The Jonas Project’s Senior Capacity Builder, David Hincapie, has written a three-part series on one of the topics he gets the most questions about. This is the third of the three blogs. David is the first point of contact for Veterans who inquire about The Jonas Project, and the one who coordinates all of the resources for their business. He’s on the front lines every day steering our Veteran entrepreneurs in the right direction.
(In the two previous posts we discussed the customer development model from Steven Blank’s Four Steps To The Epiphany, also known as the lean startup. Those ideas will show up tangentially here as well.)
In the traditional business model, you write a business plan first, then you go out and try to find the financing to start the business. Writing the business plan requires you to decide on the product or service, then do a bunch of market research to determine how much of it you can get.
Then you make financial projections (predictions) of your future sales and expenses. You put these numbers in a three-year income (or Profit and Loss) projection and three-year cash flow projection and you design a marketing plan to ensure you actually sell as much as you say you can.
Then, if you are bootstrapping or using your own money you find a location, sign a lease, get your permits from the city or county, and open your doors. If you don’t have your own money you take your business plan around to lenders and see who will lend you the money.
As you can see, nowhere in this model is there contact with paying customers until after you commit to a loan and a lease. It’s a gamble. So, does this mean you shouldn’t use the traditional model?
The Jonas Project has worked with two veterans who started food service businesses. One used the customer development model; the other used the traditional model. The difference was the veteran who used the traditional model for his business had fourteen years of experience in the restaurant business. We are also mentoring another veteran who hasn’t yet launched her business but is using the customer development model to validate her idea.
How do you reduce the risk in the traditional model?
With market research.
Because you won’t have contact with paying customers until after you make large financial commitments (loan, lease, capital equipment purchases or leases, etc.), you must be as sure as you can be about your market segments.
If I build it, will they come?
“If I build it, they will come” is a very fast way to lose a lot of money. In other words, you better be damned sure they will come.
The traditional model relies on intelligence gathering- or market research- in a different way than the customer development model. Instead of talking to paying customers who are buying your MVP (Minimum Viable Product), you must do a lot of data research in libraries or online to get demographic information about your potential customers.
For an introduction to doing your early market research, see our Market Research Guide.