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The Average Plan vs. Reality

Most plans are well-intentioned but … 

The Average Plan

Investment > Rapid Revenue Growth > Profitability > Exit or SPAC

Reality Stream 1

Revenues fall well short of projections, expenses are higher than expected, run out of cash and the business fails.

Reality Stream 2

Revenues fall well short of projections, expenses are higher than expected, raise more cash (at a price), become an overnight success in 5-10 years

Why do these Realities occur ...?

There are many common theories …

Lack of Sales

The most common theory you will hear is that the founders/team didn’t make enough sales … 

No Product-Market Fit

Another common theory is that there was a lack of product-market fit and the timing wasn’t right …

Competition

Others will say that the competition got there first and won the game …

Ramen Profitability ...

If you read some of our posts on Airbnb, you will see that they nearly went under several times in the early stages of their business. One of their biggest breaks was getting into YCombinator where Paul Graham told them to focus on getting Ramen Profitable.  At this point, their sole focus became making enough to pay their bills ($4,000 per month).

In late January 2009, about three weeks into Y Combinator, their efforts started to show results, and their numbers crept upward. But it was hard to say for sure whether it was growth or just random fluctuation. By February it was clear that it was real growth. They made $460 in fees in the first week of February, $897 in the second, and $1428 in the third. That was it: they were airborne. Brian sent me an email on February 22 announcing that they were ramen profitable and giving the last three weeks’ numbers.” The Airbnbs

They shifted their focus in their business (to a subset of the market, and hosts) and became intimately familiar with their business model … and the rest is history. 

Steps in the Process

You can’t go from 0 to 60 in a night, but you can take steps in the right direction to understand the mechanics of the business model, core margins of the business, and what key activities need to be focused on to drive growth at the margins

Map out the Business Model

Create a Canvas.  Study up on other proxy/analog models to see how they map out compared to yours. If you are completely stuck, look on the Canvas Index or a host of other sites to find examples. 

Work out the Margins on Paper

If you earn $1 in Revenue, how much flows down to the Gross Margin (net of Cost of Goods Sold, see Glossary). How much of that flows down towards Profit (factoring in Operating Expenses)

Find the Growth that Drives Margins

Once you have an idea of what the margins are, figure out what type of Growth drives the highest margins.  What customer channels, what segments, etc. 

The Model Begins to Emerge

From here, the business model begins to emerge.  This is where Visual Planning can help, as it helps bring these somewhat abstract concepts to life. 

What are the Key Activities?

What activities need to be focused on – over-and-above anything else – to drive profitable growth.

What are the Key Metrics?

Find one or two Key Metrics (usually customer-based ie. AOV, LTV, etc) and use those as guide posts to measure progress.

How is the Cashflow Impacted?

Sometimes new insights require upfront investments, shifts in marketing strategy. Ensure the impact on cashflow is well understood in relation to the business model.