In my last article, “5 digital business predictions for 2016,” I highlighted that this year we’ll see digital disruptions in the form of innovative industry business models, processes, products and services hitting the marketplace in full force. Much like a seismic event, market activity will become stronger and more frequent this year with ever more digital services — with compelling new value propositions — entering the market.
As these digital services roll out, there will of course be winners and losers. Armed with a vision for a new digitally enabled product or service, as you get ready to seek internal or external investment, it’s important to do the upfront strategic homework. This homework needs to be not just on the vision, value proposition and differentiation of the product or service itself, but on your entire business model and how you intend to go to market.
With this upfront strategic homework in mind, here’s a list of nine key questions to ask of your next digital business initiative. The questions include some of the standard, litmus-test types of questions that VCs like to ask — often focused on “team, market and technology” — and are intended to serve as a checklist to help you think through your business plan.
- What’s the scope, value proposition and differentiation of your overall solution? This should include a description of the scope of the solution — i.e., exactly what is being offered, the specific use cases for your target customers, and how the product or service fits into, or replaces, their current way of doing business. Clearly articulating the scope of the solution, including the starting and ending points in the customer journey, will help potential investors determine if you’re attacking the right problem space, in terms of both market/customer appetite and your own ability to execute, or if you need to narrow your original vision to avoid trying to boil the ocean.
Product or service
- What’s the detailed functionality of your product or service? This should include a description of the key features and functionality, the enabling/disruptive technologies employed, and the overall technical architecture and deployment model, as well as the core IP being employed and your envisioned product road map. In addition to your overall business model and partnering strategy, unique IP is key in terms of barriers to entry since it may help stave off the competition and other new entrants for at least a time sufficient for you to gain an edge.
- What’s the market you intend to serve, and what is its size and growth rate? This should include answering the key question of why now is a good time for your specific solution, given the evolution of the market and recent market trends and developments — including changes to customer/buyer profiles, needs, expectations and behaviors. In addition, address what will compel customers to want to adopt and utilize your specific solution, instead of what’s out there already, and what some of the envisioned drivers and barriers are to gaining this adoption.
- Who are your key competitors and what’s your competitive advantage? This should include your competitive differentiation, at both a solution level and a company level, as well as how you anticipate competitors may respond to your market entry and how you plan to sustain your competitive advantage. To think through the various strategic angles, it’s useful to assess how digital business disrupts the five forces of industry competition.
- Who are your key partners and how do they fit into your ecosystem? This should include the unique value each partner provides in your overall business model and how it will enable you to succeed. If a digital platform model is part of your approach, where the platform itself is the engine for growth, this should be covered here as well. In addition, with strange bedfellows for digital partnerships becoming increasingly commonplace, investors will be looking for how well you’ve thought through your partnering strategy.
- Who is your target audience and what are your customer segments? This should include a profile of your customers/buyers, their needs and a list of initial prospects. If you have feedback from initial customer discussions, proofs of concept and pilots, this should be shared here as well to help validate customer demand and interest levels. The digital customer experience bill of rights may be useful here to baseline customer needs and expectations, and can be further tailored and refined for your target industry.
- Who is part of your team in terms of founders and management? This should also include the board of directors and board of advisers (where applicable), and key resources you plan to utilize as part of the initiative. This section will, of course, be very different depending on whether you’re pitching to internal or external investors. If internal, then focus on the team needed to build, operate and maintain the solution on an ongoing basis. If you’re a follower of the business model canvas approach to describing and documenting your business model, then you may want to include key activities in this section as well as key resources.
- How do you plan to go to market in terms of your sales and distribution model? This should include a discussion of your channels as well as your pricing model. It should also include how you plan to scale the business and your overall marketing plan. If your model is B2C, then it will be key to explain how you plan to create customer awareness and drive initial adoption and usage of your solution. If you’re not a B2C company, it may be more prudent to employ more of an “arms dealer” model by working through partners to reach your intended end users. In this section, at least when you’re getting started, it’s good to explore several business model alternatives and work through the pros and cons of each model.
- What’s your overall financial model for the business? This should include your revenue model as well as your P&L, balance sheet, cash flow and cap table (where applicable). Investors will be looking for a carefully thought-out revenue model that’s realistic and achievable. It will need to be based on an in-depth understanding of the target audience and what they may be willing to pay for the service given the value received. While advertising may be an easy answer for B2C business models, this should be carefully vetted and challenged before being incorporated into the plan, if at all.
While VCs and other investors may ultimately base their investments on additional criteria such as their own market validation, target investment themes and chemistry with the founders, having a detailed answer for each of these questions will help ensure that you’ve thought the plan through for your own purposes and that you will be better equipped to address stakeholder and/or investor scrutiny.
Rather than spending weeks or even months on the business plan, you can do this in a lean manner, much as you may be approaching product development using an MVP approach, and still be ready for investor discussions. Many VCs like to see no more than a few slides in PowerPoint format upon initial discussion, so preparing a short business plan and then distilling this to produce your elevator pitch and executive summary will be a useful way to prepare.
According to Scott Goering, vice president of business development at Battery Ventures, it’s important to engage early with investors. Investors can work with you to assess and improve your business plan. Firms generally fund only a small fraction of the deals they see — so while your business plan doesn’t have to be perfect, you do need a compelling idea and a strong team. Goering notes that it is important to have a go-to-market strategy in mind, not just product features.
Doing your homework here will get you to a point where you can have an intelligent discussion, not only about the benefits of the application or platform you’re envisioning, but also how you believe you can realistically take it from idea to execution.