A Guide to Successful Business Models

“Luck is a matter of preparation meeting opportunity.” - Oprah Winfrey

It is common for people to think that a good idea is what drives a good business, although it is important, it is not the only thing. Venture Capital (VC) Funds analyze hundreds, if not thousands, of investment opportunities in startups per year. Thanks to this experience, the failures, and the successes they have in the investment portfolios, they can understand which factors influence the potential success of a projects.

Some elements to observe are team, opportunity, traction, context, and the deal terms.

Team

The team makes things happen, and this could be the difference between success or failure. For instance, the creation of social networks, such as Friendster, Myspace and Facebook. The Facebook´s founding team, Mark Zuckerberg (CEO), Eduardo Saverin (CFO), Dustin Moskovitz (CTO) and Sean Parker (Founding President), had multiple experiences, complementary skills and a wide network of contacts. On the other hand, the formation of this social network included a high level of commitment and positive attitude, which also caused some team members to drop out of university. They were fully committed, had a smooth successful execution and became the dominant player.

Generally, VC funds try to invest in teams and not in a single founder, because having more than one reduces the operational risk and allows the continuity of the company as a going concern. Many of the projects start with an idea, a strategy and a business model, however, as time goes by, changes are needed and in some cases pivoting is essential, only good times will deliver on this adjustments.

Opportunity

Opportunity is the project that requires scare resources to be fruitful and deliver future positive returns, and this project is generally the solution to a problem.

For example, with COVID-19, various home delivery platforms have had an accelerated growth since they not only allow the user to stay at home, but also it solves the need for food. If you want to create a platform or start any other project, assessing the size of the market, its growth and competition within the industry, becomes essential. Likewise, it is important to understand the relationship between clients and suppliers, substitutes and complementary products or services, among many other factors.

Traction

When you are establishing a business, traction and monitoring it becomes relevant. From the beginning, the entrepreneur should measure the performance of the company with two objectives a) improve the business and b) have statistics to show investors during capital raising. For example:

- Business Operation metrics, such as:  users, growth, customer retention, monthly burn rate and runway.

- Financial performance mainly measured by sales, contribution margins, cash flow, among others.

- Economic units to show the customer acquisition cost (CAC) and the customer lifetime value (CLTV).

- The capital structure shows who the investors are and the success that the entrepreneur has had in convincing them through raising capital.

Context

The context could make an opportunity a total success or a total failure. Are those factors that affect the outcome and usually beyond the reach of the entrepreneur. Some of them are the macroeconomy, laws and regulations, tax impact or sociopolitical issues. For example, the current context of the COVID-19, has positively impacted e-commerce companies such as Amazon or streaming platforms like Netflix and negatively impacted companies in the in-site entertaining or cultural industry such as theaters, Broadway, Museums, etc.

Investment terms

In the current pandemic situation, companies that are raising capital have had to adapt the deal terms. Many of them are trying to raise additional capital with the same terms established in the previous round, with the aim of giving comfort to new investors, maintaining the valuation of the company and granting the same rights to new investors.

The general deal terms are investment amount, valuation, type of security, incentives, investor rights, jurisdiction, among others.

Final thoughts for startups

Good ideas are everywhere, but that doesn´t ensure that you will have a good business or be successful. However, if you follow the proposed steps, you could increase the probability of success. At the end, a good team with efficient execution and access to capital is a good argument for success.  As the Harry Potter interpreter Daniel Radcliffe would say “When you get as lucky as I got, you have to work as hard as possible to earn that luck.”