The Basics of Business Thinking
8 questions to test your Business Thinking
So, you're thinking of starting your own business.
Before you do so, please humour me and let us quickly run through these 8 questions about the basics of business thinking. By doing so, I hope we can pre-empt (some of) the burn out and anxiety of starting a business.
I've seen and been through the excitement of a new idea, the ecstasy of gaining back my own freedom, and the sinking realization that an idea needs to be shut down. While we can learn a lot from failure, I hope that this article can increase the odds of making your first business a success.
So please put up with me and use this guide as a final checklist before you start.
What is a business?
Before we begin, let us take away all romantic ideas the media has fed you about start-ups. Instead, let us look at it from a more realistic perspective.
I believe any business can be summarised into its essence with a single sentence.
A business is “a machine that reliably takes time & effort, and spits out value for other people and money”.
There are 4 general concepts that come together within this sentence to make a business a business.
Breaking it down, they are:
- The machine
- The invested people’s time & effort
- The provision of value for someone
- The money being generated.
If you are missing a single one of these concepts, you have created something, but it isn’t a business.
"All I ask of you is to not be in the "Scam" section of the diagram above"
Only by being the intersection of all 4 components can a business truly be sustainable in the long-term.
There is a lot to unpack within the four concepts so let us proceed to explore more on each of concept.
I’ll also be going in-depth for each of the following sections and the future topics listed below in the coming weeks. If you’d like to receive a notification when new topics are covered, subscribe to our newsletter to receive weekly updates!
Part 1. The machine
Question 1: What machine are you building?
You have to determine what is the machine you are building.
You would not start building a house without thinking deeply about how the rooms are laid out, so don’t do that with your business.
While not every business needs a 50 page slide deck, every business would benefit from having its founder (you) think deeply about what work needs to be done for it to succeed, how it provides value, and how it makes money.
Put that all down onto a single piece of paper and you have yourself a 1-page business plan.
You can then take this one step further by then developing a minimum viable product (MVP) or by building in public. However, the absolute minimum you should do is have a plan for those 3 points before starting.
Question 2: Do you have all the parts to build your machine?
Next, once you know what machine you would like to build, you’d need to determine if you have all the parts (i.e. skills / assets) to build your machine. If not, do you know where to get them?
Places to get missing skills / assets can take several forms:
- Finding a co-founder (e.g. Wozniak & Jobs)
- Hiring people
- Getting a vendor (e.g. Canva when they first started)
- Finding tools (e.g. no-code tools)
Once you have all the necessary tools and parts for your machine or know how to get them, you can now officially start using your time and effort to build your machine!
Note: we are still talking using time & effort to build the machine and not about using the machine to convert the time & effort into value and money.
"Time & effort can be used by the machine in two ways - depending on what phase your machine is in"
Question 3: Are you using any techniques to build your machine?
While not necessary in the beginning, it is good to know that there are many different methods to make building the machine more efficient, faster, less risky, more flexible, etc. However, that is out of the scope of this article at this point in time.
I’ll be writing up more to explain the concepts at a later date but if you’d like, you can read up more about the topics below:
- Building in public
- Minimum viable product
- Lean development
- Agile development
- Design thinking
Part 2. The time & effort
Time and Effort as a concept
As a concept Time & effort can be used for two things:
- Used in existing machines to be converted to outputs that give tangible value. (e.g. time & effort into money for you.)
- Converted into assets/ items via skills (e.g. using no-code skills to create a website etc.)
It just depends on how you use the time & effort.
If you are building a machine, you would first need to convert time and effort into useful items for building. Once your machine has been built, you’d then be able to use your machine to convert it into money and value for others.
This leads to the second point - comparing the efficiency of machines available to you.
Question 4: What is the efficiency of your machine?
Some machines are more efficient than others.
For example, if you had a job as an Artificial Intelligence Engineer at a large technology firm, it could be an extremely efficient machine at converting your time and effort into money. It may also increase in efficiency at a pace you are satisfied with.
In the long-run, increasing the efficiency of the machines you have is very important as there is a limit to how much time & effort you can give to the machine. Once you hit that limit, the only ways to increase the output of the machine is by either getting people to use their time & effort in your machine (i.e. hire people) or by increasing the efficiency of the machine you have.
Many factors will affect the efficiency of the machine you are building. For example, the efficiency of a service business is different from a product business, the efficiencies of some industries may be better than others etc.
So you’d want to choose what machine to build wisely.
In the future, once you have built a machine that is properly churning money and providing value to others, you’d then look more into increasing the efficiency of the business via different means.
Different efficiencies of different businesses
When to grow and when to develop based on your business
What scaling up means for different businesses
Part 3. The value for other people
Different people perceive value differently - what looks like an ugly green blob to someone, can look like the cutest stuffed toy to another. This means that the minimum you’d need to do is at least state what value you are providing and to who you are providing it to.
Question 5: Value to who?
Essentially, the question you are answering is who has the problem you are solving for. It is very likely that your first business would be solving a problem which you have faced personally. However, your task would then be finding other people who face the same issues as you.
This group of people would be your first users.
If they don't seem excited by the concept, keep looking for a group of people who needs it or change the idea.
If possible, try to think up a few ways getting them to hear about your value and ways for these people to receive value from you. Remember, it may not be enough to just identify an ideal set of users, you would need to have a way to let these people know your business exists as well.
Question 6: What value?
Next, you need to clearly define on a high level what value you bring these people. When defining the value you bring, do try to help the person visualize the impact your business has on the person’s life rather than in terms of features. However, don’t explain it at such a high level that it seems vague and provides no details of how your business accomplishes that impact.
An example: iPod’s (2004) value explained
- Too vague and general: Brighten up your day with music.
- Goldilocks zone (just right): 10,000 songs in your pocket.
- Too technical: Music player with over 20GB of storage
This will be your elevator pitch and the one sentence that you want the people who is receiving value to remember about you.
Part 4. The money
Finally, you need to make sure you know how your business makes money.
Without this, the business has no legs and will never be able to stand on its own. Before you earn your first cent, it isn't a business, it's a hobby.
Two core concepts you want to include in your thinking would be "time to money" and "comparables".
Question 7: What is your "time to money"?
The essence of this concept is "How quickly can I prove that I can make money"?
In this case, you need to judge as quick as possible if you have a working monetization channel for your business and if your business can become sustainable. Even if it is not immediate, think about when is the earliest you can do so and implement it the second it becomes viable.
While your business can have other priorities in its early stages (e.g. getting more users etc.), you need to confirm as early as possible that someone is willing to pay for the value you are providing.
Even for models such as advertising, it is important to ensure that you get advertisers to pay you early - they just won't pay you very much - (if you have around 500 - 1000 free users, it is enough to validate this).
Even before you have something to sell, you should be having conversations with people who would potentially be willing to pay for the value. This will curb some of the doubts about building something no one is interested in.
Let's say you can't charge money immediately. That is when you turn to comparables for the semblance of certainty and an estimate.
Question 8: What are your comparables?
No viable market is without other players.
It does not matter how cutting edge you think the business you are building is. If the industries of "Space Travel" and "Implanting AI into your Brain" has existing players, you can bet that your field of business has existing players. Take advantage of that and consider how your competitors are making money, from whom, and how much.
The best case scenario would be to find the money making channels of a competitor which is just a few steps ahead of you and look at their pricing and business. Also remember, there are a myriad of ways to compare yourself to existing businesses, so do keep a look out for similar business models in parallel industries as well!
- Monetization: What is it and what are the different models
- The importance of Accounting and your P&L
- Social Enterprises and the Triple bottom line
In the end, this is only a simple checklist considering the fundamentals of business thinking. There will definitely be other be new business models being invented, or new systems that more brilliant minds than mine will think up.
However, let me be the first to applaud you for taking the first step and deciding to commit your time and energy into creating your own business - be it actually creating something now, or just reading, learning and thinking about it.
I hope this helped you in some way or form. If you'd like to have the next issue of Startup Illustrated delivered to your inbox, do subscribe to our newsletter. If you'd just like to say hi, just drop me a DM on Twitter - I am @foundbryan.
Until next week, I wish you all the best!