Barrett’s Briefing: Outlook for the Next Decade—Business Models
by Richard Barrett
2008 – RIP Investment Capital.
The significant reduction of investment capital ranks as one of the major challenges affecting businesses in 2009. While 2008 may be the year that investment capital evaporated, we are only now learning to live with the loss.
The drought in venture capital has been well documented, with only seven venture-backed companies completing IPO’s in 2008, generating a meager total of $551 million in liquidity (Dow Jones VentureSource). Liquidity through acquisition also fell, by 50% from 2007, both in total dollar volume and in median price paid. In 2009 venture funding will be both smaller and more difficult to close.
Start-up funding from other sources, such as angels investors and friends & family has also plummeted, in direct relation to the decline in the stock markets. Bank credit, either from loans or from credit cards, has shriveled. This deleveraging will become a permanent part of the economic landscape, for the next decade or longer.
Business Models for the New Decade—Small is Beautiful
In response, many small businesses are exploring new business models that do not depend upon external investment capital and long time horizons for liquidity. While these models are only beginning to emerge, a few trends are already evident:
- Immediate cash flow—without investment capital, cash generation becomes critical. The criteria for business investment shifts from total ROI to payback period, measured in weeks. New business models will generate cash almost immediately.
- Small scale—Scalability has lost its luster. First, there only limited investment capital to fund infrastructure for scaling. Second, the pressure for immediate cash flow shortens the window for investment in scaling. Third, the value of scaling is much lower when the traditional exits—IPO and M&A—are reduced.
- Multiple revenue streams—in the current risk-averse environment, multiple cash streams have strong appeal. Multiple streams can create challenges with business focus, but the combination of smaller scale and overwhelming drive for cash flow can help to keep the organization on track.
- Linked, but not integrated—Linkage generates benefits to the organization, but preserves flexibility and maintains focus for each individual cash stream. Tight integration, often a requirement for scalability, needs more capital and a longer time frame.
- High dependence on the owner/operator—this is a significant diversion from the venture capital business model, in which the investor/owner becomes a central actor in the success of the company. In the venture model, the entrepreneur develops and prototypes a business concept, then raises venture capital. At some point, the venture owners often replace the entrepreneur with a “professional manager” to grow the company into an acquisition candidate, or rarely into an IPO. Then the “IPO executive” steps in to provide the leadership to close the acquisition or acquisition. Note that the venture investor / owner, not the entrepreneur, provides the continuity in this model.
Example—Building Contractor Reorganizes for Multiple Revenue Streams
The Texas building contractor we met in the last post refocused his business on restoring foreclosed houses owned by banks when financing for new home developments dried up. He targeted small investors searching for cash flow from rental properties. Then he assembled several small service teams to deliver a complete package to rental property investors:
- house acquisition and restoration,
- mortgage lender,
- property manager, and
- long-term maintenance service. Each team is a separate company and a separate revenue generator with a separate revenue source.
Two threads link these companies economically. First, they all focus on a specific type of customer—a private investor in small rental properties. Each company provides a separate service, but all the services are necessary to offer a complete solution for the customer. Each individual company succeeds better when the entire group succeeds. Second, each company owner has some ownership in the other companies. As a result, the companies are more than just mutual suppliers to the customer. From the customer’s viewpoint they function as a single operation. They are linked, but not integrated.
Build Your Business for Life—Not for the “Exit”
This is perhaps the single biggest change in the emerging business model.
There is no exit.
This is not a threat from Jean-Paul Sartre, the author of the depressing existentialist play No Exit. Rather it is the opportunity of a lifetime. The entrepreneur is a business owner for a long time, even for a lifetime. The rewards for building and owning the business must directly from the business. Any financial rewards come from a stream of profits generated by the business. Any personal rewards in satisfaction come from the business itself. This new model, surprisingly, leads us back to the roots of entrepreneurship.
Do something because you love it.
The rewards will come to you.
March 24th, 2009 at 5:30 am
[…] Previously I reviewed some aspects of new business models that are emerging to accommodate new employee-employer relationships. […]