Tuesday, June 25, 2013
Thinking about the business model and micro businesses
In my view, understanding the business model is very important because if this lacks clarity (in short figuring out how are they making money out of the business), the chances are their customers may not get it either and guess what you will discover they won't actually be making money. For example, back in the so called "dot com boom" or bubble in the late 1990s, investors were pouring funds into start up Internet businesses. They in turn were spending it - 'cash burn' was a phrase commonly used. Some of it went on paying programmers to write code day and night, some on expensive advertising campaigns and most just squandered. We had via an American contact been introduced to one such start up. The briefing meeting was taking place in the entrepreneur's apartment in London's Knightsbridge - probably rented with investors' cash. He was in a great rushing, hinting of dashing off any minute on a mission to Paris to buy yet another ailing dot com business to add to the portfolio. Meantime, a woman in a dressing gown mysteriously wandered in and out of the room. It seemed buying other fledgling and ailing Internet start ups had become their main activity since the injection of investor funds. All questions aimed at understanding what their real business was about was directed to the IPO prospectus which boasted some impressive business and political names as directors and also carried the financial equivalent of a health warning. In short the merchant bankers had failed to come up with anything tangible to explain the business model. A subsequent trawl of investor comments quickly revealed stock had nose dived and they felt tricked. As an advertising agency used to dealing with challenges it was apparent there was no business plan, no vision and worryingly no customers either. We declined the invitation to bid for their account. Shortly after the business had burnt the investors cash and went the way of many others.
Out of that era however emerged businesses that used the Internet not as a novelty to appeal to investors who unwisely thought it to be a cash generator, but as a means of reducing operating costs in running businesses founded on a sound business model. This trend appears to have accelerated since the credit crunch of 2008 as the unemployed started what are being termed "micro businesses". According to Management Today "In 1971 there were 820,000 firms with fewer than 9 employees in the UK. Now there are a record 4.8 million." It goes on to say "These small companies account for 32% of private sector employment (7.8 million) and 20% of private sector turnover." Of these 4.8 million, a massive 3.6 million are sole traders.
I am reminded of a business school lecturer who advocated what back in those early 1970's when most of us still worked for big corporations was then a very radical idea of not to employ any staff. As anyone who manages staff will know, once employee numbers reach about 9 oddly enough, they tend to take up all of your time. Something the entrepreneur is probably not trained to do, is any good at and anyway is a major distraction from converting his vision into profitable business. The statistics of micro businesses tend to bear this out. Interestingly in another article, Management Today says that some global Internet names are not that much bigger with Wikipedia employing 65, Pinterest under 50 and Reddit just 12. As the work place changes, so a more flexible and mobile work force is emerging allowing companies to utilise external specialists without employing them and the burden of related legislation and overheads that accompanies it.
Technical Marketing Ltd has been in the vanguard of this trend, with our own skill sets augmented by those of other specialists as required, working on the Internet without the overhead of expensive premises and regarded very much as part of the business team by our clients. By outsourcing marketing expertise these new expanding micro companies can grow turnover and profit without adding overhead of staff, buildings to house them and all the baggage of HR headaches they bring with them. You know it's worth thinking about.