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Apr 8th, 2016 Share: Share on Twitter Share on Facebook Share on LinkedIn

Plugging into the Electric Grid

The holy grail for any startup is the business model. Finding a model which reliably generates cashflow is tough. Building something which scales is rare.

Building a company on the arbitrage model (buy low, sell high) is a common way to think about your business. Ecommerce works that way. But arbitrage models usually do not have a flywheel built in — there rarely is that magic moment when the machine just takes off by itself. Every customer is hard won.

Subscription models are similar. They have better unit economics as their cost per additional unit sold typically goes down (and sometimes approaches close to zero). And yet — unless you have something which went viral (hard!), you still have to fight for every customer.

Service businesses, where you sell your time, scale only linearly. Every big consulting firm knows this — they scale by adding bodies to their roster.

A way to think about figuring out your business model is to think about the flow of money through a system as electricity in your house: Money flows from one point to another — in a complex system where at different stages outlets plug into the stream to transform, modulate, branch off into different areas, leverage the electricity to create light, heat or power your TV and siphon off some margin in the process.

Deeply understand the flow of money in the system you are operating in. Once you do — you can identify the right places to plug in and create your business model.

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