"This is to inform you that I have already obtained all the investment funds that I need to launch my project. I thank you for doing all you have done for me. I am thrilled beyond measure. Apparently I have a better idea than even I knew."
I do recommend reading this book as background reading to the Lean Startup (published 2 years later). In Plan B the importance of testing "Leap of Faith" assumptions are mentioned frequently along with dashboards, the importance of experimentation, steering and pivoting your business to Plan B, and other themes that you will find in the Lean Startup.
The title of the book is based on the observation that between 60 to 66 percent of funded startups stated that they had to abandon their original
plan, Plan A, and that it was Plan B (or C or D, etc..) that actually ended up working for them. The book is about how to achieve a better business
model. The term "lean" is not used in this book which was Eric's contribution to finding better business models - how to do it without so much waste or muda.
There are two things I have come away with from the book so far - the importance of searching for analogs and antilogs of your business model, and the 5 types of models that comprise a business model. These will be discussed in turn.
Analogs and Antilogs
An analog is a predecessor company that does something you want to emulate. An antilog is a predecessor company that does something you want to do differently. You arrive at a business model by discovering a unique set of such analogs and antilogs that represent your vision for the company. This perspective on business model development is based on the idea that we shouldn't expect to completely re-invent the wheel when it comes to business models. Investors reviewing the startups business model will naturally compare the business to other businesses in an effort to understand their business model. We are just being more proactive as a startup in acknowledging these analogs and antilogs so we can share them with investors and can identify where the leaps of faith in our business model lie (i.e., no predecessors for that part of the business model).
My initial feeling is that this process of searching for analogs and antilogs is similar to case-based reasoning (PDF link) and this literature might help formalize how business model learning and inference takes place.
Mimicry is also something humans are good at and it starts at a young age. Here is a baby expressing analogs and antilogs to Beyoncé's moves and music :-)
5 Types Of Models
Another take-away from this book is that idea that a business model actually refers to 5 different types of models. Directly from the book (p. 9) these models are:
Your revenue model: Who will buy? How often? How soon? At what cost? How much money will you receive each time a customer busys? And how often will they send another check? This set of questions will not result in one, tidy number. It will produce many elements that should be supported by an analog or, if not, become a leap of faith and properly considered.
Your gross margin model: How much of your revenue will be left after you had paid the direct of costs of what you have sold?
Your operating model: Other than the cost of the goods or services you have sold, what else must you spend money on to support the sale?
Your working capital model: How early can you encouragte your customers to pay? Do you have to tie up money in lots of inventory waiting for customers to buy? Can you pay your suppliers later, after the customer has paid?
Your investment model: How much cash must you spend up front before enough customers give you enough business to cover your operating costs?
If you want to "break through to a better business model" then you wouldn't just create one big model called the business model, instead you might create 5 sub-models to represent different critical aspects of your business.
Where things can get interesting is when you combine the notion of analogs/antilogs with these 5 types of models. What predecessors have a revenue model that I want to emulate, and what predecessors have a revenue model that I want to avoid using? Ditto for your gross margin model, operating model, working capital model, and investment model. So analogs and antilogs can be found at the big picture level or at the level of these more detailed types of models. The book goes into alot of detail on analogs and antilogs used in the business models of 20 different companies. For more info, you may find this review of the book helpful.
Often when a startup develops a business model they find that they don't have an analog or antilog they can use as a reference point. This marks a point where the business model expresses a "leap of faith" and it is at these points that the model has to be immediately stress tested with experiments and metrics. We will discuss the concept of "leaps of faith" more when I discuss the Eric's Leap chapter, but it is worth noting how the concept arises in Plan B (i.e., when you lack an analog or antilog for some part of your business model).
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