As long time readers of this blog will know, I am a big believer in a "business model" as a means to develop a new business concept, evaluate an existing business or manage an operating company. This is the main theme in HUTM--the Hacker Universal Theory of Management, which simply put says "focus on the growth drivers in the revenue model of the business".
To achieve a well developed business model, one needs to articulate the assumptions that underlie the business model in three areas:
- the Revenue Model
- the Pricing Model
- the Sales and Distribution Strategy
(More background on these three key concepts is here.)
Steve Barsh, a professor at Wharton, has a good post-- "Want A Better Valuation? Decrease Your Assumptions"--which ties in well with my own thinking on business model. Barsh states:
"I generally find that most businesses / ideas are based on 3 - 7 key assumptions that represent the highest risk factors that will determine the likelihood of success. This applies to both new and ongoing businesses."
His advice to business managers:
* What key assumptions are we making?
* How can we figure out if our key assumptions are correct and do it quickly and in a capital efficient manner?"
The points to take away from Barsh are:
- You have to identify the key assumptions in the business model
- The assumptions represent the risk in the model
- The more confirmation of the assumptions the better the valuation of the business...(Hacker--AND THE MORE LIKELY YOU WILL BE FUNDED)
- Spend intellectual capital to confirm assumptions before you spend cash!
Go HUTM!! If you need a good laugh, read this post--HUTM Goes Viral--from October 2007.