Let’s take a minute to expand on the business model canvas from yesterday’s entry. There are some useful consequences of the business model canvas which are worthwhile to explore. This is especially true regarding the bottom of the business model where we review costs and revenue streams. Usually, when I have prepared one of these with start up teams, we will determine the costs and revenue on a monthly basis. This is a useful technique to help determine initial seed funding required to give the business an adequate runway. Here I will list some truisms I have learned from experience and that are typically taught in business schools. I wont cite or point you to specific resources on the web but I have found these rules of thumb to be useful:
First, new startups need approximately at least a five month runway to determine whether they are viable or not. The concept of runway is an important one. Here, runway means the amount of time until the business is able to cover its own costs of existence. When a business can cover its own costs the airplane has sort of taken off. It is useful to get a sense of how much cash is required for this runway. For that reason, cash burn rate is a key concept in startups and new processes. The cash burn rate as you may have guessed intuitively is the amount of speed with with your business utilizes its cash resource. Cash flow is a key concept in any business and this is even more true for startups. So, the business model enables us to solve for approximately how much we think a business will need on a monthly basis. With more startup experience certain costs become more known quantities. How much does a bookkeeper cost? Do we even need a bookkeeper? How much are bank fees? How much are lawyer fees? Do we even need a lawyer? Over time and with different startup experience we learn how much and what type of resources are necessary to make the startup go effectively.
So, if we calculate this on a monthly basis we get a sense of our cash burn rate. One typical technique is to make all of these costs a worst case cost scenario. That is, how much can the costs be if the worst case arises. This is also part of how we evaluate whether a business model is worth our time and effort. If the cost loaded business model can’t fly we consider carefully before progressing. However, even with worst case cost loading many businesses can and do survive. Keep in mind the overall attrition rate for businesses is more than 60% in the start up field. Some of the tools we discussed so far are pointed towards lessening that risk of failure. With each start up we learn not only more quantifiable tools to decrease our risk but we also learn more of the philosophic approaches to startups, such as the importance of flexible tools like the business model canvas instead of more rigid and lengthy investments of time like traditional business plans. So some unique consequences of the business model canvas include the ones we have talked about. Specifically the cost and revenue projections at the bottom of the business model canvas are especially useful. We usually use post it notes on a business model canvas to represent the different costs we expect. Again, we often calculate these on a monthly basis. There are some fixed costs which must be incurred upfront and we add these into part of the initial capital investment to get the business off the ground.
So there are those interesting consequences of the business model canvas that allows us to quickly calculate an approximate cash burn rate and runway for the business given a certain amount of capital investment. Interestingly we have found usually 5-7 months to be the amount of initial runway necessary to get the business up and running to where we have a sense for whether it is worthwhile to continue as a going concern or not.
In subsequent blogs we will talk about other unique tools in addition to the business model canvas that are really worthwhile for startups, whether that be a central line service in your hospital, new medical practice, or other unique opportunities that arise.