Maximilian Gazeroglu
2025-06-09

Operating the Startup: Business Modeling

Nearly all of this section borrows from Ash Maurya's Running Lean 3rd edition.

We Start With Business Modeling

We want to first list out all our assumptions so that we can systematically validate them. We also want to create models for how our business should behave to justify spending time on them, use them as external accountability for whether we're making meaningful progress, and simply determine whether they're viable on paper.

First, we create a Lean Canvas to list out our initial set of business model hypotheses to later test systematically. Examples below:

Starbucks Lean Canvas
Starbucks Lean Canvas
Facebook Lean Canvas
Facebook Lean Canvas

Second, because all problems come from existing solutions, we're going to focus on the existing alternatives our potential early adopters use and the switching triggers / problems of these existing alternatives worth solving.

Desirability Stress Test
Desirability Stress Test

Third, we're going to do back-of-the-napkin calculations (a Fermi estimate) to see if our business model is financially viable given our goals.

  1. 1) Determine your Minimum Success Criteria (MSC), the minimum Annual Recurring Revenue (ARR) you want to be earning at year 3, where the unit economics have become more predictable having reached Product/Market Fit (PMF) on average a year earlier. The options are $100k ARR (enough to quit your day job), $1M ARR (enough for a small, 2–3 employee company), $10M ARR (enough for a VC-backed business).
  2. 2) Determine whether your idea can deliver on your MSC starting with required number of active customers = MSC ARR / product yearly pricing. Estimate the product yearly pricing as multiples of 10, e.g. $10/year, $100/year, $1000/year etc. For example, a $1M ARR with a $100/year product would require 10,000 active customers. This number should be less than 16% of your intended market size, since early adopters typically comprise this volume of market share, and you will want to reach your MSC with them alone to avoid crossing the chasm early on.
  3. 3) Estimate required minimum customer acqusition rate. Because all businesses have churn, just to sustain your customer base you will have to acquire the number of customers you lose in a month, which on average is 3% per month. So at 10,000 customers, you will lose 300 customers / month, meaning you will need to acquire 300 customers per month.
  4. 4) Estimate the required number of leads. Since on average most businesses convert unaware prospects to paying customers at a 1% conversion rate, you will need 100x your customer acquisition rate in leads. If you need to acquire 300 customers per month, you need to attract 30,000 leads to your website per month. And this is just to maintain revenue, not grow it.
  5. 5) Estimate referral, which lessens the burden of customer acquisition. Referral rates of 20% are good, 40% great, 70% excellent. If you need to acquire 30,000 leads per month, with a 20% referral rate, you only need to attract 24,000 leads per month.
  6. 6) If the above cripples your business model because the market isn't large enough or it's unprofitable to attract sufficiently many users, you can increase price by solving a bigger problem or tackling a different customer segment (for every 10x increase in yearly price, you need 10x fewer users to deliver your MSC), or you can downsize your MSC.
The Customer Factory
The Customer Factory
waysToBuildABusiness.png

Fourth, we create a traction roadmap, the most important business modeling tool for two reasons: 1) We will use it to repeatedly validate whether we're on track to hit our goals (e.g. on some monthly interval) and pivot otherwise. 2) When we make falsifiable hypotheses about how our experiments will fare, we use the traction roadmap to determine what these numbers should be. The point of building a model is to predict how your customers need to behave to make your business work, and then we validate those predictions with experiments.

  1. 1) Determine the number of customers at year 3, which we determined above with our MSC ARR and yearly product price. Using the example above, this was 10,000 customers.
  2. 2) Assume an exponential growth rate of 10x per year, which is a common growth rate for startups, and closely matches YC's 10% per week recommended growth rate. For our example, with 10,000 customers at year 3, we'd have 1,000 customers at the end of year 2, and 100 customers at the end of year 1.
  3. 3) For the first year, linear growth will approximate the exponential curve well. Since the first 3 months will involve lots of pre-revenue search tasks, your year 1 customer goal will be divided over 9 months. For our 100 customers at the end of year 1 goal, this means we will have to acquire roughly 10 new customers per month. Remember, this is equivalent to 1,000 leads per month assuming the average 1% conversion rate. Focus on the leading measure to stay rigorous.
  4. 4) Enter these values into excel month-by-month and chart the graph, then stamp it onto your wall, and your forehead :)
exampleTractionRoadmap.png

This concludes business modeling. Now we can kick off a 90-day cycle, get out of the building to engage customers, and begin testing our business model assumptions, following the order of the funnel.

90-Day Cycles

We work in 90-day cycles to keep ourselves externally accountable: when the 90-day deadline comes due, we determine whether we achieved the goals we initially set and decide to persevere, pivot, or pause accordingly. 90 days is long enough to take on meaningful work and short enough to drive urgency.

90-day cycle overview:

  1. 1) Set a 90 day goal (comes from the traction roadmap goal 90 days from now)
  2. 2) Determine campaign(s) to achieve this goal (comes from identifying the constraint in the funnel and brainstorming ways to improve it)
  3. 3) Split these 90 days into two-week sprints to test strategies within these campaigns

The most important thing about this is that you have calendar events / reminders set up for the 90-day mark and for each two-week sprint mark. This keeps you externally accountable and ensures you don't pivot too late if you are not achieving your traction roadmap goals (which is the minimum traction that justifies you working on this startup).

These traction roadmap goals are lagging measures. I also recommend setting a leading measure for the minimum number of hours you'll work per day (e.g. 10 hours every day except Sundays), tracking it daily, and ensure you're hitting it at all costs. The intensity of work within this leading measure will revolve around the traction roadmap lagging measure.

The first goal is Problem/Solution Fit, hitting our month 3 traction roadmap goal and being on track to repeatably hit it in following months, all by selling a demo of a product we have not yet built. We'll use a mafia offer campaign to accomplish this, and the inner sprints will all be devoted to finding and moving our early adopters through the funnel from Channel/Customer fit to Customer/Problem Fit to Problem/Solution Fit.

I'll explain all this next. Let's go.

   

Email me at max@atnself.com if you have some thoughts (the temporary solution until I add comments).