There seems to be nothing that VCs and the start-up community love more than a novel business model. Ride-sharing, subscription meal kits, peer-to-peer lending, freemium games, bots… the list goes on, and the press loves a story about how a new approach is disrupting incumbents.
It’s in the name. Consumers find novel business models, well, novel. There are always consumers willing to try out a novel approach, providing the early traction for a company and helping a start-up make the case for it being the next unicorn. The usual reaction to a novel business model showing early signs of traction is to fund it up, power up the marketing team and go all out for growth. But just because it’s novel does that mean it’ll turn into a sustainable business?
Many moons ago the hot novel business model was daily deals, and Groupon & Living Social were the leaders in the space. This week though Groupon acquired Living Social, for a non-material amount, following a restructuring and move away from email deals. The problem was that just because daily deals on email was novel didn’t mean it held lasting appeal to consumers.
Don’t get me wrong. If you pick the right novel business model the rewards are big. Just look at Uber or Airbnb. The challenge for investors is not to get dazzled by the novelty of the approach and accompanying buzz, but to work out if it really has lasting appeal and is solving a genuine problem.
