Startups rarely find their business model on the first try. Truly understanding a business problem and its associated solution is a rare skill. At NextUp Labs, our initial business model was to work closely with domain experts (e.g. someone who has deep knowledge of their industry or market) who had a solution using mobile technology. We believe everyone knows enough about mobile technology to propose ideas that use mobile as medium for their domain.
We thought our expertise in mobile combined with their domain experience would make a great team! However, in practice, we encountered three challenges with our model:
With first time entrepreneurs, we struggled to agree on how to value their idea. One of our potential customers insisted that theirs would be the next billion dollar company. We should be happy to take 10% for executing on the idea, they said, because “10% of a billion is still a lot of money”.
2. Lack of focus
Some of our prospects struggled to focus the idea that they pitched to NextUp Labs. Each meeting seemed to bring a new idea or substantial variations on the initial idea. With so many moving parts it was difficult to focus in on the key problem and the proposed solution.
3. Due diligence
We found ourselves spending substantial time performing due diligence on the potential businesses because of the domain experts we were attracting. For example, if a potential customer proposed a product for chiropractors we needed to find a network of chiropractors who could provide meaningful feedback on the concept. Even if we could overcome the first two challenges above, we found it incredibly expensive and time consuming to do a proper due diligence.
I would love to say that we saw exactly how the market would better use our skills, but it actually happened organically. We found that our target market isn’t domain experts who have ideas for a new business but rather struggling domain experts who have already started their new business.
Working with struggling startups resolves our first two challenges. Most startups have a very good understanding of the value of their idea if they are unable to execute (zero) and they are focused on solving real customer problems.
That left only the challenges associated with due diligence. We found that by working with existing startups, we ended up working more closely with companies who were already in spaces we understand well (e.g. social or wireless networking). Working in domains we understand significantly reduced the burden of due diligence.
Since our pivot in January we have been making great progress. We have some outstanding customers, and we receive a lot of positive feedback from potential customers on our pitch. The concept of complete alignment with our customers goals, and taking our compensation in revenue share and equity, resonates strongly with our target market.