How Digital Business Models are Truly Special – Funding Options

In two previous articles, I discussed that digital business models are characterized by a cost structure with low marginal cost, and the implications of low marginal cost: more freedom in business model design, sales growth driving margin expansion, and potentially high valuations. The potential for high valuations makes digital business models especially attractive for venture capital (VCs).

On the other hand, digital business models often require upfront funding, and because of their cost structure, that funding typically can be obtained from VC-type investors only.

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Corporate Venture Capital in Germany – Impressions from the 8th Technology Day in Munich

On March 19, the annual Technology Day of the Munich Network took place for the 8th time. This event is one of the key events for the German VC scene. In line with a recent trend in Germany, this year’s conference focused on Corporate Venture Capital (CVC) and accelerators (conference program – in German language).

My background is in the IT industry, where – at least from a global perspective – CVCs traditionally are not the dominant force, since there is a lot of capital available from independent venture capital firms. Therefore, it was quite a surprise for me to see how important CVCs have become in other industries and in the German venture funding scene.

Here are some highlights I took away from the conference.

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How Digital Business Models are Truly Special – Implications of Low Marginal Cost

In my previous blog post I highlighted that digital business models have a fundamentally different cost structure than most traditional models – with a key difference being the low cost of revenue. Low cost of revenue in turn means low marginal cost, i.e. once everything is up and running, it doesn’t cost much more to serve additional customers.

Extremely low marginal cost has very interesting implications. Continue reading

How Digital Business Models are Truly Special – Cost Structure

Over the last couple of years, the idea of consciously designing a business model has gained a lot of traction, fueled by the groundbreaking book Business Model Generation from 2010.

However, I believe it is very important to fully understand the impact that the business model has on the cost structure in the financial model – and vice versa.

Before looking at cost structures, let’s quickly wind back to the dot-com boom around the turn of the millenium: At that time, Microsoft was the undisputed leader of the global software market, generating fantastic profits based on its digital business model. As it became clar that the next wave of digital business models was about the Internet, the assumption was that every startup that did “something with the Internet” had a fair chance of becoming the next Microsoft.

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Do You Understand the Income Statement – aka P&L?

I have found that many startup founders and even some executives in larger technology companies are not familiar with the structure of the income statement, also known as profit & loss statement, or short P&L. 

Why the P&L is Actually Quite Interesting

Every one who works on business model design or who is in a leadership role at a technology company should understand a few basic concepts about the P&L, because

  • the P&L provides information on the cost structure of a business 
  • this helps you understand your own business, that of competitors (in case you have competitors that need to report their financials), and that of industry leaders who use a similar business model as you do (for inspiration)
  • the cost structure is very much intertwined with the business model of a company
  • and therefore, it helps you understand which freedoms you have (and don’t have) in evolving or changing your business model

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Resource List for Startups – Curated Content At Its Best

This week, I came across a list of tools for startups curated by Steve Blank.

I was totally excited and impressed with this page for three reasons: it is a great list of resources for entrepreneurs, it’s an excellent example for the value of curated content, and it shows how curated content can be a valuable contribution to a broader conversation on the web.

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Crossing the Chasm – Continued …

Well, in my last blog post, I reminisced how in the nineties, Geoffrey A. Moore with his book “Crossing the Chasm”  established the reference model for high-tech market entry and growth strategies.

His thinking quickly became common knowledge in the valley. Often times this was implicit knowledge –  even people who had never read the book acquired the concepts “by osmosis”.

However, with the end of the dotcom boom, “Crossing the Chasm” seemed to go a little bit out of fashion.

That’s why I found a recent article by Andy Rachleff very interesting: “To Get Big, You’ve Got to Start Small.” In this article, Andy points out that “Crossing the Chasm” still has valuable messages for us today.

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Crossing the Chasm – An Evergreen Still has Valuable Messages for Startups

Book Cover: Geoffrey A. Moore: Crossing the Chasm, 2nd Edition 2002

Geoffrey A. Moore: Crossing the Chasm, 2nd Edition 2002

When Crossing the Chasm by Silicon Valley consultant Geoffrey A. Moore was first published in 1991, it quickly became the marketing bible for high-tech.

It was a perfect fit, especially for the type of business model that dominated the startup scene in the 90ies: complex IT products – hardware, software, or mix of both – that required quite expensive R&D and typically were sold B2B through a enterprise sales force.

One key insight presented by Moore was this: innovative technology solutions often require their users to change habits or processes.

And since individuals and organizations are typically resistant to change, a startup trying to sell such a solution was initially fighting an uphill battle with the majority of its potential customers.

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Lean Startup Misconceptions

LeanStartupLike many young entrepreneurs as well as veterans of the technology industry, I’m a huge fan of the Lean Startup approach as described by Eric Ries in his famous book. For readers not familiar with this approach, see Wikipedia for a quick summary or Eric’s website for the principles.

But recently, I’m seeing articles that are a little more critical, for example GigaOm reporting from the Lean Startup Conference in December 2012 where Marc Andreessen weighed in:

Marc stated that not all startups should be lean startups – and that investors should not automatically reject a company that is not using  this popular approach.

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Best Wishes for 2013 – As We Are Facing an Interesting Year for the Technology Industry

© Pitopia, Iwona Golczyk, 2012

© Pitopia, Iwona Golczyk, 2012

Returning from the holidays, I’d like to take the opportunity to wish everyone all the best for 2013!

I’m looking forward to an interesting year: I cannot remember a time when analysts were disagreeing that much on the outlook for major economies. Since the financial crisis in 2007/2008, economic certainties seem to have evaporated and many rules we took for granted are dissolving.

But we are not in a depression, so these times of change also present opportunities for innovators and we’re still seeing exciting growth in many sectors of the technology industry.

That’s why for the next few months, I’ll focus primarily on growth and innovation models that are specific to the technology industry – highlighting key concepts and in particular the application areas for each model, i.e. for which situations a model is appropriate, which challenges it’s supposed to address, or which problems it promises solve.

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