The three elements of a business model are value creation, business logic and profit model...

The three elements of a business model are value creation, business logic and profit model. Value creation model describes how the ventures creates and delivers value to its customers including the product, target customers, value proposition, where the venture is positioned within the value chain and distribution. After establishing the value created we can extract some it, bringing us to the profit model which shows how we extract revenue and find the cost structure.

The business logic model is an explanation on why the venture is going to work and how we can actually create value and extract some of it for ourselves. On a daily basis, the VC’s at DYL Ventures sit through five or six different presentations on businesses. These presentations & ideas are both engaging and dull, so first let’s evaluate the dull business ideas models:

a. Saturated market
b. Requires outdated tech
c. Extended sales cycles
d. Overstated launch costs
e. One hit wonders / hit or miss driven
f. too many stakeholders

The VC's job is to make money as a result of the business they invest in to be worth it. If it takes a lot of money and you make a small amount, then it’s not worth the risk. Complexity is horrible piece to a business model, it’s been done & managed well by a few business but the most straight forward systems appeal the most. A good example is Google which has a model that earns of clicks essentially. Everything else Google does is just sub-parts of the same concepts. Crowded market places are complicated which means differentiation takes up most of the business manager’s time against many players which drives up the cost of customer acquisition and penetrating the market. Models with a legacy system slow down the business model. Gaming companies are hit driven, but if your next game isn't a hit, it takes a few seconds for the customers to switch over to the competition. Long sales cycles cost a lot of money. You need to consider whether the market values your company or not.

The flip side of this are the models that are appealing and are in essence the counter-tops of the points mentioned above:
a. capital efficient & high margins
b. Great upfront unit economics [LTV/CAC is quick to >1]
c. least complexity
d. independent of external assistance
e. quick adoption cycle

The VC wants the giveaway the least amount of money in the proof of concept phase. Simple is good and complexity is bad. The customers must easily understand and adopt the product or service being offered. At DYL Ventures, we are especially attracted to business that demonstrate or estimate unit economics greater than one calculated with Life Time Value divided by Customer Acquisition Cost which demonstrates the fastest return on investment.

Let’s now examine Skype, an interesting business because it upset an expensive and slow industry making it impossible for incumbents to react in time. A few months after the launch of Skype, the CEO of AT&T said in a public statement that people would not be interested in speaking into their computers and that free software is not a business model.

The value was created with a software based solution to a traditional hardware model – a very inexpensive and smart way to go. The profit structure is even more appealing, with a zero cost to operate allowing users to utilize the service for “free” and they only charge a premium on services that cost them money thus contributing towards their Freemium revenue model. The business logic at Skype is least complex and most simple – it combines the viral acquisition with network effects for retention and growth. With CAC at USD 0.001 and a service that promoted users to enforce their friends and family to use it (not recommend) it had a network effect wherein the more people that use Skype, the more valuable it becomes.

Skype was built and launched on less the half a million dollars, then raised USD 2.5 million while growing. In the first year, revenue was USD 5 million, USD 50 million in year two and 300% of year two’s in year three. It did not require any outside assistance (no Facebook, no partners) and they controlled their own destiny. The value delivered to customers was so immense that a point came where customers would tell their friends (non customers) “this is how you can reach me” and thus more conversions occurred. At the launch, the founders used the bad boy history to gain massive press with Kazaa and RIAA. A similar area of mass disruption is occurring in 3D printing, where it allows manufacturing at a unit level which is something large manufacturers are having a hard time reacting to. Another area is the concept of the sharing economy, which provides a business model using existing assets.

RelayRides is the world’s largest peer to peer car sharing market place with the largest network of cars with comprehensive geographic covering, a unique car selection, amazing value for renters, high income for the lenders and most of all; it’s a safe and trusted marketplace. The business disrupts traditional car sharing, car rental and car ownership by enabling easy access to a massive fleet of vehicles. In the USA, the car ownership market is worth USD 1.3 trillion of which the car rental market comprises roughly 2.3% and the sharing market at 0.0007% of that market which comes to a USD 1 billion valuation. It’s worth noting that traditional car sharing was made popular by ZipCar in the USA. In the current US market, the demographic category known as “millennial” prefer access to transportation instead of ownership of it. Drivers between the ages of 21 and 30 drive 12% fewer miles today than 15 years ago, more than half of millennial says that driving less is preferred as it helps the environment and worst of all, no one car brand ranks high with the demographic. Even more striking, 46% of this market would rather have constant internet access instead of car ownership.

The sharing economy is revolutionizing how consumers spend their money:
a. Airbnb had 5 million nights booked in the first half of 2012, with average consumer age at 35 and a business valuation at USD 2.5 billion
b. taskrabbit has four thousand rabbits and has a revenue growth rate at 300%
c. RentTheRunway has over three million members, has raised over USD 50 million from VC’s and earned USD 20 million in 2011 revenues.

The ability that software has in connecting people is going to disrupt many established industries because the business models are essentially low cost, little infrastructure and deliver measurable value. RelayRides provides a disruptive value proposition for car owners – powerful economics. The average car on RelayRides is 4-5 years old; owners rent them out one-third a month and earn an average USD 150 per month. That revenue is the cost of maintaining the car in the first place, and these car owners have access to their vehicles for two thirds of the month so their personal utility cycle is not being affected. One of the most rewarding aspects of the peer to peer sharing economy is that these business are not just selling a service or product, they are also empowering people to make money. RelayRides provides a disruptive value proposition’s for renter’:

a. better value since the average RelayRides rental is 40% cheaper than ZipCar and 20% cheaper than traditional rental agencies. It’s all-inclusive with insurance and miles and there is no annual fee unlike ZipCar
b. unique vehicle selection; the traditional car rental market tries to capitalize from economics of scale by purchasing a bulk of one type of vehicle and more often than not, they are the mid-range vehicle that few want to or aspire to rent out. At RelayRides, users have a wide selection to choose from the Camaro to the 2002 Thunderbird and even smart cars.
c. easier access: the network trumps the geographic penetration of any other car rental. They have cars across all 50 states (accomplished only 12 months after launch) and the company aims that by 2015 they will have a car within 10 minutes walking distance for Americans which would be the densest geo-reach for any car rental company in the world.

On the appealing side, the “if and when” this idea works equals enormous revenue due to its disruptive nature. In the US, it is estimated that cars are used 8% of the time which means that 92% of the time car owners have a depreciating asset locked away doing nothing. Unlike its competitors, RelayRides does not need to acquire vehicles in order to rent them out which is a huge positive for any VC as the cost of initial set up is significantly lowered and the renting of 60% vehicles at traditional firms is what allows them to break even so those companies have to be very careful how the expand and mistakes made in expansion cost too much. All expansion costs with RelayRides are being compensated (inventory costs if you will) by the consumer car owner and renter. However, the most striking challenge of this business model is clearly the myriad of insurance coverage that need to be distributed for the car owners, renters and other related parties that need protection against worst case scenarios. RelayRides are partnered with a large insurance company in placing safety nets to assess the renters driving ability and other essentials needed to make this work. So without appropriate insurance this business would not have moved forward.

The future will clearly find us in a position where auto manufacturers will actively want to part of the network. When the 2015 goal of having a RelayRides car within 10 minutes walking distance is achieved, the need to own a car will be eliminated and RelayRides will become the platform by which an alternative car ownership model will be explored going forward. The large auto makers will be applying tech to their vehicles to accommodate this new car market. Rather than being tied to one vehicle, the user experience can be tied to as many vehicle as per the need arises.

RelayRides is a transactional market place that charges the owners 25% for every rental made and charge the renters a 10% fee on top of that and renters pay for the level of insurance & protection that they want based on existing coverage or their risk profile ranging from premium to basic coverage packages. And while Airbnb, Amazon and eBay charge a mere 15% on transactions, RelayRides charges more purely to cover and offset the insurance offset and minimize damages if any for a smoother experience and stakeholder engagement cycle; providing owners and renters with liability coverage which is an incremental cost which doesn't affect an eCommerce market place which is why the revenue take rate is higher than others. So key costs are insurance, customer service and traditional fixed costs are the tech, marketing, staff, salaries, benefits. But how do you trust the counter-party and the other side?

The most important part of the trust in sharing economy models is reputation, the more data you have on both parties (on time, is the car clean) the trust is built by reputation over the time and what it does as a bonus is that as the reputation gains strength it becomes harder for copycat businesses to compete with the same model. RelayRides greatest advantage is that they screen drivers of the cars to understand driving history and experience using data publicly available that makes this possible. In order to have access to this market place, reputation is key. And this is based on the life view is the statistical proof that people are good which is a good belief to start with or every set back will just demotivate. There are always bad things that can happen so you don’t want to be naive and the job of the market place manager is to make sure that those things that do happen occur as less as possible and are solved as they occur. A combination of trust and safety, the former is the visible component that makes users feel good about partaking in the market place while the latter is the hardcore component behind the scenes to weed out the bad people.

One of the most important capabilities to build when managing a market place is business intelligence and that means being good at metrics like supply (traffic, conversions to new owners, fulfilling requests, transaction values, lifetime value), demand (sign-ups, sign-up conversions, repeat rentals) and transaction which allows them to optimize the marketing strategy and spend. Trust and safety metrics are things like, what % of transactions result in claims (for damages), the nature of the claims, “how to anticipate who is the high risk customer?” and be able to place more safeguards to mitigate those risks.

A young company needs a model that works using the metrics and in the end, all the answers aren't clearly present in any company – ever – and the entrepreneurs’ need to work towards perfection with measuring tools, trying new tactics to get data, to improve over time and reach a stage where the progress pleases invested stakeholders.

To learn more about navigating high stakes deals, click here to register for "Negotiation Skills" with Dean Arif Nazir Butt at Suleman Dawood School of Business.

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Babar Khan is currently editor at Trango.co, a brand professional for a leading high end fashion apparel brand and a former management consultant with expertise in strategic OD, digital marketing and project management. He can be reached on hello@trango.co or babarkj@gmail.com