to spin their technology out into a biotech or pharma company.
- What can you learn from those who have gone before?
Scientific founders often have concerns or misconceptions about the process of setting up the business, especially when it comes to losing control of their technology. The technology transfer offices at universities and research institutions are an excellent first stop to discuss the process and to set expectations. Talk with other faculty members who have spun out technologies; seek out trusted peers who have been successful and some who have failed.
- What are the potential applications of your technology?
It’s important for scientific founders to hold an open mind. A scientist who develops a great idea in her specialized area of knowledge may represent a platform technology with far-reaching applicability that is not in her chosen field. Market validation is the first step toward commercialization. It’s seductive to want to sell your idea; instead question every assumption and actively seek out reasons that it won’t work.
In fact, pre-emptively having your discovery independently (and we do mean Independent) validated, establishes credibility with potential investors and strategic partners and separates you from most other scientist/founders who will not take the risk that their technology does not work.
- What is the appropriate talent and expertise required at every stage to build a successful technology-driven business?
There is a difference between technical or scientific leadership and the business skills that are needed to commercialize a technology. Many scientific co-founders want to continue with their careers in teaching, research, or practicing medicine. Commercialization may require attracting an experienced CEO to lead the company—someone from the industry who, preferably, has led a pharma or biotech startup before—an executive who understands how to secure the IP either through patents or licenses or both; who is experienced at building strategic industry partnerships, and who understands how to attract investors.
However, the company is managed, Insist upon scientific rigor in every area of the business, just as you would in the scientific process in the lab. If you encounter anything that causes you to question the ethics or integrity of any stakeholder or process in the business being created, stop, question, and correct.
The exit strategy for biotech or pharma startups is almost always acquisition by a major corporation, so an important aspect of the business model is for the business leader to identify potential acquirers and establish collaborative connections as early in the life of the startup as possible.
- As a technical founder, are you willing to share significant ownership in the company with other stakeholders who are taking a large risk in supporting the startup and expect and deserve to be compensated?
Building a pharma or biotech business is a very long process fraught with many failure points. It must be a team approach that involves all the stakeholders. It’s important to have alignment conversations early. Most technical founders lack the ability and networks to effectively attract the right leadership and investors to help the company succeed.
These necessary steps are made even more difficult if scientific founders expect to retain an overwhelming majority interest in and operational control of the business. Financial return must be in proportion to the technical and execution risks that the various stakeholders take.
I’m always impressed by the passion and the diligence of scientists who start these kinds of companies. There’s always one question I ask: Imagine that the company you are starting is wildly successful and your therapy is helping patients in exactly the way you had hoped. What now? What will you do next?
Invariably, without hesitation or thinking, the answer comes back: “I’ll find a way to keep doing research. I’ll cure something else.” These are the entrepreneurs driven by passion.
At Rev1, we stress the importance of the “why” behind a company—that deep- seated belief that helps a business connect with stakeholders who believe it too. There’s no environment where the “why” is more evident than among scientists who are commercializing technologies that will improve lives and cure disease.