Finding the right business model is never easy, especially not for young companies. After all, there are so many factors that determine whether a new product or service will succeed. Yet it may be possible to identify success factors, which reduces the uncertainties for companies and their stakeholders, such as governments that want to stimulate innovations.
The actual environments that new companies operate in are often enough quite different from what they imagined. They even may change as the company enters the market. One company that researcher Kasia Zalewska-Kurek recently spoke to started by renting out devices with a touring app for hiking and cycling enthusiasts. Its business model was challenged when smartphones became widely available. People no longer required a dedicated device, just the app. Smartphones usually have GPS on board, which changes the way tours can be offered. The company found their customer base shifted from dedicated enthusiasts to families, and that there was a demand to provide information about hotel services with the app. By adapting the company survived.
‘Another company I recently encountered did not initially know its market’, Zalewska-Kurek says. ‘It provides a wearable electronic tag, which triggers signs in a building to guide the wearers to their destination. This company thought their market was in hotels and conference venues, but by accident they ended up in the health care sector. That’s where they are now expanding.’
Pattern
For start-ups a willingness to change their business model may prove to be essential. This is one of the findings in a detailed study of nine young companies by Zalewska-Kurek. ‘The pattern is fairly clear. In the beginning companies focus on generating ideas and market research by scanning the market or talking to industry leaders. They change their business model often, as their ideas become more focussed. Gradually, they start testing their products with potential customers. By this time, more money has been invested and the business model becomes more fixed.’
This pattern mainly applies to IT companies, because for them it is easier to test their (unfinished) product with customers. Physical products, especially hi-tech ones, are more expensive to produce and often enough also more time consuming to design. Start-ups in this field tend to be more technology driven. Only when they need capital to take the next step in their development do they start talking to customers. By this time it is often more costly to change the business model, because this would mean an extensive redesign of the product towards a new market.
Zalewska-Kurek intends to expand her research to a couple of hundred companies in IT, nanotechnology and biotechnology to get a broader view on how, depending on their development stage and market engagement, the performance of companies is affected by the way business models develop. ‘Innovation is not only about the product itself, but also about the way you interact with customers and adapt your market approach to reach them.’
Ecosystems
While the hits or misses of individual companies are relevant to their direct stakeholders mostly, on a larger scale the success rate of a company may affect local or regional economies. Consequently, if governments want to be the home of an entrepreneurial ecosystem that fosters valuable, innovative companies, they like to know which policies to implement,. In other words, governments need business models as well.
‘I will be looking at several ecosystems where universities, governments and business interact’, says Zalewska-Kurek. ‘Naturally, there is one close at home in Twente, but it will be interesting to compare this to others in The Netherlands, Europe and the United States. There are many factors to consider – this is about much more than just nursing start-up companies. A university, for instance, may also create value for local communities by offering all sorts of courses to disseminate its knowledge.’
In an ecosystem there is also the issue that interests may not always be aligned. What is good for the local economy does not automatically benefit the local university and the other way around. Successful start-ups may decide to relocate closer to their markets, taking jobs with them. So, the question is which factors maximize the advantages for all stakeholders. There is, of course, no recipe to build your own Silicon Valley, but at least you can try to savour some of the ingredients.
