Some business models are better than others

I started my entrepreneurial journey almost 4.5 years back. Over this period I have thought a lot about business, business models, how to create wealth etc. I was in Mumbai a year ago and a young relative asked an older uncle (who was a senior executive at a large bank) about “what kind of business should I do?”. Now obviously, the way to decide which business you’d like to do depends totally on you, your experiences, your circle of influence, what you love, what excites you, how you feel about a certain problem etc. However, my daily business routine makes me clearly see that some business are better than others. It’s like this awesome post by Bill Gurley called “All Revenue is not created equal” – if you haven’t read it, do read it. Just like revenue, some businesses are inherently better than others.

Here are my thoughts (I’m guessing a lot of other people have had the same thoughts, but I haven’t really checked on this much):

1. Everything else being equal, subscriptions revenue > transactional revenue > advertising revenue. A lot of businesses have a mix of the 2 out of 3 or all 3 forms of revenue. Sometimes it is tricky figuring out what kind of revenue it is e.g. Gillette looks like transactional (when I buy the safety) but it is actually fundamentally a subscription revenue (purchase of razors every month). I think all businesses strive to move to the subscription category because of better predictability of revenue, one time effort of selling and mostly additive revenue. In India, consumers are not used to subscription businesses apart from utilities (electricity, telecom etc.). In the US, you can build a business using B2C subscriptions business a bit more easily, even though it would be tough (Ladder, LinkedIn, ConsumerReports – which does $200m annual revenue).

2. Everything else being equal, for the first time entrepreneur (aspiring to create a large business) without connections/pedigree, here is how it would work best:

Product > Service. Unregulated > regulated. B2B > B2C.

If, however, you have lots of capital and you are well connected, here is how it would look:

Product > Service. Regulated > unregulated. B2C > B2B.

By regulated I mean that there is some kind of an entry barrier which favours the incumbents (like telecom spectrum, banking licenses etc.).

By product v. service, do read this Understanding product v. service – ThinkLab Notes 1. It is sometimes tricky to decide which is what (e.g. broadband is a product, even though it is sold as a service), but typically you have a good sense when you come across something which is a service.

The worst place to be (usually) is B2C + service + unregulated.

That said, there are tons of large successful companies in each of these different zones.

Different business models

Different business models

From a first generation entrepreneur’s viewpoint, it is best to look at B2B, product, unregulated markets.

3. On the internet, the strongest businesses are the marketplaces (usually difficult to pull off in the offline world). In fact, in addition to delivering software as a service, the only other fundamental use of internet from a business perspective is to build a marketplace / network. Marketplaces/networks are horribly difficult to get off the ground (especially in India where VCs are not comfortable with taking a bet to keep building one side of the pipe – usually B2C – without seeing the monetisation on the B2B side of the pipe). But if you are considering doing a consumer internet company, building a marketplace model is a great way to build a good business.

4. The other prism to look at things is to see: capital required, time required, success rate, scale of success. Typically, some business categories (B2C, service, unregulated) would take a lot more capital, get built over a few years, have a high failure rate, but have a huge scale of success if they do succeed (e.g. Amazon, Flipkart). One of the other hand, doing a B2B, service, unregulated like starting an ad agency, or a corporate law firm can require little capital, take a lot of time, have a decent success rate but the scale of success is not huge.

In summary, while an entrepreneur might choose to solve a problem he/she is passionate about, the above factors play a huge role in how and where the company is likely to end up in.

Note: Like all models, this is just a simplification for how our complex world works. I find the above mental model quite useful because it helps me understand why some businesses are really sexy while others are not. To be honest, most of the stuff is quite obvious – but one is still tempted to try and put down one’s thoughts.

Standard

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s