Why You Need To Road Test Your Business Model
A business plan used to be the underlying framework of any startup but somewhere along the line we stopped writing and reading them. It used to be that you took the time (30 or so pages worth of time) to think about, project, surmise and commit to paper some critical assumptions for your business.
But we decided that we no longer had time to write business plans, so they fell out of fashion.
With the demise of the business plan, we embraced the most pragmatic tool at our disposal: the Business Model Canvas (BMC) - a delightfully simple nine-segment diagram that fits on one page. Easy. Each segment represents a key element of a business model and poses questions to help the entrepreneur fully diagnose the likelihood of business profitability and sustainability.
The mistake that many entrepreneurs make in using the BMC method is that, even if completed, (and many entrepreneurs fail to complete the exercise entirely), they treat it as a one-time exercise, fill in the boxes and promptly forget about it. More often than not, it is created and remains in isolation within the diagram, the entrepreneur fails to apply the findings to a real world reality check and it becomes another futile exercise in the process of mapping the startup journey.
Many startups seek seed investment (or grants in the EU) based on their ideas and assumptions without having fully tested the business model in-market. The brutal reality is that the number one cause of startup failure is a lack of any true ‘market need’ in the first place. CB Insights lists in their “101 Startups Postmortems,” the number one reason for failure as ‘not targeting a market need.’ In fact, of those startups that underwent the postmortem, a staggering 42% failed for this reason. CB Insights state that approximately “70% of upstart tech companies fail — usually around 20 months after first raising financing (with around $1.3M in total funding closed.”
So how can an early-stage startup avoid that trap? Complete the BMC exercise with brutal honesty and in plain English (no buzzwords or guess work - if you don’t know then figure it out first).