Profit Driver #3: FUNCTIONS

“Capitalism has turned human beings into commodities. To the owner of a restaurant: the cook and a bag of potatoes are equally important.” 
~Mokokoma Mokhonoana


Well, of course a cook is much more profitable than the sum of the meals that could be cooked from all the potatoes in the bag (even if they may, sometimes, cost the same... :-) ). And this is because they fulfill radically different functions:
- a cook's function is to ensure quality meals, to manage a team of aides, to come up with new recipes, all in order to secure a repeatable positive customer experience etc.
- a potato's function is to be cooked and served in one single customer experience event.

That is the reason why a law firm will always earn more profits than a construction company with similar headcount - the market pays better for a perceived higher function that drives more value throughout the value chain.

Also, this is the reason why education is expensive - education amplifies a function so that it may earn more for its carrier.


Translating this to a lean start-up world, this gets very difficult to crack. A lean start-up has to make very tough choices not only about the risk priorities, about the assets to build, but also about the best functions to perform.

The original Business Model Canvas captures the function on the left-hand side: the Key Activities and the Key Resources.

The Lean Canvas instead replaces this with a different, more focused approach: the biggest areas on the left side of the canvas are called Problem and Solution. So a clear proposition emerges: split your start-up into a Problem Team and a Solution Team. 

Now, strictly in terms of business functions, Ash Maurya argues that a lean start-up should only employ the 3 most critical ones:
- Development (solution engineering)
- Marketing (customer understanding)
- Design (embeds design thinking into the functions above and makes them "sing" together in harmony)

Not coincidentally, the three quoted functions have the highest profit potential of all functions. Any other support function (finance, administration, legal etc), at the lean start-up stage, should be carried out by the founders.


So, don't start up by stocking up on your cafeteria supplies, by renting out the nicest office space or by buying that ever-present ping-pong table :)

A Lean Start-up Perspective On Profit Drivers

Profitability is what makes a company real.
~Elon Musk



When I was still a relatively junior Finance Manager, I have learned from my dearest mentor that, for a business to be profitable, it must have a combination of three key drivers:

RISK
Any business needs to venture in the unknown. There is no money left where the markets have already priced in all the information, opportunities and events. Conceptually, the more risk you take, the greater the return you should expect.

ASSETS
By definition, an asset is something of a long-term value that is held by a business with an implied expectation that the asset will accrue future benefits to the business. Again, theoretically, the more assets you can leverage (and think of assets in the broadest way possible), the more profits you should expect as an entrepreneur.

FUNCTIONS
It also matters what type of activities the business undertakes. The more sophisticated the activities, the greater the likely return. For example - engaging in basic web design will earn you far less than creating a web platform with an embedded network effect.

I will tackle, in the next few posts, some opinions on how to maximize the combination of the three drivers to reach profit as a lean start-up.

By the way, the 3-driver concept is now a major methodology used in international tax planning.