Whether you’re raising first-round venture capital or cultivating shareholders in a public company, investors need to understand the business model – and drawing a picture of it may help – suggests Cliff Illig, co-founder and vice chairman of Cerner Corporation, a mid cap healthcare IT company listed on NASDAQ.
Illig told a meeting of entrepreneurs last night at the Polsinelli Shughart law firm in Kansas City that a business model is essentially a value proposition. It’s not about how well-designed your widgets are, or the wonderful efforts you exert internally to develop or produce those widgets.
The business model looks outward and answers the question, “How do we create value for customers?” Someone else has described this less delicately as “How do we move money from the customers’ pockets to our pockets?”
Cerner includes a picture of its business model in each annual report and in every presentation to Wall Street, Illig said. Of course, I had to see this picture – so I looked it up (apologies for the shrunken copy shown here).
Well, Cerner’s business model picture isn’t exactly pretty – most companies bog down in complexity when explaining their business – but it does explain their financials. The graphic is a flow chart showing where the money comes from (sales pipeline on top), how it flows through contracts and backlogs into each of the business segments, what the margins are – and, ultimately, how money gets to shareholders in the form of operating profit and EBITDA (at the bottom).
I’m not pointing to Cerner as the Michelangelo of IR art – but do consider this picture.
A schematic of a business model says a lot. The more you can simplify it, the better. My feeling is that investor relations people ought to be doodlers – always taking what we hear and looking for ways to sketch a picture of it – simpler, more visual and more intuitive. Bottom line, we want investors to understand how we create value.