If the founders of
Google, Starbucks, or PayPal had stuck to their original business plans, we’d
likely never have heard of them. Instead, they made radical changes to their
initial models, became household names, and delivered huge returns for their
founders and investors. How did they get from their Plan A to a business model
that worked? Why did they succeed when most new ventures crash and burn?
face an uncomfortable fact: the typical start-up process, largely driven by
poorly conceived business plans based on untested assumptions, is seriously
flawed. Most new ventures, even those with venture capital backing, share one
common characteristic. They fail. But there is a better way to launch new
ideas—without wasting years of your time and loads of investors’ money. This
better way is about discovering a business model that really works: a
Plan B which grows out of the original idea, builds on it, and once it’s in
place, enables the business to grow rapidly and prosper.
to Plan B in Your Business
can you break through to a business model that will work for your business?
First, you’ll need an idea to pursue. The best ideas resolve somebody’s
pain, some customer problem you’ve identified for which you have a solution
that might work. Google, for example, makes hard-to-find information
Alternatively, some good ideas take something in customers’ lives that’s pretty
boring – think old-fashioned coffee shops, many of them now gone, supplanted by
Starbucks – and create something so superior it provides true customer
you’ll need to identify some analogs, portions of which you can borrow or
adapt to help you understand the economics and various other facets of your
proposed business and its business model. You’ll need antilogs, too. Analogs
and antilogs don’t have to only be from your own industry, though.
Sometimes the most valuable insights come from unusual sources, as was the case
for Steve Jobs in turning Apple from an innovative but struggling PC-maker into
a music industry phenomenon. Jobs copied ideas from Sony’s Walkman, Napster’s free
but illegal downloads, and more.
identified both analogs and antilogs, you can quickly reach conclusions about
some things that are known about your venture. But it is not what you
know that will likely scupper your Plan A – it’s what you don’t know.
The questions you cannot answer from historical precedent lead to your leaps
of faith – beliefs you hold about the answers to your questions
despite having no real evidence that these beliefs are actually true.
address your leaps of faith, you’ll have to leap! Identify your leaps of
faith early and devise ways to test hypotheses that will prove or refute them.
By doing so, you are in a position to learn whether or not your Plan A will
work before you waste too much time and money.
what do you actually need to consider when developing your business
model? Every model needs to quantitatively address five key
- Revenue Model: Who will buy? How often? How
soon? At what cost? How much money will you receive each time
a customer buys? How often will they send you another check?
- Gross Margin Model: How much of your revenue
will be left after you have paid the direct costs of what you have sold?
- Operating Model: Other than the cost of the
goods or services you have sold, what else must you spend money on to keep
the lights on?
- Working Capital Model: How early can you encourage
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?
- Investment Model: How much cash must you
spend up front before enough customers give you enough business to cover
the right analogs and antilogs, identifying your most important leaps of faith,
and testing a series of hypotheses to inform all five elements of your business
model doesn’t happen in a single ”eureka” moment. Getting to a viable Plan B is
a journey that can take numerous iterations over months, perhaps years. For
PayPal, what eventually worked was founder Max Levchin’s Plan G!
guide this process, we suggest you build a dashboard – a systematic record that
will focus your attention on the critical issues and more efficiently deploy
your precious time and resources to removing the critical risks. It
provides a way to respond to the real-life data you generate and make
mid-course corrections when your data so indicates.
Cold, Hard Facts
business plans assume that most everything is already known up front – not the
case, as the PayPal example shows. As the famed American general in World
War II, Douglas MacArthur, is reputed to have said, "No plan ever survives its
first encounter with the enemy.”
process articulated here is a healthy alternative to the straight-jacket of
today’s business planning practices – to enable you to anticipate and move
beyond a failing Plan A. It is a process designed for learning and discovering,
rather than for pitching and selling. It’s a process that recognizes the
cold, hard facts – most often, what ultimately works, is not the Plan A that
was so persuasively articulated in the original plan. Instead, it’s Plan
MULLINS is an Associate Professor of Management Practice and holds the David
and Elaine Potter Foundation Term Chair in Marketing and Entrepreneurship at
London Business School. RANDY KOMISAR is a Partner at Kleiner Perkins
Caufield & Byers in California. Their new book, "Getting to Plan B:
Breaking Through to a Better Business Model,” was recently published by Harvard
in the book? Check out the review from the FinancialTimes.