Your Business Model Probably Sucks - Part 1
Welcome to The Very True podcast. I'm Alex Oppenheimer, the founder of Verismo Ventures, an early stage venture fund investing in Israel and The US. Previously, I was a tech banker at Morgan Stanley and a VC investor at NEA. I then spent several years working directly with startups on finance, business models, rev and more before launching Versimo Ventures in 2020. I got into this business because I enjoy working with founders and helping them realize their vision and fulfill their potential.
Speaker 1:I created this podcast to shine a light on the day to day reality that most people are too afraid to discuss. The pivots, the fumbles, and the so called non core aspects of building a business from scratch. Rather than focusing on the end of a successful road, we spend time here discussing the tougher, lesser known parts of the startup life cycle. The goal is to offer insights to founders to improve their startup experience, whether that means avoiding problems and finding success faster or just feeling more confident and less isolated on their entrepreneurial journey. So after a bunch of guest episodes, I'm excited to get back to a solo episode.
Speaker 1:And today we're going to talk about a subject that if you know me, you've heard me say many times, but it's absolutely critical in a world where most companies don't make money. This is one of the scariest parts of venture, which is you don't really know if the emperor has any clothes or not until, like, really, really far down the road. What we do know is if a company is capitalizable, but we don't really understand deep down if they're accruing value unless it is perceived that they're accruing value. So the title of today's episode is your business model probably sucks. And it's true.
Speaker 1:It probably does. I'm running my own business. There's big questions if it's a good business model or not. Some are worse than others. Some are good in some context and not good in other contexts.
Speaker 1:And I think that's probably going to be the biggest takeaway of today is understanding who you are, where you sit, and what are the tools that you can build to realistically understand that. Because the truth is that some business models in a venture backed context are fantastic. Some business models are not. Some business models in a lifestyle business are much more difficult than they seem. Some business models that are legacy work great, but if you try to start it again, it would never work.
Speaker 1:And the most important thing is just understanding what your business model is and if how you're trying to capitalize it and what you're trying to do with it actually sucks or not. Or if it's really promising and has the hope that you think it does. The weird reality that we live in in the capitalization business that I'm in is that a lot of the capitalists are not actually capitalists. Like, they're not financiers in the classic sense. They're not classically trained in finance.
Speaker 1:They don't really understand the difference between debt and equity. They don't understand cost of capital. I'm no, you know, absolute genius expert on this stuff, but I am a student of the game. I took one class in college on this called finance three thirty five, which is a fantastic class inside Stanford GSB, which I don't think I should have been able to take, but I did and I learned a tremendous amount that has carried me through the last fifteen plus years of my career. And there's just a lot to poke on here, which I think gets swept under the rug a lot in the name of they're making money or it's growing really fast or the founder's really amazing.
Speaker 1:And I've seen a lot of great ideas get capitalized incorrectly. I've seen them executed on poorly. I've seen great products go the wrong way because they didn't understand what their business model was and therefore they didn't know what the right capitalization structure should be. And I think back in the day, I mean we'll say ten, fifteen, thirty years ago, the person writing the checks who had that ability generally had a long career in finance prior to earning the opportunity to sit in that seat. And as a result, you could really rely on them to say how should we capitalize this business?
Speaker 1:What's the right mix? What's safe? What's not? Again, they have their own interests, but at least they're gonna be aware. And I think that we've moved into a world where there's so many other factors that are involved in the company capitalization process that a lot of that gets lost in the mix, which is which is pretty scary.
Speaker 1:I think that people in private equity understand this a bit better, but the venture world, which has obviously captured a ton of attention globally and an insane growth in the total AUM that it represents and the chunk of the economy that it is, we'll say, involved with. I I just frankly feel that there's a lack of understanding of both business model and capitalization. So I personally am more of an expert in business model than I am in capitalization. There are other people that are much better at that. I take my lead from the greats, from Benjamin Graham, from Charlie Munger, from Warren Buffett, from Howard Marks on what is a great business, how do we define a great business.
Speaker 1:And today I'm going to kind of explore a lot of these different ideas that have been bouncing around in my head that have been coming up in conversation either recently or honestly for a decade. And so I'm gonna start with what is a business model? And I just had a conversation with a founder that I backed many, many years ago who built a hardware company. And we were talking about CAD and and these sort of things. And that's what it really all comes back down to.
Speaker 1:You know, my background is studying mechanical engineering. I've been a tinkerer for a long time. And I actually always did things experientially. Again, being a tinkerer means that I'm frankly good at building stuff with my hands. This was my superpower in college.
Speaker 1:This is how I frankly got away with teaming up on things and let's just say delegating a lot of problems at work. And the answer is because I could build. I have a way with tools and materials, which frankly I haven't done a lot of lately. I guess the most recent thing would be I order new wheels for this bike and, put them on myself. I didn't take it to the bike shop and I don't think I need to, which is great.
Speaker 1:New brake pads, new wheels, move the cassette over, new new tubes and tires. And, that's kind of what I get now as a 37 year old venture capitalist father of three living in Jerusalem. Every once in a while I go to my friend's machine shop and get to weld and cut and do that sort of stuff. But anyway, that's all to say that my background in mechanical engineering was actually on the experiential side. And pretty quickly you start having to CAD things up.
Speaker 1:And the short answer of why you do that, why do you build a CAD model? And CAD is computer aided design. The answer is that it's too complicated to do in your head. It's just that simple. Like there's too many moving parts.
Speaker 1:It's too precise. You want to see it from different angles and just sketching that out on a piece of paper is going to be really, really inefficient. And so whether you're sketching something out to laser cam it in two dimensions or you want to build a multi part three-dimensional three d printed sections, really complicated device, That CAD model is actually a critical piece of the story. If you can solve the problem in your head, great, and you should always start with that. You know, simplest, the simplest answer is pretty much always the best answer unless it's completely wrong, but it's usually the best answer and the right one.
Speaker 1:You got to start there. And then once you get into the nitty gritty and these details start becoming more important, you've got to build a digital representation of that thing that you want so that you can explore how it's going to operate in the real world and run simulations across it before you actually take the time to build it to whether that just means prototyping it and testing it or actually sending it to manufacturing. And we've probably all had the experience with some physical device where we get it and it just doesn't work and it sucks and it's so annoying. You'd be like, how did they make this mistake? And the answer is that like, they were looking at it at digital representation and they missed something and they didn't understand that there was a tolerance issue or some conflict of parts where they bang into each other all of a sudden and they just didn't see it.
Speaker 1:And so maybe the model was good, probably the model wasn't. And that's why it didn't happen. And this actually flashes me back also to a teacher I had in a professor I had in college in a classics course. And he was amazing. His name is Marsh McCall.
Speaker 1:And he had this line. It was kind of a joke, but he says, you gotta have a good outline when you're writing a paper. And and it that's really kind of the same idea. It's like you need an outline. You need to sketch out the flow and get that clear before you take it into the real world and actually start fleshing things out and making it into something tangible.
Speaker 1:And he had this funny line where he said, I would look in the mirror and say, Marshall, your outline is weak and therefore you are weak. And I couldn't say anything more adept about a business model. Like if your business model's not good, your business isn't good. And you can hope you can get lucky, but I think that what drives the lack of business model rigor for a lot of people is just, it's mix of fear and laziness, which is effectively cognitive dissonance for most people. They don't want to go through the exercise because they're not sure if it's going be right.
Speaker 1:And then if it tells them something they really aren't ready to hear, then they kind of just don't want hear it. No, confident it's going to work anyway. And like, let's just let's go for it and we'll learn a little bit more. I think it's obvious why that's a weakness. You know, you get the devil's advocate of like, well, we don't want to go too deep into the weeds before we know enough.
Speaker 1:We need to explore and test a little bit before we Like, yes, that's true. But sometimes you have to go, you know, or not sometimes, always you have to oscillate between that kind of digital imaginary world and then, hey, let's get on the ground and go talk to customers or build a prototype out of something really easy like foam core and just see if the thing does even something close to what we want it to do. But if you could just draw it out and realize that it's not gonna work, or maybe that means building it out of Legos, I don't know, and see if the thing's not going to work, then like maybe you just save yourself some customer meetings or some construction costs or whatever it may be. The reality is that the instincts of how to oscillate between those two worlds is really the superpower of creating anything from scratch. Whether that's a company, whether that's a product, whatever it may be.
Speaker 1:The other thing that I find in the startup world is so often people are like so good at one aspect of this business. Whether it's sales, product building, architecture, engineering, product design, marketing, hiring, and they have all these superpowers. And I find that if you really boil down those superpowers to what drives them, it's just process. It's understanding what matters. It's like Howard Marks' book, The Most Important Thing.
Speaker 1:Like figuring out the most important thing and building a process around it and then repeating, focusing, repeating, focusing, and drilling down and getting better and better. It's always a head scratcher where when someone's like really analytical, but then they're not good at sales, it's like, okay, so why don't you just take those analytical strengths and apply them to the sales process? Or, hey, you're really good at building a product, but are you really good at building a business on top of that product? Now I still remember I got asked this question by a founder years ago. It was like casual on one foot, and it stuck with me because I think it was the right answer.
Speaker 1:He said, oh, do you have any quick tips on how we go from being a startup to a growth business? And I was like, that's a huge question. And we were like meeting in passing at like an event, and I said, the minute you realize that your product is not your product, but your product is the whole business, that's when you go from being a start up to a growth company. And I believe that to be the case. But I think that if you start out understanding that your business is your product and that is what you are selling, and you are a critical part of that, especially if you're a startup seeking venture funding, then your ability to develop products, which again is a critical part of developing a business, even if that business is a service business frankly, because you still have to package your service.
Speaker 1:You can apply that to all aspects of the business. So again, a lot to say there, but that is the going back to it and bringing it together, like the purpose of a business model is the digital representation of what you're hoping to build. And so the exercise I always start with is what I call the one column model. It's very, very simple. You open up an Excel sheet.
Speaker 1:You can even do this on a piece of paper if you want to. And you just start asking, what do we need to know? What do we need to believe? And how does this work? And basically what that comes down to is three key elements.
Speaker 1:The first is independent variables, and those are our inputs, the things we control. The second thing is the dependent variables, which are the outputs. Really, they'll often be the leading indicators, but often more even the lagging indicators, but really the outputs of that model. And then you have the mechanics. And the mechanics is all of the equations and interplays and dynamics between the independent and dependent variables.
Speaker 1:Now, those three ingredients, inputs, outputs, and mechanics, are the foundation of any business that actually makes sense on paper. But how do you apply that to a real world start up? And how do you know if your unit economics are actually healthy or if you're just following a dangerous playbook? We're going to get into the tactical side of building that model and look at some high stakes examples like Uber and WeWork in part two of this conversation. I'll see you there.
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