The Smartest Business Model Ever (Part 1: Build A Moneymaker)

If you want to scare a bunch of business-school students, show them what it really takes to be an entrepreneur. I see it happen twice weekly during a course at the Norm Brodsky College of Business at Rider University. The class is called “Inside the Mind of an Entrepreneur,” and I co-teach it alongside Professor Lisa Teach and Brodsky himself. Every Tuesday and Thursday, Norm and I arrange for a world-class entrepreneur to present their personal journey to 15 undergraduates. The entrepreneurs we bring on all have harrowing stories about building their businesses from nothing and overcoming adversity over and over again. 

By the end of the first class or two, I can practically see the confidence drain from the students’ faces as they confront the reality of entrepreneurship — backbreaking work and sky-high financial risk. They hear how Noah Chaimberg of Heatonist spent his weekends behind a push cart outside music venues to test his approach to selling hot sauce before it became a multi-million dollar business. Jay Jay French from the heavy metal band Twisted Sister related how they played thousands of live shows before getting their big break on MTV. They learn how Charley Ryan from Brooklyn Bowl navigated the COVID pandemic with a shutdown that lasted more than a year. I imagine that an entry-level CPA position began to look increasingly attractive to them by comparison.

It’s no surprise that these students have a skewed idea of entrepreneurial life. Like all of us, they’ve read how Brian Chesky got the idea of Airbnb when he decided to rent out his apartment for a few days, or how Pierre Omidyar started eBay to sell his girlfriend’s Pez dispensers. This familiar narrative starts with solving a common problem with a brilliant, disruptive solution that was right in front of everyone’s eyes, continues with enthusiastic inflows of VC capital, snatching market share from traditional players to an eventual lPO and… well, you know the rest.

The problem? That’s not how the vast majority of entrepreneurial wealth is actually created. In reality, a successful entrepreneur is someone who builds what I call a smart business. 

HOW TO BUILD A SMART BUSINESS FROM SCRATCH

A smart business is one that has the potential to provide all the wonderful benefits of entrepreneurial success without requiring a one-in-a-million idea. While it’s true that being an entrepreneur allows you to design your own career, your own company culture and your own impact on the world, it doesn’t happen the way we’re told it does. A smart business doesn’t solve a problem we all have, and it doesn’t require a boatload of outside investment — at least not at first. 

There are two phases to creating a smart business. The first is to build a “moneymaker.” Simply put, this is a business that makes money — one that grows consistently and profitably. The most direct path to building a successful moneymaker is this:

Step 1: Start a small services business which solves a problem for larger businesses.

You’d be surprised at how many young entrepreneurs want to start the next Yeezy sneaker company or AirBnB. The first two things we show them is that B2B strategies are more likely to succeed than consumer-facing businesses, and that service-based businesses require less cash to launch and grow than product-based businesses. 

Step 2: Start a business that solves three underlying problems for large companies:

• Problem #1: Large companies prefer not to hire people. Every addition to a large company’s headcount means more costs in benefits, real estate and fixed overhead. A new hire at a large company costs more than just the salary. It would be safe to assume that every new $100,000 employee at a large company costs about $150,000 when you add up everything (taxes, real estate, etc.). 

Your small B2B services business can hire at a lower cost than your larger customer. 

• Problem #2: Large companies are afraid of technology. New technologies to make work easier and faster are entering the marketplace every day, but investing in new technology comes with risks. The technology (or the company behind it) might fail. It might become obsolete or increase cyber risk. 

Your small B2B services business can adopt new, unproven technologies more nimbly than a large company. If something bad happens, it’s not your customer’s problem. 

• Problem #3: Large companies use small companies as their bank. This is a surprising one, but the logic is simple. When you employ someone to service a contract for your large customer, you pay them every week or two. Your customer, however, pays you every month, and may even stretch out their payments to two or three. There’s a cash-flow problem, but the problem is yours, not your customer’s.

Thank the small business gods for American Express and other short-term lenders that allow you to manage the float in between your employees’ payday and your own. 

That’s Part One: Build a moneymaker — that is, a small services business that solves a problem for large companies. Make sure you address the three underlying challenges that large companies face when you design your offering. 

Some examples from our Inside the Mind of an Entrepreneur class at The Norm Brodsky College of Business include: 

Customized Energy Solutions, Philadelphia. Founder: Stephen Fernands

Customized Energy Solutions monitors energy usage for large clients like big box stores in your neighborhood so these stores can manage their electricity usage better.

Terracycle, Trenton, NJ. Founder: Tom Szaky

Terracycle helps large consumer-based companies develop more environmentally-friendly products to reduce their waste footprint. 

In my next post, I’ll show you Part 2: How to Build a Moonshot.