Business Model Evaluation

Imagine you are a venture capital investor who considers investing into a start up.

In terms of due diligence there is not much to analyse except a team and an idea expressed in a business plan.
What method would you use to evaluate the business model if you don't want to rely on your gut feeling alone?

Here's what I've found so far:

1) Business Model Generation (2010): 
Two-fold evaluation: SWOT for Canvas as big picture and SWOT for each single component.

2) Morris, Schindehutte, Richardson, Allen (2006):
7 performance indicators: uniqueness, profit potential, internal consistency, imitability, robustness, adaptability, sustainability.
That's great so far, however unclear how to operationalise this. There seems to be no method how to actually measure this.

3) Amit, Zott (2001):
4 performance indicators in their NICE-framework: novelty, lock-in, complementarity, efficiency. 

4) Hamel (2000):
4 performance indicators: efficiency, uniqueness, fit, profit boosters.


Which ones do you find useful and have you come across other approaches that can be operationalised and are therefore useful for practitioners?


Regards,
david

Tags: VC, assessment, capital, due, evaluation, indicators, investment, investors, performance, venture

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Replies to This Discussion

Permalink Reply by David M. Weiss on November 20, 2010 at 11:29pm
Had a look, sounds interesting. Thanks for the post
Permalink Reply by David M. Weiss on February 14, 2011 at 12:27am

Alex, the Business Model Evaluation Tool (Excel) is ready and uploaded on

http://www.businessmodelhub.com/forum/topics/business-model-evaluat...

 

Regards, David

Permalink Reply by Max Forcett on October 25, 2010 at 10:37am
I've heard from some VCs that scalability is one of their most important evaluation criteria.

That is true. However, I think not only the outcomes and possibilities of a successful idea (best case) should be evaluated. Considering the large amount of start-ups that fail in the early stages, I would like to add some risk evaluation criteria. For my needs, I created a questionnaire based on an article by Shi/Manning (2009): "Understanding Business Models and Business Model Risks"
My questionnaire follows the idea: The lower the scores, the lower the risks of failing. If any situation requires to focus on some special risks, you can simply include a factor to weight the items/questions/risks.

Feel free to use and redistribute this questionnaire with credit to the creators.

Looking forward to your comments.
Best, Max
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Permalink Reply by Douglas Wiley on November 16, 2010 at 2:47am
I've never in my life needed to evaluate a start up, but the first thing that popped into my head while reading through this and the other comments was the importance of having a standardized set of tools, and to use them without much (if any) alteration for a set period of time (or number of startups). The reason for this is that you need to be able to evaluate the effectiveness of your measurements as best as possible.

I think of it in terms of a standard costing model in a manufacturing environment. If you're constantly changing your standard, it's meaningless, and you need to look at the eventual success/failure of those startups you pass up as well as those you invest in to make sure you're getting a complete picture.

Like I said, this falls completely outside my realm of experience, but if the old adage is true about measuring performance, then toolsets like this need to be held to the same standard as everything else. You want repeatability from your startups, it seems to follow that you'd want the same thing from your own tools and resources.
Permalink Reply by Marc Sniukas on November 19, 2010 at 6:03pm
Permalink Reply by David M. Weiss on November 20, 2010 at 10:59pm
I like that you explicitly separate "what we know" from "what we assume". Certainty about information is definitively an important aspekt in evaluating a business model, especial in an early stage venture.
Permalink Reply by David M. Weiss on January 27, 2011 at 1:30pm
Mark, hope you're doing well! My results are out:

http://www.businessmodelhub.com/forum/topics/business-model-evaluat...

What do you think? David

Permalink Reply by David M. Weiss on February 14, 2011 at 12:28am

Marc, the Business Model Evaluation Tool (Excel) is ready and uploaded on

http://www.businessmodelhub.com/forum/topics/business-model-evaluat...

 

Regards, David

Permalink Reply by Rod on November 25, 2010 at 9:43am
David,
If I were an investor looking to invest in a scalable startup, I'd give them a Quartet of Global Value Chain (Business Model) Maps to complete. The Quartet consists of the following visual templates:

1. Global Value Chain Map
2. Global Value Chain Dashboard
3. Global Value Chain Attractiveness Map
4. Business Model Plan

The above Quartet obviates the need for an entrepreneur to present a traditional business plan for funding.

You could view the Quartet at:

http://www.slideshare.net/RodKing/global-value-chain-map

The enterpreneur would use the Global Value Chain (VC) Map to present his or her vision/hypotheses on how the proposed business model works to deliver both customer value and business profitability throughout the lifecycle of the scalable startup: birth (Customer Discovery and Validation), growth (Customer Creation), and matured (Company Building) stages. Incidentally, Alex's Business Model Canvas can be directly mapped on to the Global VC Map. The Global VC Map is designed for visual collaboration and scalability. The Global VC Map functions like a fractal mind map and one could zoom (drill) in and out of elements using additional mini-maps.

The Global VC Dashboard is especially important as it allows an enterpreneur to visually formulate and test vision/goals/hypotheses regarding performance of his/her business model. The presented Global VC Dashboard contains metrics for a startup in what Steve Blank calls the Customer Discovery stage. In fact, the metrics are gleaned from Blank's blog (www.steveblank.com) regarding metrics for a Customer Development/Lean Startup. The metrics are demanding. And so they should be, for the metrics assume that the enterpreneur has developed and tested product prototypes with prospective customers. If an enterpreneur is able to describe the hypotheses, results, and pivots (structural changes) of his/her operating business model using the Global VC Dashboard, then the investor will be able to make a very informed decision. The Global VC Dashboard also facilitates in-depth discussion about validity of the assumptions inherent in the entrepreneur's business model.

The third template, the Global VC Attractiveness Map, focuses on the business model of the startup's industry. This template largely draws from Michael Porter's Competitive Analysis especially his Five Forces and Value Chain Analysis. Again, the investor would get a lot of insight about the depth of knowledge that the enterpreneur has about the startup's industry especially how attractive the industry is for investment and emergent competitive advantage.

Finally, the enterpreneur should be able to present the main hypotheses and projections using a one-page Business Model Plan. From this Quartet, the investor should be in a position to assess the risk associated with the startup that is requesting funding as well as the startup's potential for extraordinary profitability.

Please note that the presentation of the Quartet is in PowerPoint and can be freely downloaded and completed by enterpreneurs, VCs, or business strategists. Also, the metrics and descriptions of the Global VC Dashboard and Attractiveness Map can be modified.

I hope that you find useful the above ideas and templates.

Best,
Rod.
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Permalink Reply by David M. Weiss on January 24, 2011 at 11:35pm
Rod, the templates are really useful, thanks!
Permalink Reply by Rod on January 27, 2011 at 2:01am

Hi David,

Thanks for your feedback. I'm glad that you found the templates useful.

 

Best,

Rod.

Permalink Reply by David M. Weiss on January 27, 2011 at 1:34pm

Rod, my results are out: http://www.businessmodelhub.com/forum/topics/business-model-evaluat...

Is it of use to you? David

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