Unicorns never stand still – Why business model innovation is so important to startups

In many tales since ancient times, unicorns have been regarded as magic creatures with special powers that are hard to be tamed. In 2013, Cowboy ventures analysed US-based tech firms and eventually aggregated 39 of them to their so-called “Unicorn Club”. In their rating extremely successful startup unicorns were defined by a foundation since 2003 and a valuation at over $1 billion by public or private market investors. Somehow it doesn`t seem farfetched that these creatures are nowadays used as symbols for very successful startups. But what actually makes a startup successful? What is it founders need to keep in mind?

In my consideration, startup unicorns are survivors, conquerors of a niche and serve as model for others. Their business model is never final, but always being innovated. Speaking of the big unicorns, we usually consider Amazon, Google and Facebook as the grand winners. I would hold that the three of them do indeed constantly look for opportunities to innovate their business model. Their product portfolio expands regularly: For example, Amazon that is not just a bookseller any more. The grand winners look into various sectors, e.g. Google who wants to enhance the health sector with its contact lense. And their clients form a daily part of development, e.g. Facebook with their open coding approach. Yet, looking at the present and the near future, I would hope for many more unicorns to arise.

Unicorns have the magic power to constantly question their current business model

But in order to do so, they need to develop special powers – special powers to constantly question their initial hypotheses and to develop new ones on the go. This way, their business model will never be final or fixated. Taking Facebook as an example: They started off as an exclusive dating platform – today they are the leading social network worldwide. Their exclusive model has become an inclusive freemium business model for everyone.

But what actually is a business model? Looking at research to the topic, there are various definitions going into both, a detailed and a holistic direction.

Basically, a business model describes how a firm does business. It explains the who, the what, the how and the value. In doing so, it firstly defines, who the target customer is. Secondly, it considers what core products or services are offered. Thirdly, how value is delivered. Fourthly, the business model depicts value namely satisfaction of needs, USP and revenue generation.

Consequently, a business model can be regarded as a holistic description of a certain firm (Zott & Amit, 2010). That description allocates activities and roles whilst simultaneously depicting content, structure and governance of transactions. Additionally, a business model serves as vehicle for value creation (Chesbrough, 2003), thus leading to a competitive advantage. Here, I agree with Steve Blank that a business model should be repeatable, scalable and flexible. The last factor is especially important for startups. They do start off holding various hypotheses. Then, following a lean startup approach, they are to test their hypotheses and to develop new ones on the go. Developing new hypotheses may relate to markets, customers, products and services, to only name a few. Thus, that process of constant adaption – also called pivoting – will possibly affect many, if not all elements of their business model. Let`s look at Google in this regard: They started off with the idea to make information easily accessible to everyone for free – another freemium model. Today they provide various services that are still related to the initial objective, yet somewhat different. Google provides internet services like advertising where you pay for clicks on the words that were once part of free information. That pay-per-click model is their greatest and central revenue stream which has made them a multimillion corporation.

Untameable unicorns always innovate their business model

Therefore, a startup’s special power of pivoting leads to being untameable in the long term. But how do startups really become untameable?

They need to be able to align their actions of pivoting and to develop it as their first and foremost strength: They need to become a unicorn in innovating their business model. We often read that business model innovation is the response to a changing world. Similarly, business model innovation can be regarded as a constant process of questioning the current model. It thus serves as vehicle for transformation leading to innovation and renewal (Chesbrough & Rosenbloom, 2002). Exchange of knowledge beyond a firm`s boundaries becomes crucial. Consequently, ideas should be sought for both, internally and externally. How can that thought be put into practice? Well, nowadays every company has first, the chance to be responsive to customer needs via social media. Second, companies should be open to ideas of their employees. Provided that they haven`t yet grown too big, this should be easily achievable by harvesting a culture of exchange.

If executed effectively, business model innovation eventually leads to a change of two or more of the aforementioned elements to a business model. A change of three elements can then be regarded as option to incrementally innovate a business model. As we have seen, a startup’s world is changing almost constantly. Therefore, an establishment of mechanisms to business model innovation becomes crucial. Provided how fast the clock of startups ticks, I hold that business model innovation must become a part of a startup’s agenda right from the start. It must become a part of their daily routine. I think, Amazon has done amazingly well in this regard: They started off as an online bookstore. Today they help authors to publish their own books. We can say they expanded their niche successfully. But there is more to Amazon: They also offer software services. In doing so, they share the knowledge which they have developed in way that again generates revenues for them. Obviously, they did not only change the basic elements of their initial business models, but even consider external needs combined with internal knowledge and resources to a level that lead to a new business model.

So, business model innovation should move beyond singular canvas mapping or workshops. Especially, since both of these measurements are regarded as too time consuming by founders anyways. Business model innovation is an approach to constantly questioning the status quo. It is never holding anything for granted. And it is the willpower to relentlessly change. Thus, it is an on-going process of developing new hypotheses which requires alignment but eventually leads to strength. If startup founders support these attitudes and allow business model innovation to become an integral part of their daily routines, their startup will become an untameable unicorn in the long run. And hopefully, we will name more than just a few startups that have made it to become part of the unicorn club in the near future.

Literature

• Chesbrough, H. (2003). Open innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press.
• Chesbrough, H., & Rosenbloom, R. S. (2002). The role of the business model in capturing value from innovation: evidence from Xerox Corporation ’ s technology spin-off companies. Industrial and Corporate Change, 11(3), 529–555.
• Zott, C., & Amit, R. (2010). Working Paper, Business Model Innovation: Creating Value in Times of Change.

This post is part of a weekly series of articles by doctoral canditates of the Alexander von Humboldt Institute for Internet and Society. It does not necessarily represent the view of the Institute itself. For more information about the topics of these articles and asssociated research projects, please contact presse@hiig.de.