Business Model Innovation and Venture Capital Assessment
I believe the Business model canvas, presented by Alexander Osterwalder & Yves Pigneur in their book “Business Model Generation”, holds a very powerful way for Venture Capital to use in their assessments of promising ventures they are considering for investment.
Traditional pitches to VC’s are loaded with financial numbers, providing crisp, well written business plans pitched by teams oozing with optimism but much of this is still highly intangible in reality. There is often a decision made on the people chemistry more than anything else. There is nothing wrong with that if you are the lucky one, but tough on the countless thousands that face rejection after rejection for their ideas to attract the necessary funding needed to move their business forward.
Where the Business model canvas can fit in the VC pitch.
You can often feel that there are different thinking through conversations going on, one from the presenter of the pitch and another in parellel in the way the investor is thinking this through at the same time and they so often on such different thinking plains or planets, and you as the presenter need a way to bring them back to ‘seeing’ the same opportunity. To do this a more highly visual way is needed, well beyond the classic PowerPoint presentation. I think the Business model canvas could be that very ‘meeting point’ tool to strengthen and convey many of the important points being looked for by the VC.
These important points are a real clarity on the value proposition – the what – by providing something new from a market/ customer perspective that is different and exciting to invest in. Then “how does it work” in key partners, activities and resources, the “who it appeals to” in customers, channels, segments and the vital part for many investors point of view – showing them the money in revenue streams and cost structure for the “how much” it will provide in return for their investment. All of this can be covered off well, within the Business Model Canvas.
I can see the Business Model Canvas as a strong compliment the VC’s Strategic Market Map (their need for the external analysis) and the Strategic Competencies Map (the internal core part).
The Four Critical Parts of the Canvas
- Describing the Customer part Within the Canvas you would need to have an increased emphasis for that often understated part, the Customers- in showing the discovery of the job-to-be-done that your proposal addresses, your ability to test the hypothesis by providing customer facts and having validation that indicates or shows a repeatable, scalable business sales model. It takes the Canvas a little deeper than normal but within its sections of Customer relationship, Channels and Customer Segments you can specifically address this need to address for the VC investor. This becomes a strong selling story of the distinct offer you have seen and validated.
- Clarifying the needed infrastructure needed to support this proposal. Often these remain far to hidden in any plan. The Partners, the Activities and the Resources are the very structure of a successful business. These are more often the intangible part, the part that resides, needs to be found to fulfil the plan. Knowing the present gaps of what is needed to create the value intellectually and where this knowledge resides is important to know. These help you see beyond the present and can help the VC quantify the risks that level more. The BM Canvas can provide a powerful support to filling out the Strategic Competence Map required by a VC in what is core, what is needed to be ‘purchased’ ,the technology/ patents, action plan and why this is a ‘winning combination’.
- Showing where the money lies underpins the Financial Numbers. Numbers are the ‘meat and drink’ of VC’s, this is where they do their countless calculations of risks, attractiveness, cash flows, exit forecasts, returns etc. Showing where the money lies within the Business Model is showing the repeating, scalable part that can lead to a profitable business. So often business plans have those magic spreadsheets showing a classic ‘hockey stick’ outcome but do they clarify the ‘willingness to pay’ and the breakdown of the different ways to generate revenue streams, not just in tangible products and services but in usage fees, subscription fees, lending/ renting/ leasing grants and licensing, all growing in increasing importance today in the business model. The BM Canvas can ‘flesh’ these out in potential to strengthen the business case by being a little more imaginative. Also offering some potential concepts of different fixed/ variable costs, economies of scale and scope all can show a determination of wanting to minimize costs and maximise opportunities.
- The Value Proposition shows the VC investor the strength of your concept. It needs to address the newness or novelty of what it is addressing in customer needs; it needs to clarify performance and how it will be customizable to take advantage of economies of scale and scope. It states how it is getting the ‘job-done’ in broad design and convenience and usability. It states and describes ‘resolution’ and ‘context’ to all the other aspects within the Business model canvas. It articulate the vision that everything else supports, that piece of innovative thinking based on the customer value proposition, that is better than ‘something’ already in existence, and why it is valuable to financially support by the VC.
In a highly visual one page diagram using the Business model canvas you can bring those ‘divergent’ thoughts of the people clustered around the table into your thinking in new ways, so all can share and better understand many of the often ‘hidden’ parts of the pitch. The Business model canvas ‘speaks’ more powerfully due to its simple but effective building block approach in some highly visual ways, that focus everyone’s attention onto a single page and the shared place to think together and ‘see’ the opportunity in new ways.
Paul Hobcraft runs Agility Innovation, an advisory business that stimulates sound innovation practice, researches topics that relate to innovation for the future, as well as aligning innovation to organizations core capabilities.
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