Yesterday, I met with an entrepreneur, and we discussed a variety of ideas related to building community. Late in the conversation, he shared one of his favorite mental models and asked for one I liked. After thinking for a second, I knew my go-to: simply distilling the financial model or business down to its most basic format. The idea behind this exercise is that if the financial model doesn’t work at the most basic level, it’s unlikely to work at a more complex level. Conversely, if you can’t break it down into a simple form, understanding it at a complex level becomes challenging. If it’s so complicated that you can’t understand it or help others understand it, the chance of success significantly decreases.
Let’s look at a couple of examples. In the first example, with software as a service, it’s easy to describe what the product does, whom it serves, and how it will work in the real world. Even with all that, if it’s not clear that our business model is to sign up 1,000 customers, who will pay us $10,000/year, and we plan to sign up this many more customers over the years, and we believe that with the gross margins and everything else, it will be a viable, if not great, business, then all the other pieces don’t matter. Of course, businesses are much more complex than that, but at a simple level, what is the financial model?
Look at a second example. If you talk about something like co-working space, it’s a similar pitch. How do you distill the business model as simply as possible? We’re going to have 200 desks and we’ll charge $350/month per desk surrounded by incredible community and services. This will provide the scale and revenue to offer an amazing experience to our members.
When thinking about different businesses and exploring entrepreneurial opportunities, my go-to is a simple distillation of the financial model in a way that can be described quickly and easily out loud. Start simple before adding complexity.
Entrepreneur
via https://www.aiupnow.com
David Cummings, Khareem Sudlow
