The 5 Different Startup Models: Shubham Chauhan

Hey You,

I do not know of anyone who wants to build their own business. And building a startup and making it succeed can be one of the best experiences of your life. The wealth (if you achieve it) will be one of the rewards, not the only reward.

When you build a startup, the startup works on you more than you work on the startup. It transforms you into a different person and for that it is worth it.

You need to navigate a landscape demanding hope, optimism, dedication, emotional resilience, market foresight, and adaptability to shifting conditions, among other traits.

In this email, I intend to explore the different types of startup models you can potentially develop.

While the types of startups are many, they predominantly fall into five overarching categories of startup structures.

They are:

1. Agency Startup (Services & Consulting)

2. Coaching Startup (Ed-Tech)

3. eCommerce Startup (Online Shop)

4. SaaS Startup (Software as a service)

5. Platforms (Networks & Aggregators)

Let’s look at the pros and cons of each of these models in-depth.

1. Agency Startup (Services & Consulting)

Launching a startup that provides services through an agency model is a prevalent and logical progression for many individuals transitioning from roles as employees or freelancers.

The fascinating aspect of service provision is its inherently decentralized market structure. When observing platform or software-based companies, we often see a monopolistic trend where a single platform captures over 90% of the market share.

For instance, Instagram and Google are dominant leaders in their respective sectors, leaving little room for other entities to flourish. Such companies tend to secure early funding with the expectation of monumental growth over the next decade or two. This aspect will be explored more comprehensively in section 5.

Service-oriented markets, contrastingly, avoid this monopolistic trend due to their personalized nature. Agencies and freelancers offer bespoke services, unlike software or platform-based solutions, which tend to be more generic.

The scalability of these latter solutions may seem appealing, but the likelihood of achieving substantial growth is relatively slim, deterring many risk-averse entrepreneurs.

The beauty of agency models lies in their profitability, even on a smaller scale. A manageable portfolio of clients can yield significant revenues.

For instance, maintaining ten clients on a retainer of 1 Lakh per month would generate monthly revenue of 10 lakhs or annual revenue of 1.2 crores. Under this model, one could anticipate a profit margin of at least 50%, if not higher.

The key to such success lies in focusing on a specific niche and maintaining a compact, high-value client base.

While numerous companies have managed to upscale their revenue to 1cr per month with a team of 20-30, expanding beyond this mark becomes increasingly challenging.

There are only a handful of agencies that have surpassed the 100cr per year milestone. Typically, such sizable agencies become acquisition targets for larger service-based corporations, although these instances are more exceptions than the rule.

What I'm emphasizing here is that if your objective is to build a startup with a high probability of success and substantial profit margins - enough to build personal wealth - then launching a service-providing agency startup is an excellent course to consider. The predictability of success in this model often surpasses other business models.

Indeed, this model is not devoid of challenges. Clients can sometimes be difficult to manage, and client turnover will necessitate the acquisition of new clientele.

However, with efficient marketing strategies and personal branding, you can ensure a steady flow of prospects, ready for onboarding when you're prepared to engage.

2. Coaching Startup (Ed-Tech)

The next model of startups that possesses a notch higher scalability compared to agency startups is the ed-tech or educational technology startup. It presents an excellent progression if you are already involved in coaching or mentoring.

One of the primary issues that plague this industry is the prevalence of underqualified coaches and a saturated marketplace. Nevertheless, if you possess proficiency in a specific field, you can leverage this expertise to educate others and monetize your knowledge effectively.

Transitioning into the ed-tech sector can be a strategic move after gaining considerable experience in the freelancing or agency realm. Your expertise, whether in website design, building iOS apps, or any other domain, can be transformed into a teaching module to guide others. Essentially, you will be sharing the skills that you practice professionally.

However, it is vital to uphold the adage of practicing what you preach. The downfall of many mentors lies in their deviation from this principle. Failure to do so would render you no different from a business professor who imparts business knowledge without having engaged in business activities themselves.

This principle underlies my reluctance to endorse an ed-tech startup to anyone without substantial experience in the field they intend to teach.

Conversely, if you possess the requisite experience, I wholeheartedly encourage you to disseminate your knowledge. My journey in digital marketing, for instance, commenced with a five-year stint as a digital marketing manager across various startups before establishing my own digital marketing agency. To maintain relevancy and up-to-date expertise as a digital marketing mentor, I continue to provide digital marketing services for clients alongside my teaching role.

As you begin to transcend personal limitations, you can onboard additional mentors, creating a balance between pre-recorded courses and live sessions. This combination can facilitate the sale of cohort-based courses, masterminds, e-books, and self-service video courses.

The primary niches within the ed-tech industry can be broadly classified into four categories: Health, Wealth, Relationships, and Art.

In terms of scalability, an ed-tech startup can reasonably aspire to achieve up to 1cr per month with a compact team of 5-10 people. With adept scaling strategies, the business could potentially reach up to 10cr per month, supported by a workforce of 50-100 people.

Typically, this scale can be accomplished without external funding. The intricacies of personal branding often deter investors, as they are cognizant that the business's salability hinges upon the key person's involvement – the mentor, or in this case, you.

To seek funding for an ed-tech startup, you would need to restructure your role, shifting the emphasis towards processes, systems, and people, thereby minimizing your indispensable status.

Exploring the operational details of running an ed-tech business exceeds the boundaries of this article and will be reserved for another occasion.

Let's now turn our attention to the third variant of viable startup models.

3. eCommerce Startup (Online Shop)

By setting up an online shop, you have the opportunity to reach millions of customers from all over the globe. However, like any other business, ecommerce startups come with their fair share of benefits and challenges.

One of the primary advantages of starting an ecommerce business is the reduction in overhead costs. With a physical retail store, the cost of rent, utility bills, and shop fittings can be substantial.

Ecommerce, on the other hand, eliminates these costs and allows you to operate from virtually anywhere. This makes it easier for people with modest budgets to start a business.

eCommerce platforms provide a wealth of analytics and data, helping you make informed decisions about product selection, pricing, and marketing strategies. You can adjust your tactics based on real-time feedback and customer behavior, something that is often more difficult in a brick-and-mortar setup.

Ecommerce also offers unprecedented scalability. It is relatively easy to expand your product offerings or reach into new markets without the same geographical constraints or increased operational costs that a physical business would encounter. The internet is available 24/7, meaning your store is always open and you can make sales at any hour of the day.

The convenience of ecommerce for customers is another plus. They can shop from the comfort of their homes, browse through various options, and make purchases with just a few clicks. This accessibility can dramatically increase the potential customer base compared to a physical store.

However, there are also several challenges that come with running an ecommerce business. The virtual nature of the business makes building customer trust a significant hurdle.

Customers can't physically examine the products, making them potentially hesitant to purchase. High-quality images, detailed product descriptions, and a reliable customer review system are necessary to alleviate these concerns, but they may not completely eliminate the hesitation.

Ecommerce also implies intense competition. The barriers to entry in ecommerce are relatively low, so new competitors can enter the market easily. The online world is vast, and with so many businesses vying for the same audience, differentiating your brand and products can be tough. This competition can also drive down prices and, therefore, profit margins.

Another potential disadvantage is the dependence on third-party platforms. Ecommerce businesses rely heavily on search engines, social media platforms, and ecommerce platforms.

Changes in algorithms, policies, or pricing can impact visibility, customer reach, and profitability. Additionally, technical issues like website downtime or slow loading speeds can frustrate customers and lead to lost sales.

The supply chain is another challenge. Managing inventory, fulfilling orders, and dealing with returns can become complicated, particularly as the business grows. Shipping logistics, especially international shipping, can be complex and expensive.

In conclusion, while the world of ecommerce offers exciting opportunities for entrepreneurs, it also poses unique challenges. As with any business venture, success in ecommerce requires careful planning, ongoing effort, and a willingness to adapt to changes and overcome obstacles. It is important to thoroughly consider these pros and cons before deciding to start an ecommerce startup.

4. SaaS Startup (Software as a service)

Starting a Software as a Service (SaaS) startup can be an intriguing prospect. In the era of digital transformation, businesses of all sizes are shifting towards software solutions that can help them streamline their operations, enhance productivity, and cut costs. The global SaaS market is on a growth trajectory, offering vast opportunities for entrepreneurs. However, like any business model, a SaaS startup has its benefits and pitfalls.

One of the most significant advantages of a SaaS startup is the recurring revenue model. Rather than selling a product once and recognizing that income immediately, SaaS businesses charge subscription fees, usually on a monthly or annual basis. This model leads to predictable and steady cash flow, which is essential for startup survival and growth. The recurring revenue model also helps build stronger relationships with customers over time, as the emphasis is on providing ongoing value to retain subscribers.

SaaS startups also offer scalability. A well-designed software solution can serve a few clients or scale to accommodate thousands without a significant increase in operational costs. This potential for rapid growth can make SaaS startups particularly attractive to venture capitalists and other investors.

Furthermore, the global reach of SaaS startups is another major advantage. Since the product is delivered online, it can be sold to customers anywhere in the world. This significantly broadens the potential customer base and allows for expansion into new markets without the need for physical presence.

However, starting a SaaS business also comes with considerable challenges. Perhaps the most daunting is the high upfront development cost. Creating a robust, reliable, and user-friendly software product requires significant investment in skilled personnel and technology infrastructure. And while the SaaS model allows for eventual high profit margins, the initial return on investment may be slow. It takes time to attract and onboard enough subscribers to offset these initial development costs.

Furthermore, competition in the SaaS market is fierce. Many niches have several competing solutions, making it crucial to differentiate your product not just through unique features, but also exceptional customer service and support. Effective marketing, therefore, becomes critical and can represent a significant ongoing cost.

Customer churn is another challenge specific to the SaaS model. Maintaining a high level of customer satisfaction is critical to retain subscribers and maintain revenue. Unlike in traditional sales where the relationship with the customer may end after the purchase, in SaaS, the relationship is ongoing. If a competitor offers a better solution, or if the customer is dissatisfied, they can easily cancel their subscription.

Finally, a SaaS startup can face the complex task of managing privacy and security issues. Since SaaS solutions often handle sensitive customer data, any breaches can lead to serious reputational damage and potential legal ramifications. Therefore, considerable resources must be dedicated to maintaining robust security measures.

In summary, while a SaaS startup can offer significant potential rewards, it is not without its hurdles. The recurring revenue model, scalability, and global reach are appealing, but the high upfront costs, intense competition, customer churn, and security issues pose significant challenges. Any entrepreneur contemplating a SaaS startup must carefully weigh these pros and cons and be prepared to invest significant time, effort, and resources into the venture.

5. Platforms (Aggregators)

Starting a platform or aggregator startup can be a highly lucrative and rewarding endeavor, especially in the digital age.

These platforms serve as intermediaries that bring together various service providers or sellers and consumers under one virtual roof, facilitating interactions or transactions between the two.

Notable examples include Uber, Airbnb, and Amazon. However, like any entrepreneurial venture, starting a platform or aggregator startup comes with its unique set of advantages and challenges.

One significant advantage of a platform startup is its scalability. Once the platform is developed and launched, it can quickly scale up as the number of users increases, without the need for significant additional infrastructure or resources.

This scalability can lead to exponential growth and profitability, as seen with many successful platform businesses.

Another advantage is the network effect, a phenomenon where each new user that joins the platform increases the platform's value for other users. For instance, the more drivers Uber has, the more convenient it becomes for passengers, and vice versa.

This creates a positive feedback loop that can help the platform grow rapidly once it reaches a critical mass.

A platform or aggregator startup also offers a relatively low-cost business model. The startup does not have to produce goods or carry inventory. Instead, it focuses on providing a platform for others to offer their services or products. This model significantly reduces the cost and risk associated with traditional business models.

However, despite these advantages, running a platform startup comes with several challenges. One of the biggest hurdles is achieving a critical mass of users. For the platform to be useful and attractive, it needs to have a sufficient number of service providers and consumers. Achieving this balance can be difficult, especially when the platform is new and not well-known.

There's also the issue of quality control. The startup usually doesn't have direct control over the quality of the goods or services provided by its users. Poor quality offerings or experiences can harm the platform's reputation, even if it's not directly responsible for them.

Therefore, the platform needs to invest resources into monitoring and maintaining quality standards, which can be complex and costly.

Another significant challenge is the legal and regulatory landscape. Platform startups often operate in gray areas of law and can face legal challenges and regulatory backlash. Uber and Airbnb, for instance, have faced significant legal issues in various countries and cities.

Platform businesses also face considerable competition. The low barrier to entry means new competitors can easily emerge, while established businesses may launch their own platforms. Differentiating the platform in a crowded market and retaining users can be tough.

Lastly, there is the issue of dependency. As an intermediary, a platform is dependent on its users on both sides of the market. If service providers or consumers decide to transact outside the platform to avoid fees, the business could be negatively impacted.

In summary, while starting a platform or aggregator startup can provide substantial rewards, including scalability, network effects, and a low-cost business model, it also brings challenges such as achieving critical mass, maintaining quality control, navigating the legal landscape, facing intense competition, and managing user dependency.

Aspiring entrepreneurs need to carefully consider these factors before launching a platform startup.

With Love and Respect

Shubham Chauhan