Investor or Employee: Build a Business Model First

If you are thinking about changing companies or investing in one you should build your own business model of that company. There are several reasons to do so though the number one reason in my opinion is understanding.

When you buy a house you get an inspection done. You’re going to live there potentially, you want and should know if it is safe. Going into someone else’s company as an employee, investor or where some of your pay is in shares or options, the same concept applies. Know what you’re getting into.

A business model is a design for the successful operation of a business, identifying revenue sources, customer base, products, and details of financing. Further it helps you understand why they have customers (and income) and why those customers think the product or service is valuable.

If you can’t discern the business model, there is something potentially wrong with the overall business or products. How safe is your income if their business model relies solely on investments into the company? Will they ever make a profit? Can they pay you?

There are many quick and easy ways to make a business model, but the one I recommend to begin with for any company (including one you may consider starting) is the business model canvas found in Business Model Generation by Alexander Osterwalder. This book is designed for entrepreneurs but helpful for any type of company review and business model construction.

Where to start when reviewing someone else’s company? Revenue streams is always my starting point. What do they sell to make money? Most people say revenue should be obvious. they are often wrong. Revenue comes in from investment, from interest, from sales of product and services, and from back-market contracting.

Back-market contracting in the tech industry (eg web or mobile apps) is often the real revenue stream of some companies. For an example let’s look at Facebook: They sell information about their users behavior and stored information to advertisers and marketing research companies. This is back-market that many people don’t address when looking at the products and services. As a FaceBook user, you are more their vendor/supplier then their customer. (That you don’t get paid while they make money is for another post.)

I tend to work through the boxes on the model clockwise and then repeat several times until I feel i have a handle on the company and could write a 1 page or less summary on the company. The exercise has saved me from taking jobs with companies that would have crashed very soon after I became dependant on their income or lost money.

As with anything you are not the founder or are in charge of, carefully consider their model before investing or accepting employment. Yes, there are many companies that grow fast and sell for big bucks. But for every 1 of those there are 1000+ that fail and will leave you broke or unpaid.

 

Business Modelling books:

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