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so one of the interesting things about thinking about a start-up is how is your company going to be organized and what we now know is the most efficient way to think about all the pieces just all the parts is by a business model and so the next question is okay Steve you just told me to think about a business model but what is a business model what are all the pieces well let's take a look and a business model is how a company creates value for itself while delivering products or services for its customers now if you think about it in the old days we think about how to organize a company around functional organizations we think no no a company is about its sales department or its engineering department and you would draw an org chart but now we're going to draw a very different diagram we're going to draw a diagram how to think about all the pieces of a business and so let's take a look at these nine boxes the nine boxes to describe any company from the world's largest to a two-person startup starting in your parents garage let's take a look at the first piece called the value proposition the value proposition answers the question what are you building and for who the value proposition says hey it's not about your idea product it's about solving a problem or a need for a customer that is what pain are you solving what gain are you're creating and more importantly who are your customers now value proposition is a fancy word for what product or service are you building this is where you normally would list all your features and here's all the speeds and feeds and benefits and whatever but we're really going to be asking a different question than might have been used to it's not all about your technology your technology is just part of the value proposition customers really don't care about your technology the customers are trying to solve a problem or fulfill a need by the way we'll be talking about this through multiple lectures the difference between a problem and a need is a problem is I have an accounting problem or I want to use a word processor and and those types of products solve a problems but there are other things that human beings do like I want to be entertained or I want to have a date those are some basic hardwired social needs or I want to communicate with my friends like Facebook or Twitter those are needs these are different than problems and by the way if you could find products that solve needs your total available market as you'll see later is huge compared to I solve specific problems so the next thing is who are my customers who are they and why would they buy and as you'll hear a number of times your customers do not exist to buy you exist for them and what you're going to do by getting out of the building is figuring out all their geographic social characteristics demographics such that you actually could draw and put up a picture of on your wall of who the archetype is or who the persona is of your customer and it turns out that in most startups you might have more than one or two or three types of customer archetypes and personas but you need to understand them in detail and there is no possible way you could have anything but a hypothesis on day one of who they are the next is channels how does your product over here get to your customers over here and we use distribution channels to do that now what's really interesting is pre 1990s the only channels to get to a customer was a physical channel that is you went to a store you had sales people there was physical distribution but since the mid-1990s in the last couple of decades we now have virtual channels the web mobile cloud and so distribution channels the first question you want to ask is how will I be selling and how do I be distributing my products are they through physical channels or they web mobile or given today almost every physical channel also has a web presence what is the relationship of how your product gets from your company to the customers customer relationships it's kind of the fourth piece and customer relationships has a really interesting interaction with these other three pieces it basically says how do I get customers how do I keep them and how do I grow them and just like thinking about distribution channels these are very different for web mobile than they are for physical channels but visually they kind of look like this double-sided funnel so let's just take a look at quickly a web example in getting customers you're gonna be worrying about how do i acquire them that is how do I get them even to my website how do I activate them that is how do I make them do something and then later on we'll see after I got them how do I keep them around that is how do I not lose them through attrition and churn and then what can I do once I have customers to make them spend more money or use my product even more and so one of the things we'll be thinking about is how do I get keep and grow customers and just like every other step you might have hypothesis on day one but you're only going to figure this out when you're out of the building the next thing is revenue streams how do you actually make money from your product or service being sold to customer segments you know revenue streams basically ask the question what value is the customer paying for and then actually has you think about what's the strategy of how I'm gonna capture that value is it I'm gonna just have a direct sale and it's a complete a transaction based on price is it a freemium model where I'm going to give away the product for free and hope that some portion convert later is it a license or subscription model that revenue model is different than the pricing tactics that is what is the dollar or pound amount or euro amount that I'm gonna be charging again the only way to figure this out is being able to interact with tens or hundreds or thousands of customers so you finally understand what the right revenue stream and revenue model is next piece you want to think about is one of the key resources what do you need to make the business model work what assets are important and what's an example of an asset and in a key resource well finance do you need capital do you need a line of credit some assets are and resources are physical do you need physical plan to like the manufacturing line do you need specialized machines do you need vans and for delivery do you need cars is there something else you need if there are intellectual property you need is there patents you need to acquire or protect do you need to acquire customer lists or is it just that you need to get great people great software programmers in a specific area or great hardware designers or great manufacturing people and then finally again at the interaction between intellectual and human capital is that's another key resource what specifically do you need to do to keep these people and who are they the next pieces who are your key partners and suppliers and partnerships are kind of interesting is we need to ask ourselves before what's the deal is what exactly are we acquiring from partners and also what activities are they going to perform and when and this is where startups sometimes make a mistake of thinking well large companies do partnerships I guess I need those two on day one it turns out the types of partnerships you need in year one are certainly not the ones you're going to need in your three or five or ten and the types of partnerships could be strategic alliances joint ventures just regular suppliers and buyers and so you need to be thinking through who they are and actually getting out of the building and testing them next our key activities what's the most important things you need to do for the business to make the business model work are you in the production business you know are you making something or are you in the problem-solving business like you're doing consulting or engineering or are you managing supply chains what what are the key activities you need to become expert at and then finally all this adds up on the left-hand side over here to costs what are the cost and expenses to operate the business model one of the interesting things about cost is it's not just the obvious ones like people or buildings or materials what you're really gonna be asking or what are the entire costs to operate our business model and so you want to think about our what are the most important costs you need to worry about what are the most expensive resources you're going to need to pay for and what key activities are the most expensive and then you want to ask the typical accounting things what are fixed costs what are variable costs are there economies of scale and you want to start getting a good handle on what it is that will end up costing you money to run your business