I’ve been a fan of the Business Model Canvas as a strategic enabler for organizations that seek business model innovation, or for entrepreneurs who want a simple but powerful way to describe a new business concept. But as I note below, this approach has not gotten the attention it deserves within the Northwest tech community. Thanks to a forthcoming enhancement, the Business Model Canvas is now poised to become a formidable tool for business innovators.

Critics point to the Business Model Canvas’ lightweight treatment of the central value proposition — the underlying rationale that fuels future revenues — how and why specific offers will satisfy the needs of defined customer segments. Ironically, where the canvas is most weak lies at the epicenter of what drives entrepreneurs to go without pay or sleep, mortgage their homes, and risk their most important relationships in order to build a business.

Enter the Customer-Value Canvas to address that challenge, as a conceptual “plug-in” for the Business Model Canvas.

The Business Model Canvas itself is based on groundbreaking work by Alex Osterwalder and Yves Pigneur, with crowd-sourced contributions from hundreds of business leaders. Their approach is described in a delightfully illustrated book, Business Model Generation, which I highly recommend. (I also recommend Osterwalder’s blog.)

Outside the time– and money-starved tech community, the Business Model Canvas has been acclaimed by many forward-thinking businesses. Here’s why.

Business Model Canvas Overview

The Business Model Canvas enables entrepreneurial teams to collaborate on a new business concept that can then be presented on a single page. The canvas itself is a 9-box framework, encapsulating the key dimensions of a holistic business model.

Structured Brainstorming

The canvas provides an effective means to structure collaborative thinking, discussion and brainstorming about the most important aspects of a proposed business model. Via a brainstorming process (online or in-person workshops), people capture their ideas using sticky notes that they place within the appropriate box. Constraining ideas to sticky notes enforces high-level thinking… Constraining those notes to fit within the boxes requires the team to set priorities.

Each box represents 1 of the 9 most important components of a holistic business model (e.g., customer segments). Each note outlines a single idea, an aspect of their proposed business concept. The team must ensure there’s an internal logic to the model — each sticky note (or idea) must be conceptually linked to other core drivers of the business model.

The 9 Components of a Business Model

Osterwalder and Pigneur, the proponents of this framework, define the 9 most important aspects of a business model as:

• its value proposition
• customer segments to be served
• customer relationships (how the organization will interact or deal with its customers)
• the channels to be used
• the organization’s key activities to be performed
• the key resources to be utilized
• the partners needed to fill in key gaps (e.g., gaps in channels, critical activities or resources)
• the cost structure
• the revenue streams to be generated

See Business Model Generation for more information on how “visionaries, game changers” and entrepreneurs are using this approach to envision innovations that can be designed and then developed into action plans.

“Yes, But…” Say Tech Firms

This approach has been proven as an effective innovation resource, when adopted via facilitated workshops that bring out the best thinking of the innovation team. In fact a worldwide consulting industry has emerged to deliver workshops and follow-on services leveraging the Business Model Canvas. (Just search on #bmgen to see the many tweets from practitioners.) The European business community has been especially enthusiastic about this approach.

But when proposing this framework to tech clients here in the Pacific Northwest, I often encounter resistance due to its lightweight treatment of the value proposition and customer needs. Clients criticize its lack of focus on the value prop’s implications for segment-specific product/service offers, or the rationale for those offers.

When this model fails to resonate with what tech entrepreneurs care about most, they often overlook the value of the BM Canvas as a means to structure or draw out their thinking in more productive and holistic ways.

As a stopgap I’ve developed some approaches to bridge this conceptual gap; however, that has entailed rough links to customer development, lean startup and other frameworks for entrepreneurship and innovation. Clients find this obvious mash-up of models to be too confusing…

Fortunately, the creators of the Business Model Canvas have now begun work on a supplementary canvas that focuses squarely on the customer-value proposition linkage — the sine qua non of a business model that can actually create value for all stakeholders.

Linking Customer-Value to the Business Model Canvas

Alex Osterwalder, one of the core architects of the Business Model Canvas, is now prototyping what he calls the “Customer-Value Canvas.” Calling it a “plug-in” to the Business Model Canvas, he is testing and refining it via client engagements.

This new Customer-Value Canvas should help innovators focus attention on what matters most when crafting a value proposition — the key drivers that respond directly to the pains and desired gains that surround a customer’s unmet needs.

Osterwalder recommends framing those needs in terms of the jobs-to-be-done, a proven model for less risky innovation that’s based on research and practice by Harvard’s Clayton Christensen, Mark Johnson of Innosight and others. He also reinforces Steve Blank’s call for real-world, “out of the building” observation of customer needs, rather than basing a business on what the founders assume to be true.

Here’s the customer-centered component of Osterwalder’s Customer-Value Canvas; this drives focused thinking on the most important aspects of the customer’s job-to-be-done, and the pains and gains associated with that customer “job.”

The Customer-Value Canvas | Observing the Customer’s Needs

Source: The Customer-Value Canvas created by Alex Osterwalder

The right-hand side of this canvas should reflect real-world assumptions about customer needs, based on “out-of-the-building” observations of what customers really care about: the jobs they need to perform in their personal or work life, and the obstacles to getting those jobs done today. (Read Four Steps to the Epiphany by Steven Blank for more insights into this process.)

It’s dangerous to base these assumptions solely on what the founders say is so, no matter how impassioned their argument…

Designing the Offer to Satisfy Those Needs

The left-hand side of the canvas shows the value proposition that will be designed in response to the customer’s job-to-be-done. This value prop comprises the core aspects of a compelling offer that will satisfy the customer’s needs — the things that will deliver on the customer’s desired gains, and eliminate or neutralize the pains they confront today. This is where the entrepreneurial team should focus its thinking on the bundle of products and services to be delivered.

Source: The Customer-Value Canvas created by Alex Osterwalder

The Business Model Canvas describes how the company will organize itself to deliver that value proposition to those customers, and how it will generate profits while doing so.

Based on the Best Thinking about Entrepreneurship

What makes Osterwalder’s proposed customer-value model even more powerful is the way it builds upon some of the best thinking for 21st century entrepreneurship:

• Lean Startup models for entrepreneurs, for continuous innovation (Eric Ries and others)
• Customer Development Process (Steve Blank)
• Seizing the White Space, a disciplined approach for innovation and execution (Mark Johnson)

Adoption of the Customer-Value Canvas should help forward-thinking tech founders and innovators clarify their thinking about the critical ingredients that power their revenue engine. If so, they will be better equipped to build smarter businesses that are less likely to fail.

Consulting: Glamor or Hard Work?

People say that consultants are blessed: able to work just 8 or 9 months a year, with lots of time off for exotic vacations or leisure pursuits. Highly paid, lots of bling… Glamorous projects, their choice of clients. All the work they want.

I wonder where that myth originates. For most consultants, it’s tough out there unless you’re part of a larger organization. Much has changed over the past decade, particularly the way clients buy consulting services. If you’re thinking about becoming a consultant, do your homework, and know what you face before you jump in head first.

The Squeeze Play for Consultants

Buyers Have the Power

Consultants who want to serve large enterprises clients often confront powerful procurement functions (here’s an example). By design corporate purchasing policies dramatically reduce the number of approved vendors.

Procurement policies increase and complicate the contractual requirements for approved vendor status. They may impose a number of standard agreements whose terms are rigid, with little room for negotiation. The cost of compliance (such as commercial liability or E&O insurance, not to mention high indemnification hurdles) may be cost-prohibitive, relative to the fees clients are willing to pay. As a result some enterprises have been able to cut thousands of small firms and freelancers from their vendor list.

They may also impose “no compete” terms that block you from providing services to firms in your marketplace that they deem to be their competitors. This can limit your potential clientele for periods of a year or more.

From conversations with my husband and friends who work for large enterprises, I hear that the time and effort required to retain a consultant who’s not on the approved list is just way too painful. It’s very hard for managers to engage freelancers or boutique firms — even when those specialists might be the smartest choice for a particular project.

The Impact on Consultants

Even if you succeed in earning approved vendor status, getting paid can be a nightmare. Getting reimbursed on time for project expenses can put you in a cash flow bind. Large corporate accounting departments have much more power than the consultant — and little compassion for the special needs of smaller cash-constrained firms.

Despite net 30 payment terms, some large enterprises routinely squeeze their vendors, paying invoices 90–120 days later. Meanwhile your credit cards’ grace period will give you less than 30 days to pay for the travel or other out-of-pocket expenses you incurred on your client’s behalf. So you can end up “financing” your client’s project expenses if you’re not careful.

We all tell horror stories of what happens when our client is laid off or reorganized to another department before our invoice is paid. When that happens, we’ve lost our internal champion, and the likelihood of getting paid any time soon goes out the window…

Business-unfriendly practices like these can make it difficult for freelancers or small consultants to do business with large enterprises unless you work through an approved vendor organization such as a project placement firm or temp agency. These firms tend to have lots of implementation work. If your skills are in demand, you may be lucky enough to get all the project opportunities you want, but not at the rates you used to be able to charge. At least in technical circles most of the project opportunities are contractor roles.

Because of the mark-ups that the agencies impose on your billing rate, you may well face at least a 20–30% discount on your “normal” hourly rate. (I’ve heard of some discounts, for multi-month projects, as low as 40%.) Meanwhile the client normally ends up paying more on an hourly basis, due to the agency’s overhead costs, but has the comfort of being compliant with internal procurement policies. If you’re busy enough, you may end up making as much money as in “the good old days,” but working many more hours than before.

What About Start-ups?

Some consultants move down-market to the start-up world, where these hostile procurement practices are not as well entrenched. This is often their strategy for staying independent.

Although early stage start-ups can offer exciting opportunities, there are drawbacks. Many face cash flow challenges that make it impossible for them to pay their bills on time, or even at all. Almost everyone I know in Seattle has been stiffed more than once by start-up clients. (I have at least one client that’s 2 years in arrears.)

Other start-ups may ask for significant fee discounts in exchange for equity. (Similar to the “sweat equity” deals they cut with their employees.) This complicates the negotiation process because now you need to agree to several value equations:

• What your time and effort is worth to you (your POV on value)
• What your services are worth to your client (their POV on value)
• What their equity is worth today, and in the likely future
• What the formula is for translating that potential value into your billing structure

The “KoolAid” factor may make it very difficult for you to reach agreement on the true value of their equity…

Before agreeing to these deals, make sure you understand the risks and implications, and get good advice from a securities lawyer who can help you make sense of the legal agreements.

You should go into these deals knowing there’s only a very small chance your stock options or warrants will ever turn into real money, due to many factors beyond your control. Things like dilution, changes in company valuation, and the possibility that they never have a good exit strategy outcome.

It’s Tough Even in Seattle

Most of the people who were successful consultants when I hung out my shingle 15 years ago have now moved on, taking a job “client side” in order to benefit from a predictable paycheck and health insurance. Or they’re working through a placement agency, performing contractor roles rather than delivering the true consulting services that they’re capable of doing, but can no longer sell.

Locally the project placement and temporary staffing agencies thrive, as long as Microsoft, Amazon, AT&T, T-Mobile and others are still allocating budget line items for contractors and outsourced services. As a consequence the local business economy goes through feast-and-famine cycles, in response to budget cutbacks or frenzied contractor hiring on the part of these corporate giants. These giants can be unpredictable sources of work over the long term.

Implications for Consultants

To survive as an independent consultant means mastering the skills of personal branding and knowing what it takes to market professional services. That’s the subject of a future blog post.

In the meantime if you’d like to learn more about this, there’s a very good reference source: Professional Services Marketing: How the best firms build premier brands, thriving lead generation engines, and cultures of business development success, by Mike Schultz and John E. Doerr.

Their book offers a lot of practical wisdom on what it takes to build a successful practice. They also offer an online subscription service for people who really want to improve their ability to sell and market professional services.

Net net: consulting is hard work these days. Don’t go into it blindly, dreaming of all those months on the beach, or time off for golfing and gardening.

I stumbled upon an intriguing way to think about innovations and predict their likely success, thanks to some blog posts by a Canadian consultant, John Sutherland. Although his ideas are a bit abstract, they offer useful constructs for thinking about or assessing potential innovations.

Sutherland’s blog explores behavior space and relationship space, and their implications for value creation as a result of an innovation. Here’s what he means by these concepts:

Behavior Space

As a context for exploring these concepts, Sutherland compares the iPad to the Kindle. He analyzes their respective innovation potential in terms of likely adoption and market footprint, using behavior space as a predictor.

Says Sutherland, the Kindle does one thing really well, facilitate “mobile reading” as a new behavior — but it’s largely mono-dimensional in terms of the behaviors it affords.

By contrast just think of the many things people can now do with an iPad. (Or check out what’s available now in the iTunes App Store.) Thanks to the huge ecosystem of iPad apps, there’s no doubt that the Apple iPad enables a much larger behavior space. Consequently, says Sutherland, we can confidently predict the iPad will achieve much more market impact than the Kindle.

Relationship Space

The notion of relationship space is an useful framework for analyzing people-centered innovations. Here’s how Sutherland defines the key dimensions of relationship space:

• Time: when we are [how long things take or when they occur]
• Space: where we are
• Ourselves: who we are
• Other people: by themselves or in groups
• Objects: living or inanimate (e.g., pets, cars, books, etc.)
• Ideas [and values]: how and why we are

I’ve found this an interesting list, either singly or in combination. Let’s take this one step further.

Applying the Relationship Space Framework

Using knitting as an extended metaphor, let’s identify some potential applications using the relationship space framework. Think of these as seed concepts for iPad apps for knitters and crafters (and yes, some of these ideas can already be seen as early knitting apps in the iTunes Store):

While this is more about knitting than you may care for, this extended example shows the power of the relationship space framework for imagining new product/service concepts.

It got my attention…

And by the way, there are only about a dozen knitting apps in the iTunes Store so far.

How to Increase a Business’ Chances for Success

Lately I’ve been captivated by a new framework that enables businesses to describe their business model on a single sheet of paper. It’s a 9-box model for synthesizing the key components of a business and the relationships among those components.

This model is eloquently described by co-authors Alexander Osterwalder and Yves Pigneur in Business Model Generation — to my mind, one of the best business innovations to emerge from Europe in a long time.

Their intent is to create a common visual language for envisioning, visualizing and talking about business ventures, as well as a springboard for innovation.

Its creators refer to the framework as the “business model canvas.” Today this model can be used as a paper-based canvas with Post-It Notes for group brainstorming activities, or as a PowerPoint template for individuals or small groups. Soon there will also be an iPad app.

From my experience facilitating strategy offsites, I can readily imagine how well this canvas would support a common language for brainstorming new business concepts. It also serves as a visual reminder, one that demands a more holistic approach for defining the key strategic drivers of that business model. It’s strikingly similar to an approach I used earlier this month with a client’s global leadership team, which is why I can readily imagine how effective it will be as a brainstorming aid.

The Business Model Canvas: The Power of Simplicity

I’ve not yet had the opportunity to interact with clients using this particular framework, although I’ve used similar models and analogous concepts when working through “fast-track strategic planning.” I look forward to adding this resource as a toolkit for my consulting practice.

Although I realize the model is intended principally for envisioning new business concepts, I’ve found it handy when coaching entrepreneurs on their pitches to angel investors.

With entrepreneurs I take notes on their pitch; the canvas helps me assess how well their pitch covers all the key bases — the key drivers of their business and the relationships (or logical disconnects) among their strategies. It’s amazing how often entrepreneurs, especially those from engineering backgrounds, get so enthused about product features that they forget to talk about the customer, the customer’s compelling reasons to buy, or how they intend to reach and serve those customers. (Some of this is probably symptomatic of a lack of deep thought or hard work to validate core assumptions about customers and buying processes.)

Improving the Model: The Link to Customer Development

Fortunately, serial entrepreneur Steve Blank is collaborating with Osterwalder and Pigneur to integrate his notion of “customer development” with their business model canvas. Here’s a helpful discussion, showing how these combined frameworks help entrepreneurs think through (and then validate) new business concepts.

They’ve developed a terrific joint presentation, combining the best of their respective frameworks:

The Strategy “Stack”

The resulting “strategic solution stack” (as Blank calls it) will offer entrepreneurs a systematic way of formulating and testing hypotheses about target markets, customers, sales channels, revenue models, etc. Here’s an early iteration of these combined models, with some emphasis on where hypotheses need to be validated.

I highly recommend his blog post on this subject. I also hope Blank revises his book on Customer Development, Four Steps to the Epiphany, so these emerging concepts get fleshed out, more clearly developed for a broader audience of business people.

Businesses can stumble badly in their financial projections if they over-estimate customer adoption rates. And if you work in product marketing or sales environments where everyone must “drink the Kool-Aid,” you’re potentially at risk, especially in B2B markets.

In consumer markets, where the decision maker and the end-user are often the same person, motivational issues are less likely to affect post-sale adoption rates (unless the product is a “lemon”).

By contrast enterprise employees have relatively little control over the choice of technology-related tools they must use at work. Faced with a mandated change, employees may have all sorts of conscious or unconscious reasons to stall or minimize use of the new tool or application. Especially if it requires behavior or process changes, or new learning. Passive resistance flourishes — which is bad news for sellers counting on rapid uptake of their “Kool-Aid.”

People are resistant to change, for lots of reasons, including unconscious biases. One such bias is people’s tendency to highly overvalue the status quo.

Entrepreneurs and salespeople also suffer from biases, what I call “the Kool-Aid factor,” a form of irrational optimism. This can cause them to over-estimate the speed as well as the degree of adoption for new enterprise applications or other types of employer-mandated tools and resources. Sellers often have inflated views of the value of what they have to offer, relative to the prospective end-user’s perception of its value. Add in the end-user’s inflated perception of the status quo, and you have a sizable value gap.

As shown here, the combination of these flawed assumptions can lead to almost a ten-fold value disparity (thanks to Joyce Hostyn for the infographic):

Why? There are significant cognitive biases and psychological barriers to adoption that sellers overlook at their peril.

A thoughtful post by Open Text’s Customer Experience Director, Joyce Hostyn, outlines her thinking on the stages that people must pass through before they’re willing to change habits or adopt new applications at work. Joyce also points to several must-read articles on the topic.

Her visualization of the stages people must pass through before they become advocates or champions of the “next new thing” is quite helpful. Although aimed at customer experience designers, Joyce’s diagram of the experience journey offers a useful POV for people who forecast revenues tied to assumptions about adoption scenarios within enterprise environments.

If you must “drink the Kool-Aid,” take note of your customers’ motivational climate, and factor in how their adoption journeys will affect your product/service uptake.

Lately I’ve been coaching some entrepreneurs as they prepare their investor pitch to prospective angel investors. One of the recurring challenges with their draft pitch is a lack of clarity on:

• who needs the product (and why)
• who can pay for it — who has the budget and/or the authority to pay for it
• what customer segments do they plan to target, and how might this evolve over time
• the paths the company plans to go to market: how will they sell and support the product, direct via their own employees or indirect through some distribution or partnership model (including online models)
• how money flows through this market ecosystem, if that’s not already abundantly clear

Because entrepreneurs are fueled by passion for their product, that’s where they focus their attention during the pitch. Lavishing us with all the details about why the product is so cool, and why the competition won’t have a chance… But investors want to understand how and why there’s money to be made if they invest in this emerging company.

And that means we need to understand the market dynamics: who the customers are, what’s their compelling reason to buy, and where the money comes from.

Particularly in complex markets (like life sciences or healthcare) it’s incumbent upon the entrepreneur to insure the investors understand these issues. Follow the money.

Without a vibrant market of paying customers and efficient routes to market, investors will never get their money back. And until they believe there’s a solid market opportunity, most investors will shy away from funding the entrepreneur’s venture — no matter how unique or sexy the product.

Last night I heard Daniel Pink, author of A Whole New Mind and the new book Drive, speak about the most powerful wellsprings of human motivation: the intrinsic motivators autonomy, mastery and purpose. If you haven’t read Drive, here is Daniel Pink’s TEDTalk on human motivation. An entertaining 18-minute summary of what behavioral scientists know about human motivation, but ignored by business and management theorists for 40 years.

Pink struck a responsive chord with his Seattle audience by contrasting today’s dysfunctional 20th century institutions, with their outmoded management and reward-punishment mechanisms, with the 21st century model: what happens when you unleash the power of engaged and motivated employees. He summarized a number of experiments that proved the failure of “contingent motivators — if-then rewards and punishments” to drive the best performance from people who do anything other than rote, mechanical tasks.

In an economy fueled by “the marketplace of ideas” and intangible services, intrinsic motivators like autonomy, mastery and purpose are far more effective than external carrot-and-stick motivators. Employee engagement flourishes, says Pink, when people have more influence over what they do, when they do it, how they do it, and the team they work with. The lack of this autonomy was a contributing factor for the past “decade of truly spectacular underachievement,” asserts Pink.

To make his case for the superior power of intrinsic motivations, Daniel Pink cites the impact of the open source movement, as well as “20% time” policies on spurring new product innovation and new business models. 3M’s biggest hits (like PostIt notes) and 50% of Google’s new products all have emerged from the unstructured 20% time when employees are allowed and encouraged to work on things they feel passionately about (versus things they are required to do as a defined part of their job).

Putting It into Practice

Today while reading Jive Software’s manifesto, “The Social Business Imperative,” I find myself asking, what if enterprises truly embraced Pink’s ideas, and were empowered to do so? What if they invested in the processes and technologies to enable these changes? What if they thought, and acted, differently about how best to inspire and motivate their people? What if they discarded their outmoded theories of what motivates people?

Could this accelerate the reinvention of the world of work within large enterprises and institutions? Could we thereby unleash the power of the human imagination, and channel people’s passions and creative energies into more worthwhile products and services? Instead of believing the mantra “more is better,” might we shift toward “better is more?”

Yes, people who live their lives online are all in a frenzy about this thing they call “social.” But human motivation is even more fundamental. What if we linked the power of intrinsic motivators to right-brained work in the context of marketplace or intra-company conversations and learning? And enabled it with one of these so-called “social platforms?”

Jive’s social business manifesto asserts:

When your best people work on your best ideas in an open, transparent, collaborative way, they create a completely new kind of asset called Social Capital…. Social capital is what your company gains when its best people with the best ideas can take the right actions, actions that speed all sorts of time-to-business outcomes — from reducing costs to driving new product innovation and increasing sales and marketing effectiveness.

If you believe Daniel Pink’s assertions about the power of autonomy, mastery and purpose to fuel employee engagement and passion, what if your best people were enabled to work (at least part of their time) on their best ideas? What if they were really engaged, spending time on things they believe could truly make a difference, and had the opportunity to bounce their ideas off the best and brightest, or most experienced people in your customer and partner community? Or with fellow employees in other regions?

What might happen then?

How will your business address the enormous business opportunity that lies within the so-called “female economy?” Did you know that:

Women now drive the world economy.

As a market, women represent a bigger opportunity than China and India combined — more than twice as big.

On a global basis women control over $20 trillion in consumer spending each year, potentially growing to $28 trillion over the next 5 years.

These assertions were published in the September issue of the Harvard Business Review, based on a global study commissioned by the Boston Consulting Group in 2008. (For details refer to “The Female Economy,” Michael J. Silverstein & Kate Sayre, HBR, 9/2009. Or get a copy of Silverstein and Sayre’s book, Women Want More.)

Where Are the Biggest Opportunities

Based on purchasing power, American women represent the lion’s share of this opportunity, because we control or influence almost $6 trillion in consumer spending. Japanese women are the next largest segment, with power over $1.6 trillion in annual spending.

According to the HBR article and the BCG study, some of the largest near-term opportunities fall within the investments and financial advisory services sector, the life insurance business, and payments/rewards processing. Another area where women are hugely dissatisfied with current offerings is the healthcare sector.

The BCG study found that:

Financial services wins the prize as the industry least sympathetic to women

I must admit: that research finding does not come as a surprise to me…

Despite the enormous opportunity within the “female economy,” few companies have effective strategies to serve women’s needs and preferences. Many who try stumble at first, falling into the classic “make it pink” trap – a sure sign that the product planners are looking for superficial shortcuts or have under-invested in needs-based research.

Potential Root Causes

So if this opportunity is so huge, why do companies so often under-serve women? Here are some of my hypotheses:

• Ineffective segmentation when it comes to needs, attitudes, lifestyle drivers and purchasing power
• Not enough women in true leadership positions, exercising authentic control over the world’s largest enterprises
• Too many men driving product planning and targeting decisions – case in point: think about the fashion industry…
• Not enough intelligent or insight-seeking market research
• Not enough women with the courage or authority to dissuade their male colleagues from falling into the traditional “make it pink” trap
• Too much conventional thinking: “If it’s good enough for men, it works for women too”

In a future blog post, I’ll describe some of my recent experiences as a consumer where I’ve encountered situations of missed opportunities or female-dumb marketing.

I’m on the coaching committee for a Seattle area angels network, and have been struck lately by some of the traps that fledgling entrepreneurs can fall into when pitching angels:

• They “sell” us as if we were prospective customers
• They fail to describe their proposition for prospective investors (i.e., what their financing terms are)
• They lack a differentiation strategy

And very often,

• They forget to describe how their revenue engine will work.

If you’d like to increase your chances of securing financing from angels, make sure you take the time beforehand to have good answers to the questions you can expect to hear from potential investors. No matter which angel group you pitch, they’re all likely to ask similar questions.

What Fuels Your Revenue Engine?

Angel investors are increasingly cautious about where to invest their capital, so they tend to subject entrepreneurs to more scrutiny than in boom times. Except for those with money to burn, angels won’t invest in your company unless they understand:

• How and why you will make money
• How they will make money on their investment

What angels want to understand is how you plan to turn your ideas into money, and what evidence you have that there’s a market for your particular product or service. They really want to believe that you’ve thought through the key components of your “revenue engine” and that its mechanics are sound.

Tell Us More

For each of your potential revenue streams, angels want to know:

• Who will want to buy your product or service
• Are there enough other people like that to sustain your business over time
• Why is your proposition compelling to your future customers – what “job are you getting done for them,” or what needs will you satisfy – and how is this better than their alternatives
• Why will they want to buy from you instead of your competitor(s)
• What value do you deliver to customers, and what will they want to pay for your service
• How often do they tend to purchase your product or service: once a month, once in a lifetime

Your answers will be more convincing if you have some early market validation, and evidence of paying customers.

How Will Customers Buy

What’s your distribution strategy, and how will you sell your products or service? Will customers need a trial experience, validation by trusted sources, or other proof points before they’ll be willing to buy your product? (Questions like this help angels understand what it’s going to cost your business to acquire new customers – a key driver for how entrepreneurs tend to burn through investor capital.)

Where and how will customers want to buy your product? Will you need direct sales people or manufacturers’ reps to provide presales support, or will customers prefer to conduct the whole transaction online? Will consumers need to see or touch your product with supporting merchandising in a real-world retail environment?

How do you plan to recruit your sales or distribution partners? Will they need any special training, credentials or other “enablement” to equip them to sell and support your product?

Do you have a controlled roll-out and distribution plan, starting in a limited number of markets, or do you want to “get big fast”? Can you finance your inventory if demand exceeds initial forecasts? Can you finance the implications (generally multi-million dollar) of get-big-fast strategies?

Note that angels tend to be cynical about grandiose nation-wide distribution plans when a start-up has no prior track record…

Why You

Me-too products and services aren’t very interesting to angels, because it’s hard for investors to believe they’ll (a) ever get their capital back and (b) earn a multiple on what they’ve invested. Trusted brands and known suppliers have a huge advantage over start-ups unless there’s a clear and compelling advantage to your product or service – one that is readily apparent and meaningful to customers.

What sets you apart? How do you prove it to would-be customers? Is it easily explained, or must customers experience the product first before they understand its advantages?

Can you sustain this advantage over time? How significant is this “edge” to your customers? Will they pay a premium for products with this advantage – or be willing to take the risk of doing business with a start-up?

Because there’s a risk in buying from fledgling companies, your differentiation has to be compelling enough to customers to help them overcome the perceived risk in doing business with a company that might fail – a situation that could leave them unable to get service or spare parts.

You may also find it important to think through your differentiation strategy as a part of what it takes to recruit sales people, biz dev folks, or channel partners. Like angels they want to understand how doing business with you – or joining your company instead of others – will translate into money in their bank accounts.

Where Can You Get Help

Start by doing some homework online – there’s a huge amount of information scattered across the Web.

When you’re ready to engage in dialog or seek help from people, there are lots of resources for entrepreneurs – at least in major urban areas. Perhaps your state or country has entrepreneurial or economic development zones, with supporting incubation services. Maybe there are incubators with advisors in your city. Check out the community colleges to see if they offer classes in entrepreneurship.

Look for professional associations like Seattle’s Northwest Entrepreneur Network, or “universities” that are run periodically by leading angel networks. These associations are generally set up to share best practices, war stories, and help entrepreneurs connect with founders who’ve been successful with prior start-ups. They can also help introduce entrepreneurs to service providers who focus on the start-up world.

There are thousands of consultants who are willing and able to help – but figuring out how to pay them may be a challenge for very early stage companies.

And for people who really want to think through their revenue engine, there’s a wonderful book by serial entrepreneur Steven Gary Blank, The Four Steps to the Epiphany: Successful Strategies for Products that Win. There are many business books on the market, but this is one of the ones that’s most insightful for the special challenges of early stage ventures.