Founders can't afford to wait to find a business model

When you're just starting out there are some problems that honestly need to wait. There's no sense in freaking out about whether your tech will scale to 1,000 customers when you don't know whether you can even get a single customer to buy first. In 2004 it would have been pointless for Zuckerberg to halt the launch of Facebook until he figured out what to say in a theoretical congressional testimony. I've noticed however a lot of entrepreneurs still continue to wait to figure out a feasible business model until after they've built a big enough user base or have a sizable number of free trials underway. It's worrisome because while there are many problems that can wait 'til later, figuring out whether or not you can make money is not one of them.

There are a couple of different kinds of businesses where this can happen. Probably the most common are B2B2C companies that are trying to leverage a large user base to create value. I'll preface this by saying I totally understand that some of the most valuable companies in the world use this type of business model but they are really more the exception than the rule.

The most common gripe people tend to have with this type of business model is that it requires you to burn a ton of cash in the beginning all the while hoping to build a large enough user base so that you can begin to monetize it. It's much more appealing from a financial standpoint to start making money on day 1.

The problem I have though goes beyond just cashflow. The challenge is that you can spend all of that time and money building a user base only to then find out you don't even have a feasible business model. In other words, what if you build this huge base of "free" users but then find out no business customer is willing to pay to get access to it? You may be able to switch to a freemium model and start charging users but that can be a bitter pill to swallow. Assuming you can pull it off, chances are you'll see a huge drop of in users and a significant loss in your company's valuation.

The better solution is to start testing your business model from day 1. If you can't find a way to make money from the beginning with high gross margins you're heading for an uphill battle. In that case your go vs no-go decision may have less to do with whether or not you can get "users" to actually use your product so much as whether or not the pot of gold at the end of the rainbow is big enough to be worth the journey.

James Shomar
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