Business Model Evolution: Planning Capital Investment Strategy in Ambitious High-Growth Start-Ups.

Abstract

Ovelin is a Finnish start-up company founded in 2010 by the author of this thesis and another student of Tampere University of Technology. The mission of the company was and is to revolutionize music education, and to make learning to play an instrument more fun and motivating. To achieve that, Ovelin combines music education with the addictive features of computer games. By utilizing high-tech audio technology the games would be played on any device, with any real musical instrument, without using any additional equipment.

The business idea and plan the two co-founders wrote in 2010 received very positive feedback in general. However, building the extensive online music education service the two had envisioned would take years, and cost millions of Euros in development cost. At that point, neither of the co-founders had any experience in game development, music education or entrepreneurship. Thus, the team was unable to raise an investment for the venture solely based on a business plan, let alone the projected millions of Euros that the whole project might have cost. Thus, the team decided to break down the product development into several stages. Starting from a simple learning application, and eventually build it up over several stages into the service they envisioned and called StarEyes. This would in turn also cut the development costs into multiple chunks, a first one small enough that the team could gather it. And, should the development stage be successful, the team expected to raise larger financing rounds to support the next stage of product development.

In 2010, this thesis was initiated to formalize this plan of building a product and business over several stages in a more academic way. Thus, the concept of Business Model Evolution was created. Business Model Evolution is a framework built on the Business Model Canvas by Alexander Osterwalder (Osterwalder et. al, 2010) and its nine building blocks: Value Proposition, Target Customer, Distribution Channel, Customer Relationship, Value Configuration, Capability, Partnership Network, Cost Structure and Revenue Model. For each step of the development, each of the nine blocks would have to be formalized, to describe a feasible business case for the current stage of the product. In the beginning of 2011, the thesis was almost concluded, and described the development of StarEyes over 6 development stages. However, at that point, the author decided to focus his time entirely on the development of Ovelin, and thus set the thesis aside unfinished. 18 months later, after the successful launch of Ovelin’s first product, the author decided to finalize the thesis by comparing the planned development 18 months earlier to how Ovelin had developed until in reality. In other words, which parts of the plan did actually happen, and where did the real development significantly diverge from the planned Business Model Evolution concept.

The Business Model Evolution concept itself was very interesting, and was in many areas also beneficial to the development of Ovelin. For example, breaking down the concept into a smaller “Minimal Viable Product” turned out to be possible, and was achieved at a fraction of the expected overall budget. However, the rigor at which the plan was first formalized, adhering to academic principles, turned out not the most suitable for its purpose. In practical terms, it takes a lot of time, and builds much on assumptions that have not been confirmed or disproven yet. In some aspects, planning each of the steps this thoroughly was in some points even counter-productive. For example, it encourages the management to try to follow the plan, and make them reluctant to take new knowledge into account. On the other hand, re-visiting an 18 months old plan turned out to be rather interesting. The new knowledge and experience the team had gathered after this “first stage” caused much of what had been planned subsequently irrelevant or obsolete. Yet, many of the assumptions turned out to be surprisingly accurate.

As a consequence of both the positive and negative aspects of the initially chosen Business Model Evolution plan, the Ovelin management team eventually adopted a new approach. Usually it is advised that entrepreneurs have a vision of what they are aspiring to do with their startup. At the same time, the more immediate months should be planned thoroughly. Thus, the Ovelin team currently tries to follow thorough 6 months plan, while having formulated a 5-year vision too.

The term Business Model Evolution was chosen to highlight the idea that a large project can be developed over several stages, rather than to be developed in one major effort. Interestingly, the reality turned out to be even closer to the “evolution idea” as initially thought. Much like in biology, the development of a product has to take new situations in the environmental changes into account. In other words, planning several years ahead is very difficult, and can in the worst case even be counter productive. However, unlike in biology, it is still very advisable to have a vision of what the start-up is aiming to achieve, even if not all the steps in between can be foreseen at the outset.