Every startup needs to make money, but how you do it can greatly effect the success - or failure - of your company. Luckily, Orange County Founder Institute Director Henri Duong outlines the essentials of revenue models for aspiring founders in the article ,"The Startup Guide to Revenue Models", which has been republished below with permission.
I had the honor to speak to a room full of startup entrepreneurs last night in LA for the Founder Institute LA chapter on the top of "Revenue Models". For those of you not familiar with Founder Institute - it is a 14-week startup bootcamp which charges through some of the foundations of starting up a technology enabled business.
The topic of "Revenue Modeling" is in the early part of the bootcamp called the "Ideation" phase. The part of "How to make money" is actually quite simple but yet is made unnecessarily complicated with all the streams of thought out there. I'm going to attempt to summarize my 25-minute talk into a few brief takeaways.
I. There are 3 Revenue Models: Advertising, Marketplaces, and SaaS
I originally had 4 in my talk but decided to further narrow the classifications. My goal with this statement is to help you compartmentalize and process the process in order to help you as the startup entrepreneur to move quickly into building the product. Don't be that lazy guy or gal that says "My idea is a cross-over between this Revenue Model and that Revenue Model". Yes, it's actually hard to pick just one. As a founder, you have to make that call and bet the next 3 months of your life (and everyone around you) that you made the right choice.
II. Pick One of the Revenue Models and One Business Model.
In each revenue model, it could be stated that you may have multiple business models that hypothetically could exist. The trap is that you feel like a superhero since you quit your job so you think you can take it all on...I'll even go as far to say that if you've only raised $2MM or less you should still only focus on the one thing and the one stream. Pick one and build your MVP around that one thing. Test your assumptions around that one thing.
III. Use Your Instinct + Market Research + Mentor Advice
Your instinct told you after 10+ years that there are demanding needs and your market research validates it. Most entrepreneurs that join the Founder Institute have anywhere from 5-10 years as executives in a specific industry and have discovered a problem they wanted to solve through technology. The usual entrepreneur dilemma is that they have the industry confidence but not the architectural "know-how" of translating their experience into designing the simplest revenue model + business model as it relates to the essential value proposition. Mentor's advice is critical at this early ideation stage. [side note: Mentor's advice become less and less critical as you start to go from Revenue Model configuration to full blown business model.]
IV. Revenue Models and Business Models are the Same Difference
In the sea of startup confusion, you will find that Revenue Model is often referred to as "Business Model" but that is the first mistake first-time entrepreneurs make. Your google research led you to the 10-page AirBnB deck that helped them raise their first VC series-A round without a mention of any Revenue Model.
The fact is that AirBnB had already been in business for a few years prior to presenting that deck. They were testing their revenue model MVP - rented out rooms and had proven that it worked and was ready to scale. What they presented to investors happened to only need a Business Model because a Business Model is what you show investors when you are ready to go beyond proving your initial hypothesis or assumption.
V. What About Key Metrics?
Let's not fool anyone at this point - you won't know all your key metrics because right now you are doing the "Unscalable" things and testing out your one assumption. It's good to be prepared to talk about those exhaustive performance metrics but don't get bogged down with having a complete understanding of how your ARPU, CAC or LTV is going to make or break your success at the onset of your startup.
We put you through this at the early stages of the startup bootcamp to help you identify whether or not this is your strength or weakness. If it's a weakness then you know what sort of potential help you'll need down the road. If it's a strength than you'll know what sort of role you'll be playing in developing the business.
The Orange County Founder Institute is accepting applications to its upcoming semester. Apply today!
(Revenue - Chart with keywords and icons - Flat Design image by Shutterstock)