Sunday, December 02, 2012

A question that every business should ask

Silicon Valley is buzzing about how the funding environment for startups is changing. Sarah Lacy has a good post on it. Fred Wilson provides his own explanation. YCombinator is even shrinking their current class size, although they are blaming it on internal problems, not the larger funding environment.

This feels similar to the crash in the early 2000s when companies with no real way to make money were funded with abandon.

Techcrunch is now reporting that when startups are getting meetings with investors,
"Investors are increasingly asking 'What’s the business model?'"
Call me old fashioned, but shouldn't every business ask themselves this question? It shouldn't take a savvy silicon valley investor to ask this. Anyone starting a business should be asking this question of themselves.

And beyond just asking how you plan on making money, it never hurts to explore a simple budget to see if the business is actually viable. I'm not talking about a 5-year forecast, but a simple model that shows the costs of acquiring and servicing a user and what that user might be willing to pay. This simple back-of-the-napkin exercise is fundamental to entrepreneurship and critical for anyone considering starting a business.

I know, some of us entrepreneurs want to change the world with our ideas. But the fact is, being an entrepreneur is about creating a business, and businesses need to make money. I don't think it gets much simpler.

Image courtesy Andrea Resmini on flickr

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