Business Modeling A Startup Without Financial Forecast?
Building a startup is about designing a business that could scale and make profits from a great solution answering a customer problem.
Today startups are helped by a lot of business tools and methodologies to build new businesses that may change tomorrow's world. Indeed, the startup ecosystem has gained great maturity in the past years, thanks to some awesome tools like the “Business Model Canvas” or the “Lean startup” methodology (inspired from the “Four Steps to the epiphany”, Steve Blank).
The Business Model Canvas is an interesting tool to help entrepreneurs designing a Business Model. It gives a frame to design a business taking into account the main aspects of it. Its really simple form has probably been the key factor of its success in the startup ecosystem.
But unfortunately, the Business Model Canvas is not enough on its own.
The Lean Startup methodology is complementary in the way that it tells entrepreneurs “to get out of the building” to test their hypotheses and to refine their models with a learning curve enhanced by customer feedback.
Combined together, the Lean Startup methodology and the Business Model Canvas tool are great to build a Business Model that fits customers' expectations.
But surprisingly, financial forecasts are generally not used during business modeling. Why that? Are financial forecasts useless to create a Business Model for a startup?
In startup ecosystem financial forecast is often considered as bullshit because it’s hard to predict the future for a “new” business. It’s also perceived as a narrow-minded way of doing innovation, especially during an ideation process.
However, building a business is not just about creating a great product or solution for customers. It’s obviously key to success but not sufficient. How many entrepreneurs have good ideas and how many really succeed?
In all businesses, and especially in startups, execution is more important than the idea itself. Indeed, building a great Business Model on paper doesn’t necessarily transform on a successful startup with steady growth and rentability. Entrepreneurs need to execute great plans to get from scratch with little cash to worldwide companies with the exceptional business model (built on day 1 on a paper, with the help of the Business Model Canvas).
That’s where Business Model meets Strategy!
To go from nothing to a successful business, entrepreneurs need to work also on a relevant strategy.
But what “strategy” really stands for?
The strategy is the design of execution planning to get results in order to get close to the targeted Business Model. Executing a Business Model can take time and multiple transitional steps.
Any entrepreneur will thus need to plan its execution process to expect any success. Planning is pretty basic :
- What are the key steps to get to success?
- What does it take to get to the first step? And to the others? What are the necessary means to get there (human resources, investments, expenses, …)?
That’s where financial modeling is coming up. Entrepreneurs need cash to get the means to build a successful Business Model. Without cash, it’s pretty hard for any entrepreneur to get anywhere (“Cash is King”).
(By the way, there are of course usually many possible strategies to get to a goal, making strategic planning more complicated than it really looks…)
So entrepreneurs need to build their strategies to know what cash is needed to get (at least) to the first step. Defining “keys steps” are rarely obvious for entrepreneurs (the first step is usually quite simple, but the next steps are more difficult to define or to predict for a startup). Working on financial forecasts will help entrepreneurs understand the financial impacts of their ideas: cash needs, treasury management, risk management, business performances, means scale-up, etc.
This financial work is of course an iterative process that can have a big impact on the business model itself.
Hence, building a business model without working closely on financial modeling and strategic planning seems like being a great mistake (or a lack of seriousness).
