How to choose a business model for a startup

In the latest video on his YouTube channel, Igor Shoyfot, a well-known venture capitalist,   explained the main business models for startups and gave some tips on how to choose them.

Igor says that overall, there are five basic models of startups. All others are combinations of these five. Within these business models four are for earning money. The fifth model doesn’t involve making money - it  is a model without the "business" aspect.

Business Model 1 - B2C : A business sells goods, services or products to end users.

Business Model 2 - C2C : Users sell goods and services to other users. Examples of this include eBay, Uber, Amazon and Yahoo Shopping.

Business model number 3 - B2B : A business sells something to (an)other business(es).

Business model number 4 - C2B : Users sell themselves to a business. For example, users get something free from  business in exchange for their time and attention, allowing the business to earn on advertising. One of the most famous examples of this is YouTube. Its users watch it for free, and YouTube earns money through the sale of advertising.

Model number 5 - The "Hyper Growth" model : A company grows rapidly, just like a rocket. Growth is usually in the number of users. Most often, such companies do not sell anything and thus do not earn anything, even on advertising. Their strategy is to grow super fast, raise venture money for this growth and then sell to someone so they can make money on it. Some examples of these enterprises include ICQ, Hotmail, WhatsApp, Instagram, YouTube and Skype.

Converting from the hyper growth model to a business model must be timely. A business model that is not undertaken at the right time can ruin a company.

Utilising a business model to reap profits straight away can ruin a startup. This occurs when a company chooses to take as much profits as possible without investing in the company. However, if a company doesn’t raise any capital, they cannot afford to offer a completely free product. We can see an example of this with GitHub. For a long time, the company has not had any business model but has not raised any investments either.

Another cautionary tale comes from Friendster. Rather than taking profits, they should have focused on the hyper-growth model and raising serious investments. This is what Facebook did when they copied Friendster.

If a startup is thinking about the hyper-growth model, its main enemies could be its own Sales people. Shifting the focus from hyper-growth to simply making money can kill the company. Of course, sales are important, but impacting future growth is also a consideration.
There are companies that make money, but intentionally do not become profitable. That is, all the money they earn is invested in growth in order to capture more market as soon as possible. Amazon has done this very successfully. For years, the company did not show any yield, focusing only on sales growth instead.

The lesson from Amazon is that if a company can afford not to earn money for months or even years in order to constantly grow its users, products and the volume of services provided, it will be very strong.

On the flipside, if a startup does not have money for a long existence, then the money must be earned right from the beginning. That is, you need one of the four business models in order to earn money.

In conclusion, no two startups are the same; however, the problems that these startups face are often similar in nature. Balancing the four “business models” and the “hypergrowth model” is key to becoming a big player in the market.

Author - Alexey Shashkov