Purpose of this document

This document outlines the business framework of a successfully scaling startup.  When a company is first launched, some components may not exist, or may be very simple. Successful growth results in the evolution of the framework, with components being added and changing.

The 10 components of the business framework are all inter-related( e.g., every component requires talent):

1       What can only the CEO do?

There are three things only the CEO can do, and no one else in the company:

• Create and maintain alignment of people with the purpose of the company;
• Nurture the company’s values, morals, and ethics (often referred to as culture);
• Hire the leadership team and ensure they work well together.

Many startups fail because:

• People are not aligned and working towards the purpose.
• Morals, values, and ethics vary, leading to inconsistent and dysfunctional behaviours and decision-making.

2       Company purpose

What is the purpose of the company? Why does the company exist? The description of the purpose of the company should be positive and outwardly focused on how you benefit customers and society.  For example, Nike’s “authentic athletic performance,” rather than “sell lots of shoes made in China.”  Is the purpose of the corporation to make as much money as possible? How should the company benefit society?  Or, should it?

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors”[1]

3       What are the company’s values, morals, and ethics?

What are the company’s values, morals, and ethics?  These are often referred to as culture.

Values: Values are what someone thinks and feels internally and the rules by which they make decisions about what they should or should not do. Values have different importances, which are helpful when people need to trade off or balance one value versus other values.  You make a decision based on what you believe is “the right thing to do.”

Morals: You are judged by others as to whether or not your actions are moral or immoral.  Morals reflect external observable actions and behaviours. Morals are decisions, actions, and behaviours which people feel are right or wrong, good or bad.  Morals are actions and behaviours arising from one or more values.  Not all values are related to morals.  Morals are based on a broader perspective than just the individual.

Ethics: Ethical decisions, actions, and behaviours are based on following a documented set of standards or principles.   Many companies and professions have a Code of Ethics.

Values, morals, and ethics should also tie back to the purpose of the corporation. Is the sole purpose to make as much money as possible, constrained by laws, regulations, and company policies?

Some companies have published a set of decision-making principles.  A famous example is Bridgewater Capital (a $150 billion investment fund).  Ray Dalio, the founder, has published many of his beliefs in the book “Principles”.

4       Customer perceived value proposition

A value proposition is the customers’ perception of value.  This perception can be influenced by facts, emotions, family and friends, social media, etc.

The value proposition = (All the customer achieved benefits) / (All the customer incurred costs)

• All the customer achieved benefits can include both financial and non-financial factors (e.g. time savings, convenience, status, etc.).
• All the customer incurred costs can include financial (purchase costs, costs to switch to your company, other adoption costs, and ongoing costs) and non-financial (time, inconvenience, loss of status, etc.).

You will only succeed if the customers believe your value proposition is better than the alternatives, which may include the status quo.

5       Business model

5.1      What is a business model?

A business model describes:

• The value the company enables its customers to achieve.
• The resources and capabilities to create, market, and deliver this value.
• How to generate profitable and sustainable revenue streams.

5.2      What are the 9 elements of a business model?

• Who are your target customer segments? Some segments may not provide any revenue. g. Google seeks to provide the best search experience, which enables Google to generate advertising revenue.
• What is the customer’s perceived value proposition of your solution? How are you different from, and better than, the competition?  The value proposition includes all of the customers’ costs and benefits associated with adopting your solution, which includes any transition costs from existing solutions.
• What are your customers’ expectations of their relationship with you? g., if it’s a software product, how often will there be updates with new features?  How easy will it be to install a new version?  Will customer service be a chatbot or a live person? Etc.
• What will be your channels to the customer?
  1. Communications channels with potential customers?
  2. Sales channels which result in a sales transaction?
  3. Logistics channels which deliver the product or service to the customer?
• Who are your key partners? A partner is more than a channel. A partner may be: enhancing your credibility due to their reputation; adding value to your solution due to their resources; or enabling you to close sales.
• What are the key activities? Which processes and actions are required to manage partners, channels, and resources in order to enable customers to achieve their value proposition.
• What are the key resources to enable customers to achieve their value proposition? These include: intellectual property, technology, people, contracts, financial and physical assets.
• What is the cost structure to create and deliver the value proposition?
• What are the revenue streams? These could include: subscription-based per person per month, free for a basic service, with multiple tiers of extra services with fees, etc.

6       Talent Management

Talent management is the foundation for success. Key processes include:

• Determining talent requirements;
• Being an attractive place to work for target talent;
• Acquiring, retaining, developing, and exiting talent;
• Compensating talent.

Only the CEO, and no one else, can hire the leadership team and ensure they work well together.

7       Capital and cash management

A monthly free cash flow forecast, with detailed assumptions is critical.  You need to understand, and model, what drives revenue and costs.  A rapidly scaling business will have negative cash flow, and likely negative accounting profits.  You need to be able to understand and describe this to both investors and employees.

8       Investor Management

You must define your target investors and how they will enable value creation within your company.  Start building relationships with investors before you need the capital.  Ask potential investors if it is alright to include them on your monthly investor update.  Shareholders will require additional detailed communications and meetings.

9       Exit Management

The founders will leave the company at some point, even if it’s by death.  You need to first establish founder expectations regarding exit and potential risks, such as unexpected death. Processes and legal frameworks should be in place to deal with the risks.  Planned exits, including selling stock as part of an IPO, need careful planning.  The founders need to take into account their personal family, tax, and financial situations.

10   Governance

• Governance is the set of relationships and the structure to set and achieve objectives, and monitor performance.[2] You need to be clear on how decisions are made.
• Begin with setting out the stakeholder(founders, shareholders, CEO, C-Suite) expectations and then producing the necessary legal, policy, and procedure documents.
• Governance will dramatically evolve from the early stage with only two founders, to a company with hundreds of staff.
• Governance documents may include:
  1. Articles of incorporation and bylaws;
  2. Shareholders agreement and shareholders voting trust;
  3. Board of directors mandate and board approved policies;
  4. Board of directors delegation of authority to CEO;
  5. CEO Management contract.

Your next steps

To enable discussion with your investors, founders, board of directors, C-Suite, and advisory board, download the following one-page slide:

The startup business framework has 10 sets of components

Further reading

“Crafting your value proposition Workbook 1”, MaRS Entrepreneur Workbooks, https://learn.marsdd.com/wp-content/uploads/2012/12/Crafting-Your-Value-Proposition-WorkbookGuide.pdf

“Business model design Workbook 2”, MaRS Entrepreneur Workbooks, https://learn.marsdd.com/wp-content/uploads/2012/12/Business-Model-Design-WorkbookGuide.pdf

Footnotes

[1] https://corpgov.law.harvard.edu/2018/01/17/a-sense-of-purpose/

[2] Summary of  “G20/OECD Principles of Corporate Governance”, 2015  https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf