I’ve been involved with startups for the past 20 years or so, and during that time I’ve been exposed to plentiful of different business models.
Some have been good, some have been outrageously bad.
But how do you know which business models are good and which ones are bad?
Short answer: it’s quite hard.
Business models that are generally bad
In terms of bad business models, there are quite a few that generally should be avoided:
- business models where you are highly dependent on one party, company or entity
- business models that require a lot of upfront capital and where ROI takes a long time to achieve
- business models that require a lot of work with very little potential ROI
Being highly dependent on one party
Building a business where your entire business model revolves around or is based on one party is extremely risky.
This could for example be building a business catering to a certain government sector (that could be shut down = you will be out of business), building a web startup or site that only relies on traffic from Google or by the means of Search Engine Optimization (Google decides that you’ve behaved badly and penalizes you = your business is gone) and so on.
Building your business and relying on one big key party is quite bad. The retail coupon site RetailMeNot experienced this (and they’re even backed by Google Ventures!), and even smaller players in smaller segments and regional verticals aren’t safe either.
You could literally spend years of your life building something, and in the matter of a few hours you’ve lost everything.
In that case, you’d have to start over, like the person in one of the linked articles had to do with his Smartlend project.
Or just better – don’t start over. Move on to a better business model.
Upfront capital and delayed ROI
Theoretically this is a bad business model – but it can work practically, even if it very rarely does. But if it does work, it will generate a lot of revenue down the line.
Great examples of this are Facebook, Twitter, Instagram etc. These products/services didn’t make any substantial money for a lot of years and they required an insane amount of investment to keep the product going while it didn’t make any money at all.
Even though Facebook, Twitter etc. have succeeded – very few following this business model actually do. You have to be able to acquire capital, and lots of it.
You’ll be building something that won’t generate revenue money for several years and you need to have partners onboard that understand and accept this fact.
There are plenty of companies that have followed this model and either a) couldn’t acquire sufficient capital while building the product or b) could acquire sufficient capital but couldn’t monetize and make a ROI in the end.
A lot of work and very little potential ROI
This one should be obvious to most people, but generally it isn’t. The truth is that most local, smaller businesses follow this model.
They require a lot of work, they aren’t scalable and in the end they don’t generally return the sufficient ROI to reward you for your work.
A very obvious example of this business model might be a restaurant, or a highly unscalable IT-consultancy.
Always try to strive for business models that allows you to scale easily.
The business models to focus on
In my next blog posts I’ll write about business models that I believe to be the best ones. Stay tuned!