How We Formulated Our Business Model

The following is adapted from Takeaways: Secret Truths from Leading a Startup.

For startups, business models are moving targets, and the questions are endless. 

What is the best way to generate perpetual income? Are your products for sale, for rent, or both? Should your business model include short-term contracts? Long-term contracts? Perpetual licenses? How do you support all of them simultaneously? 

Throughout Silicon Valley, Software as a Service (also known as SaaS) is the business model de jour. Many companies use this subscription model to lure customers in with a “freemium” offer that evolves into recurring regular payments. 

Because Loopd was primarily a wearables company with up-front engineering and manufacturing costs, the SaaS subscription scenario was risky and unattractive.

Answering the Tough Questions

In May 2016, we were raising our third round of financing and starting to hear more pressing questions from investors about the Loopd business model. We were not entirely unprepared, because Series A included plenty of traditional venture capital funds who were hyperfocused on the bottom line. Before that, angel investors put up the capital for research and development, a minimum viable product, bare-bones sales organization, and market-fit trials, so we were practiced at giving them answers, too.

Yet as these new financial investors entered the picture, we faced even harder questions about our sales numbers and customer lifetime value (LTV). Under their tough scrutiny, we were measured against hundreds of other startups internationally. Many of these other companies had great products, proven revenue, and in some cases long-term customer relationships.

In our corner, Tim Draper, an angel investor and well-known venture capitalist (VC) with DFJ Venture Capital, had already started preparing us by asking tough questions. Tim challenged us to think big with our business model. In an email, he bluntly wrote, “I am thinking you might want to do some brainstorming on how you can keep your customers. Either create a SaaS business where you get them to sign up for a subscription or move this to the consumer where there will be a network effect.”

Tim argued that Loopd could evolve more quickly as a B2C (business-to-consumer) company like Fitbit than as a B2B (business-to-business) company like IBM. He believed Loopd could serve as a digital business card for consumers worldwide in addition to selling to corporate events.

We agreed, but we struggled with our product reliability in those early stages. We wanted more time to refine our products and prioritize user experience in the controlled environment of the corporate event space.

I also worried about the bigger challenges of being a small startup trying to access consumer channels. This would require tens of millions of dollars, specialized retail promotional expertise, and a high-performing supply chain with access to consumers via the web, large distribution networks, and large-volume outlets globally. 

Only a few wearable digital device startups have succeeded in consumer channels and built a sustainable business. After we decided to exit, Tile, a smart lost-and-found tag, raised $60 million and can now be found at Target, Walmart, Amazon.com, and other retailers in fifteen countries. But Tile is the exception, not the rule. 

Finding a Business Model That Works

Our business model was one of our most difficult challenges, but we had been forewarned. During my time at Draper University, Tim used to say, “A lot of entrepreneurs have good ideas but cannot figure out where they are going to make money or even get to the end user or how their businesses are going to work.” 

In many ways, Tim’s genius comes from his uncanny ability to distill successful business models. He is famous for helping startups wade through the confusion to design something brilliant. 

Tim often remarks that he “got lucky” with Hotmail, the first web-based, free email platform in the late 1990s, when he suggested the founders put in a small promotional link for viral marketing in every email. The promotion stated simply, “Get your private email at https://www.hotmail.com.” 

He was also an early investor in social business models like Skype and Bitcoin, companies that grew globally through the networking effect of the internet.

Tim likes to remind new startups that many big companies have been formed through unique and clever models. His formula for identifying the best strategy is one that we adopted and now preach as business gospel, “You assess the fastest way to get the service to the user, but in a way no one is thinking about. I always like to get to the end user. All the greatest companies have end-user connections.”

It’s easy to get lost in the endless questions that come after product inspiration. But forming a successful business model hinges on remembering why you started. The beginning and the end are always about the end user, and the best business model is simply the path that connects these two points.

For more advice on growing a startup, you can find Takeaways on Amazon.

Brian Friedman is a millennial entrepreneur who went from a blank sheet of paper to a successful multimillion-dollar exit in less than three years. During this time, he secured over $2.5 million in angel and venture capital financing, hired more than ten employees, opened  offices in San Francisco and Taiwan, and sold global brands like Intel, Cisco, Castrol, and Box. His ideas about analytics and business practices have been quoted in TechCrunch, Yahoo!, Forbes, and other leading publications. He started the largest Wearable Technology Startup meetup in the US and now serves as VP of digital innovation on the executive team at Aventri, a leading enterprise cloud-based, event management software company.