The Investment Readiness Level
You have used the Business Model Canvas to layout your new business idea. But, is it ready? How comfortable do you feel if you have to explain your idea to someone? Do you have answers for typical questions like “how much money can your make”?
Filling the canvas it’s not a one time exercise that you do in a workshop or brainstorming session. It’s a great tool to help you think about your business, but its simplicity can be misleading. With 9 blocks to describe how your business model works, many call it the “One Page Business Plan” or a “20 Minutes Plan“. But it’s not something you fill out and forget, it’s a first step in your entrepreneurial journey.
Instead of writing another post on how to fill the canvas blocks, we will dive on how to validate it. To help you know when it’s “ready” we will use our own approach to Steve Bank’s Investment Readiness Level:
Level 1 – Business Model Hypothesis
Start by making a first version of your business model. You can do it in any order or follow these steps:
- Customer Segments and Value Propositions to each segment.
- Channels and Customer Relationships … how will you get keep and grow you customer base ?
- Revenue Streams…how will you make money ?
- Key Activities, Resources and Partnerships … what is key to make your business work?
- Cost Structure .. what are the most important costs in your business model?
It does not be to be perfect! You are going to iterate it over and over. But it might be worth to check now if you are doing some common mistakes with the canvas, such as:
- Capturing “End Users” as a Customer Segment
- Confusing Product Features with Value Propositions
- Creating “Orphan” elements. Each element in your model should be related to at least one element in another block. You should not have revenues without customers for instance.
Level 2 – Market Need & Potential
Don’t assume you know your customers and their problems. Research Customers in each segment and prepare some interviews to understand their needs. After the interviews, you can build an empathy map to organise you research. It will help you understand not only their needs but their emotions. If you are using MetaCanvas you can create a map for each customer segment, if not, any other template will do. Don’t build your business in a vacuum but do build your business inspired by your customers.
Market Size and Competitive Analysis
By interviewing you can do more than design a better value proposition. You can understand what alternatives to your products and services they are using.
Competition is not part of your Business Model, but you still have to understand it. With MetaCanvas you can do it in 2 ways:
- Study the Business Models of your competitors and create a canvas for each one
- Use the the NABC tool that MetaCanvas provides to help you refine the value proposition. This tool was developed by the Stanford Research Institute and stands for Need-Approach-Benefit-Competition. In this level you should, at least for now, detail Need and Competition. The Need fulfilled by your goods and services should relate to a market opportunity. Check that the market is large enough to merit the investment to develop the business.
Level 3 – Compelling Value Proposition
By now you understand your customer needs and what the competition is, or is not, offering. It’s time to refine your solution and value proposition to your customers. Continue woking on the NABC tool and detail:
- Approach: You solution to the market need you uncovered. Explain how the approach is especially compelling or unique.
- Benefits: Describe the benefits of the product to the customer. How does the unique approach yield unique customer benefits?
- Competition: Why are the benefits significantly greater than those provided by the competition?
You can use content of the NABC can for an “elevator pitch” to promote your product. You may also arrive to the conclusion that the proposed product is not so valuable, so not worth pursuing. In this later case move on to more promising ideas.
Level 4 – “First MVP” Tested
You still do not have evidence that your customer cares about your value proposition to buy it. So, don’t rush your idea to development until you test it.
Start by building an MVP – a Minimal Viable Product or Service, that can be offered to potential customers. The goal is to get feedback and learn fast. Depending on your offer you can have several options. You can start testing with a prototype, marketing material or even something else.
What you must understand is that the MVP is not something you build only once. A Minimum Viable Product Is Not a Product, It’s a Process . From now on, you will build MVPs to validate the remaining hypothesis in your business model.
While you can’t use MetaCanvas to build MVPs, it can help you define the goals and success metrics for each test.
“Defining the goal for a MVP can save you tons of time, money and grief” Steve Blank
Level 5 – Marketing Funnel Tested
Start validating your Business Model hypothesis for Channels and Customer Relationships. Evolve your MVP and gather evidence that its gaining traction in the market. Build your marketing funnel based on the feedback you get from early adopters. Your funnel is basically the main instrument you have to reach so-called product/market fit.
Collect relevant metrics along the funnel, not vanity metrics. If you don’t know where to start you can use the startup metrics framework AARRR from Dave McClure. The framework name stands for Aquisition – Activation – Retention – Referal and Revenue. Its a good way to help you think on what happens to users before they be willing to generate revenue for you.
You can leverage MetaCanvas to set Goals and track Key Results on AARRR categories. Here is an example:
Level 6 – Revenue Model Validated
Your experiments with you MVP can help to validate if there are people willing to pay for your offer. Understanding conversion rates on your AARRR funnel can help you do better forecasts.
With MetaCanvas you can plug the numbers in each Revenue Stream and Cost Items. MetaCanvas will then generate a Profit & Loss statement for you. You can check your margins and if your business can make a profit. This will help you validate your revenue model.
Now you understand why MetaCanvas presents the business canvas in portrait. It’s not just to fit you mobile phone. It’s because its structure looks more like the Profit & Loss, with revenues at the top and costs at the bottom.
Level 7 – “Solution MVP” Tested
Make sure you keep working on your MVP strategy. The “First MVP” Test on level 4 helped to check the intensity of customer interest in the problem or need. The MVPs should have been evolving since then to test your Business Model hypothesis. Now it’s time to determine whether customers will engage with the solution. By now you should have built a High Fidelity MVP to test the solution, even with a limited number of customers.
Level 8 – Operating Model Validated
You have learned a lot about your solution feasibility. It’s time to review the operating components of the Business Model: Key Activities, Resources and Partners. Design your processes and establish deals and commitments from prospective partners. Update your cost structure as needed.
Level 9 – Metrics that Matter
Metrics that Matter are a radically new approach to startup math developed by Steve Bank. It’s about Finance before the Income Statement, Balance Sheet and Cash Flow. In “No accounting for startups“, Steve discusses how financial documents are of no use for startups searching for a Business Model. In fact, when you are at this stage there is nothing to account for as, most of the times, there is no revenue. First you need to understand what are the Metrics that Matter for you business model. Here are some examples:
- What is the product cost?
- What is the competition charging?
- What is the market size?
- What share can you take of the marke
- What are the Customer Lifetime Values (LTV)?
- What are the customer acquisition costs (CAC)?
- What are the costs of your distribution channel?
- What’s the margin the channel needs?
- Are there any other channel charges?
- What is your customer retention/ churn?
- What are the funnel conversion rates ?
- What is the average selling price?
- How long will it take to close a sale?
- How many customers you will get per year?
- What is your achievable revenue?
- What kind of revenue curve are you likely to have?
- What are the operating costs (fixed and variable costs)?
- Burn Rate – how much money are you spending per month?
- When will you run out of money?
An early sign that you’ve found the right business model is when you believe the cost of getting customers will be less than the revenues the customers will generate. To help you with that MetaCanvas provides an LTV simulator for each customer segment. You can use it to asses your LTV to CAC ratio.
Once you understand your business metrics, the financials spreadsheets will come out easily. You can then take your time to prepare them, either to run your business or to pitch your idea to an investor. Your business model is now ready for investment. Good luck !