Value Creation, Value Capture, and the Business Model
Most people who want to enter the world of entrepreneurship, including myself, think having a good idea is the most important thing you need to start a business. But is it?
We sometimes focus only on value creation and completely ignore value capture until we are desperately trying to sell our products and realize that nobody is buying them. Only then might we realize that there were other important factors we were missing. But what factors?
The following is what I learned from Nuts and Bolts of Ventures by MIT, and unfortunately, this course didn’t exist online when I was trying to run my first startup.
Before starting a business
Before starting a business, we need some risk-reducing filters. We should ask:
Why this idea? Is it solving a real problem? Is the problem big enough? Do people actually need it?
These are questions that could have saved many businesses from losing lots of money before even starting. So many entrepreneurs find a good idea and a good solution to a problem, but they don't even care enough to ask the audience they are making the product for: Do you actually need this?
Without asking, they roll the product into the market, and the market slaps them in the face by showing them there is no demand.
Why this team?
There are startups that fail mainly because of the team. Some of them are teams with no unified objectives. They start the business together, and when the first crisis arrives, everyone has a different idea. They can't communicate successfully, and the team falls apart.
Or some businesses get together a group of people with a collection of honors without actually paying attention to one important factor: Do your team members complement each other?
And if not, let's get back to the question: Why this team?
Why now?
Timing is crucial. We know some brilliant ideas that couldn't get into the market just because they were too soon to be born, like 3D printing, which almost had to wait 25 years for the market to be ready for it.
And last but most certainly not least, why does this idea fail?
We should try to find where this ship is leaking before sinking in the market.
Execution and the business model
Just after answering these questions, you can start thinking about execution.
You can have a brilliant idea, but your idea might be so difficult to execute that it exhausts all of your resources. Or worse, your product can be found to be non-optimal and be kicked out of the market because it cannot fit into the value chain properly.
So simply, before starting a business, we can have a simple business model:
1. The value we create
- The way we bring the value to customers
3. The way we capture value
But even at this level, so many businesses fail again. They fall in love with their business models.
This is wrong by nature, and in our age, it is a time bomb for your business. In today's world, everything is changing so fast that we are almost feeling dizzy. So how can you design a business model and expect it to work five years from now?
We have to genuinely understand the pace of change. We should understand the adaptability of markets, and we ourselves should be highly adaptive.
The companies who survive are the companies who can see the future better than others and adapt themselves accordingly.
Finance and surviving the valley
There is something specific that I found extremely useful in this course: failure in planning is planning to fail.
Finance is the oxygen of every business. You cannot ignore it or postpone it for some other time. You can't start your business without financial projections and hope that you figure it out in the future. If you don't plan it in advance, you put yourself in a pretty good position for certain failure.
You have to plan for the J-curve. You should know how long it is going to take for you and how much money you need to survive and pass that valley. Without knowing it, the notorious Death Valley would welcome another victim.
Being prepared for failure
And at the end of the day, after taking all of this into consideration, you have to be well prepared for failure.
9 out of every 10 businesses fail. You should be prepared for it.
They say business is like a laboratory. A scientist can take everything into account and still fail, but he doesn't give up. He pivots, he changes direction, he uses his creativity to solve the problem, or even dismisses it entirely if necessary.
Leaving a failed idea sometimes needs its own courage.
You have to be powerful enough to see when it is time to let go of an idea and when to fight tooth and nail for it.
This essay is based on my study of Nuts and Bolts of Ventures by MIT.