These 2 VCs explain the key to finding the right business model

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In the journey of creating a new startup, founders have had to do six impossible things before breakfast. But according to these VCs, before anything else, finding the right business model is key.

Here’s their advice.

Editor’s note: Answers have been edited for clarity.

Reez Nordin, venture partner at Monk’s Hill Ventures

There are details in each element of revenue and cost, yet the fundamental elements in a sustainable business model are providing products/services at the lowest cost possible (without sacrificing quality) to earn a sustainable profit.

But a startup is like a scientist running experiments in labs: along the way, there will be many failures and successes.

It may take several experiments/iterations in order for a founder to nail the optimal business model. If at first it did not succeed (and rarely does a company get it right at first), try again and iterate to hit the jackpot.

Startups can set aside resources—time, people, capital—to carry out experiments so they can continuously fine-tune their business model. There is no magic number for this, but I’d reckon that setting aside 10 to 20 percent of a startup’s resources will have a huge upside without impacting much of its business operations.

Think of this as a call option (in trading lingo). If you spend small amounts to cap your downside, it can generate outsized payoffs if the bet turns out right.

But just like trading, teams need to know when to exit. If the outcome is still negative after iterations, I’d suggest abandoning it altogether and moving on to the next one. (A third attempt should be the limit, if there is one at all, lest you run the risk of wasting precious resources.)

How important is the business model when you evaluate a startup?

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