Some investors may want to understand a company’s business model before making a decision. In order to make the most informed decisions, investors may need to thoroughly examine different aspects of business models and be able to interpret them. In this blog, we will talk about product offerings and business models and how to gain an understanding of each.

Interpreting Business Models in the Private Market

Key Components

In order to understand a startup’s business model, it can be important to consider several key components of the business model. These components are value proposition, competitive advantage, revenue streams and cost structure, and mission and vision[1].

Value Proposition

The value proposition is one component of the business model. The value proposition is a description of the goods and/or services the company is offering and why it may be desirable. The stronger the value proposition, the more customers the business could attract[2]. It can provide the basis for differentiation and long-term customer relationships. Investors may want to look for the most recent value proposition when researching opportunities.

Competitive Advantage

On the other hand, a competitive advantage is the method of designing a value proposition in a way that could be difficult for competitors to imitate. While value proposition and competitive advantage work together, they can be very different, and it can be important to understand the differences between them[3]. Typically, companies have specific competitive advantages that they can promote to investors to help differentiate themselves from what currently exists in the market. The inability to replicate is what could make a strong value proposition.

Mission and Vision

A company’s mission and vision statement are also important to look at when viewing business models. The mission statement highlights what the company is doing currently, and the vision statement is what the company hopes to achieve in the future. An investor may want to review these statements to see the overall goals of the company. Knowing what the future of the business could look like can be beneficial when researching opportunities.

Startup Costs and Revenue Streams

The business model should also cover possible startup costs as well as their revenue streams. Both of these components are important for investors to look at because these metrics can give the investor insight into the financial aspects of the business. As an investor, it can be important to see the whole picture to be able to make an informed decision when choosing opportunities. 

Goods vs. Services

Beyond key components, it’s important for investors to review a company’s product offerings, which can include goods, services, or both. Understanding whether a company primarily deals in goods, services, or a combination can influence its business model and operational processes. Goods and services are provided to a consumer from a business. Some businesses provide goods (baked goods, groceries, books), while others provide services (marketing, car wash, tutoring), and some businesses provide both. Here are some key differences between goods and services:

Goods

Goods are items, articles, or products that consumers purchase from businesses. They are tangible items that have physical attributes that can be seen, felt, and touched. While goods can be used by a consumer once or many times, they can also be shared with others without being changed in nature. When consumers purchase goods, they secure ownership of the product(s), and now the seller no longer has possession of the item(s).

Services

On the other hand, services are intangible activities, amenities, or benefits that one person or business can perform or provide to another. The consumer who receives the service pays for it. While the consumer can utilize it, they cannot own the service they received, unlike goods as stated above. 

Understanding whether a company primarily deals in goods, services, or a combination of both can be important. This distinction may not only affect the company’s operational processes but can also influence its business model. By recognizing the nature of what a company offers, investors can better interpret the business model and its implications for profitability and growth. 

Understanding Business Models

In order to understand and interpret a company’s business model, an investor should first consider determining which kind of distribution structure the company is using. Some of the  most common types of distribution structures are business-to-business (B2B), business-to-consumer (B2C), and business-to-business-to-consumer (B2B2C). Both goods and services can be offered under any of these types of distribution structures. Let’s take a look at each one and how goods and services may fall into each distribution structure:

B2B

Business-to-business (B2B) is a classic enterprise model, where one business sells to another business. Commerce is conducted between two companies to create and sell products. B2B models are paying between businesses. In this model, the prices can be adjusted or negotiated based on the size of the business and the company is typically looking for a more structured purchasing process. Popular B2B relationships include vehicle components being manufactured separately and automobile manufacturers purchasing parts to build vehicles.

Examples of goods and services in B2B models:

• Goods: selling office furniture to a business, selling a CAT scan machine to a doctor’s office, selling point of sale (POS) software to a retail store
• Services: selling human resource (HR) or accounting services to a company, selling cleaning services to an office or apartment building

B2C

Business-to-consumer (B2C) is a classic consumer model, where businesses sell their goods or services to consumers. Commerce is conducted between a company and individual consumers. B2C models usually have more customers because they are selling directly to them. In this model, prices are typically fixed and because the business is dealing with customers, emotion tends to play a bigger role. Customers want to purchase things that they want and not necessarily what is needed to complete a project like in B2B models[4]. B2C has become increasingly popular with the proliferation of the internet because businesses can sell products online and promote them using advertisements.

Traditionally, manufacturers sold their products to retailers with physical locations. Retailers made profits by raising prices on items after they were purchased from the manufacturer. When the internet became popular and businesses were able to figure out how to sell their products online, the middleman was cut out and prices were lowered as a result. Many retailers went out of business because of this, but as we can see today, people may enjoy the ability to shop online and go into stores to purchase goods and services.

Examples of goods and services in B2C models:

• Goods: baked goods or clothing, Apple selling laptops and iPhones directly from an Apple Store,
• Services: babysitting, dog sitting, house cleaning, tax services

B2B2C

Business-to-business-to-consumer (B2B2C) can be a more complex business model because more parties are involved. The relationship that exists here is two businesses partner to offer services to consumers.  This partnership typically takes place so that businesses can reach a broader audience or so that businesses can offer their product at a more cost-effective price compared to what they could do alone[5]. B2B2C models are different from B2B and B2C because there is an additional party involved. Apps being sold in app stores for consumers to purchase is a good example of this, but here are some additional examples when it comes to goods vs. services.

Examples of goods and services B2B2C models:

• Goods: A company like Fanatics selling jerseys to a sports team for them to sell in their fan store, a pharma rep selling a medication to a pharmacy which will then sell it to customers, a farm selling groceries to a grocery store that will then sell it to a customer
• Services: A company like Instacart selling a partnership to Walmart to deliver groceries to a customer or an Uber driver working for Uber but providing a service to customers

Interpreting Business Models

In order to interpret business models, investors may want to first understand the essence of them. A business model can either offer more value to a specific group of consumers or it could potentially replace the older model and become the new standard practice. There can be higher benefits to offering a unique business model compared to disrupting an existing business model with a new process. For example, it can set businesses apart from what already exists; something new and shiny could be more attractive than old things that have been around for a while. Coming into the market with a new product also allows the business to focus on an area that may have been overlooked previously. Bringing in a new process to an existing model may not provide the same opportunities.

Interpreting Revenue Streams

As an investor, it may be important to find out how the company makes money. In addition to their business model, investors may also consider looking at the company’s historical financial statements to see how their business model has been applied and the possible trajectory of the business.

Business models are essentially a company’s plan for making money with the goal to eventually make a profit. They exist as a way to show consumers that a company is successfully doing something and that it has the potential to be better than the ways that exist currently. Understanding competitive advantage and value proposition and the role they play together can be an important part of interpreting these business models. Additionally, understanding the outlined distribution structures and product offerings within these models can be just as important. Understanding all of these concepts can help investors research opportunities.

Final Thoughts

In conclusion, a thorough understanding of a company’s business model can be important for making investment decisions. By distinguishing between goods and services, recognizing the nuances of B2B, B2C, and B2B2C models, and understanding the goods and services that exist in each type of model, investors can better evaluate a company’s market strategy and potential for growth.

Key components such as the value proposition, competitive advantage, startup costs, and mission and vision may provide important insights into a company’s operational blueprint. By analyzing these elements, investors can research a business model and decide if the opportunity may be a suitable investment for their portfolio.

Want to learn more about tips for investing? Check out the following MicroVentures blogs to learn more:

• Navigating Deal Sourcing: How to Select Investment Opportunities
• From Numbers to Insights: The Power of Data in Investment Decisions
• The Art of Identifying Disruptors: Navigating Early-Stage Investing
• Venturing Beyond Stocks: Exploring Alternative Investments
• Navigating Uncertainty: Building a Diversified Portfolio

Are you looking to invest in startups?  Sign up for a MicroVentures account to start investing!

 

[1] https://www.launchnotes.com/blog/the-essential-components-of-a-business-model

[2] https://www.linkedin.com/pulse/understanding-difference-competitive-advantage-vs-nishanth-mheac/

[3] https://www.linkedin.com/pulse/understanding-difference-competitive-advantage-vs-nishanth-mheac/

[4] https://www.symson.com/blog/b2b-vs-b2c-pricing

[5] https://www.netsuite.com/portal/resource/articles/ecommerce/b2b2c.shtml

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.