A Winning Business Strategy: The Master Funding Equation #4 (Part 1)
In this post, I pose five questions that can alter the trajectory of your business's success. But first, we have to recap the critical points we've covered to make these questions resonate.
Over the last several posts I've been guiding you through the various factors that lead to funding success in what we're calling the Master Funding Equation. We began by discussing masterful pitching. Recall that we had examined four important factors for effective pitches: they must be exciting, simple, intriguing and easy enough to remember and repeat. Taken together, that makes for a pitch that is viral -- that's your goal.
Recall that I re-wrote the formula for the equation to place trust as the first factor to master, for without trust, you'll rarely get an investor to explore any of the remaining factors with you. Here's the formula again, so you can see where we've been. Next up -- a winning business strategy.
- a Trustworthy CEO +
- a Viral Vision Statement/Elevator Pitch +
- a Powerful Pitch Method +
- the Correct Pitch Content +
- a Winning Business Strategy +
- a Balanced Team +
- Understanding the Mind of the Investor
So let's dive into the next factor -- a winning business strategy.
What is a business strategy anyway?
Here are two definitions:
According to Boston-based Solution Matrix, Ltd., a global consulting firm, a business strategy is "the firm's working plan for achieving its vision, prioritizing objectives, competing successfully, and optimizing financial performance with its business model."
According to Kauffman Fast Trac, a consultancy within the Ewing Kauffman Foundation, a business strategy is "a summary of how the company will achieve its goals, meet the expectations of its customers and sustain a competitive advantage in the marketplace."
I could list a dozen more definitions for you. They all say the same basic thing: a business strategy is your plan for entering a market (or growing a market position), competing successfully, making money and delivering value to stakeholders. At the core of your strategic plan is a business model. The business model determines exactly how you make money - how you charge for what you provide. Over the next few posts, we'll take a deeper look at these components to a business strategy as it affects funding. I'll draw upon the work of Bill Aulet, author of Disciplined Entrepreneurship, as well as the work of George Kenney and I do with entrepreneurs every day.
Whether you've long-since formulated a business model or you're just now creating it, consider that for investors it's important that your model clearly defines how you make money. That doesn't mean your model has to define money-making in an obvious way. Innovative companies often have innovative ways of making money. What's more, a truly interesting method for money-making could make your pitch quite memorable, encouraging investors to share it with their colleagues. But whether it's obvious or not, your method for making money needs to be clear. It also needs to be believable. Finally, it needs to scale.
It can be interesting to look at the business models of large, successful, iconic companies to look at how they make money. I realize that many large companies make money lots of ways. But how they strategically drive value is always interesting. Where the money comes from is often not obvious. Here are a few examples:
McDonald's drives value chiefly through acquiring valuable real estate, then leasing it to franchisees as a part of their franchise agreements. With meticulous in-house research into location selection, rather than relying on inexperienced franchisees to select locations, McDonald's ensures that when a store opens, lot's of burgers are sold. Plus they make money on leasing the store.
Disney makes about 45% of its' revenue through the media networks it owns (ESPN, ABC, Disney Channel, etc.) which is significantly more than it earns from visits to its' hotels and theme parks. Revenue from consumer products, films, and online/interactive channels is dwarfed by comparison. Yet the media networks consistently, repeatedly drive revenues to those other channels, even as they generate tremendous revenue in their own right.
Apple makes more than twice the combined revenues of all its' other divisions (Mac, Services, iPad, other products) from the iPhone. The Mac is (or at least was) it's iconic product, but the iPhone is where the revenue is coming from as the world increasingly lives on their cell phones.
Think of McDonalds, Disney or Apple, you think of burgers, Mickey or the Mac. But most of the money comes from elsewhere. Of course, none of those companies started out making money from the things they make the most from now. That should tell you something important about a winning business strategy . . .
It's malleable. It can grow or change with market conditions, competitive forces or new opportunities. Seeing the potential future is a key talent for those of you who are vision masters. You'll drive future value as you see the future and steer your company into it. For you execution masters, dealing with the current realities is your forte. That's why I've always said it takes both skill sets to create a winning team -- something we will discuss in the coming weeks as an integral part of the Master Funding Equation.
Vision + Discipline turns out to produce winning business strategies. If you haven't read my book "Born To Star" please get a copy. You'll get a tour-de-force about winning teams in action.
In future posts, we will look at some specific, fairly sophisticated methods professional investors use to assess your strategy, your model, your plan. For now, be sure that your strategy is crystal clear. You need to be able to answer the following questions succinctly, with confidence:
- What is your product or service?
- Who is your customer?
- What need does it fulfill (or what problem does it solve) for customers?
- How do you sell your product or service to them?
- How will you scale?
Notice that the first three questions require a simple, clear, straightforward answer, while the last two questions require an explanation. If you find yourself having to explain your answers to any of the first three questions, go back to the drawing board. Few things destroy investor confidence faster than a CEO that can't succinctly define his or her product/service, who it is for or what need it fulfills.
The last two questions require analysis on your part. Done well, your answers to the questions of the method for reaching customers and for scaling can also be succinct. Investors want to know that you have really thought through the different methods for selling -- direct, retail, wholesale, licensing, dealers, in-house sales representatives, etc. Be prepared to defend your selection, know why you've chosen the particular sales strategy you've chosen. But as always, be coachable, especially if your investor has relevant industry experience.
Scalability is another matter. You may be at an early stage in your business. The precise method or plan for scaling up may not be entirely clear to you. If that's the case, show that you've thought it through. Give your best answer, but acknowledge that things may change over time. According to Investopedia, "a scalable company is one that can maintain or improve profit margins while sales volume increases." Start from there. Look at the factors that go into your product development, sales/marketing and cost of sales. Run your own models. Consider things such as increased reliance on suppliers, contractors, employees or credit as you grow. Know the variables at play. Create models. Be familiar with them. That's what investors want to see -- that even though you may not know the answers now, you're doing the analysis, you know the factors that go into scalability for your company.
Key Takeaway: Work on answering the five questions posed above. Make them as succinct as possible. Practice them. Deliver them with confidence, yet be coachable. That all breeds trust. By now you know how important that is to a successful experience with investors.