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Creating a business model that works

on August 08, 2012 Source: Kauffman Foundation

Successful life science entrepreneurs know you can't create a successful business model in a vacuum. Crafting a viable business model requires real-world testing, with exposure to potential customers, prospective partners and other future stakeholders – in a nutshell, “getting out of the lab.”

“Novel ideas aren't enough,” says Kim Popovits, CEO of Redwood City, Calif.-based Genomic Health. “There was a day when you could walk into a VC firm and say, 'I've got a great idea' and everybody would be super-psyched. Today, it's different. You have to demonstrate sustainability. A big idea, while important, isn't enough to attract enough investment to extend the 'runway' to get to profitability.”

Building an effective business model is “all about creating clarity and communicating that,” says Alex Osterwalder, author of the book “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers.”  “It's not just about the technology and product you have, but: What customers are you trying to reach? How will you earn revenue, and what do you need to do that? If you can't spell those out, people won't understand your model,” he says.

According to Steve Rosenberg, chief scientific officer of Palo Alto, Calif.-based CardioDx, laying a strong foundation means gathering accurate intelligence on the needs and motivations of the major stakeholder groups – including practitioners, payers and patients.  “The challenge you have as a small company is to start off saying 'OK, why should Aetna (for example) listen to me when I call them to talk about our new product?' They are in a position to say, 'No. We don’t believe in your technology, so why should we spend money on it?'” says Rosenberg, whose firm has developed gene-expression tests for coronary artery disease, cardiac arrhythmia and heart failure.

“Payers require sets of analytical and clinical data and beyond that they want to know about clinical utility in the real world. In the real world, does a test change the way physicians and patients act? That is really important from a payer point of view because that drives economics,” he says.

Rather than a document set in stone, a good business model is constantly evolving, shaped by marketplace realities, says serial entrepreneur Steve Blank, a thought leader on startup culture and customer development. “No business plan survives first contact with your customers. As smart as you may be, no one is smarter than the sum of their customers…Don't confuse a faith-based enterprise with a fact-based enterprise,” Blank cautions. “Because every startup on day one is a faith-based enterprise. You need to turn that faith into facts as rapidly as you have a vision rather than a hallucination. Write down everything you know on day one about your business – not about your technology; but about your customer, about your value proposition, about your partners, about your channels.”

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