Business Plan versus Business Model

When I conduct due diligence on a potential investment, one of my goals is to sketch out what I believe is the companies business model not to simply build a set of pro forma financial statements. Many hedge funds and private equity investors rely heavily on excel pro formas littered with various assumptions. While this is necessary, it’s the last step. First and most important is to understand the companies business model. A business model according to steve blank, one of the countries greatest venture capitalist, “describes how a company creates, delivers and captures value. Its best understood as a diagram that shows all the flows between the different parts of a company. This includes how the product gets distributed to your customers and how money flows back into your company. It shows your company’s cost structures, how each department interacts with the others and where your company can work with other companies or partners to implement your business”. If you are a consultant or investor take the time and create a single diagram on a large piece of newsprint pad that traces all the flows within the company. Then go ahead and do the pro formas. Try it out and let me know how it works. Here is an example of a Business Model Template