How will a new technology or venture fare in an unestablished or unclear market? Palisade’s @RISK software can help answer that question, and did so for the new mobile app called Omny by 121Cast, which allows users to manage their online listening of internet radio and other audio services for total customization.
The app, a venture under the stewardship of the Australian venture capital firm Adventure Capital, was used as an study example by researchers Dr Clint Steele and Kourosh Dini of Australia’s Swinburne University of Technology , and Darcy Naunton of Adventure Capital to test @RISK’s capability of resolving business model uncertainties.
Some of the unknowns of the app’s business plan included market size, speed of adoption, resources needed to develop the application and related services for market segments, optimum pricing, effectiveness of promotions, and size of the organic market. Identifying the sources of potential randomness was just the start. The model needs to be set up in such a way that when random fluctuations in the inputs occur, they have the correct effect upon the outputs. Unfortunately, many business plans and their financial models are not usually put together in such a way. Often, fixed numbers that “seem right” to the entrepreneur are allocated to each cell within a spreadsheet. The model will balance, but if one changes a cell value for, say, the market size, then the other cells are unlike to change much. If they do, then it will unlikely be in a logical manner. An increase in sales, for example, may not cause a corresponding increase in operations costs, asset purchased, or administration costs.
Creating accurate models for these relationships was the first step. This was easy for the typical issues. The relationship between market size and the cost of customer support is a good example. However, other relationships are trickier to model. For instance, how does an increase in sales affect the position of an app in an app store listing? To figure this out, the team used @RISK to create a model with distributions specified by percentiles. @RISK also helped the entrepreneurs use ‘coevolution’ to design a business plan–coevolution occurs when a problem becomes clearer after a person engages in solving it. “Because you have to create a model that allows for the flow of variances, a lot more thought needs to go into how the proposed business will run,” says Darcy Naunton, the capital venture manager on the project. “I now know a lot more about this business than I ever would have otherwise.”
As the case study explains, new ventures will always have unknowns. “It is what entrepreneurs do – deal with uncertainty. However, @RISK can be used to eliminate uncertainty about the sensitivity of the business model to expected randomness. This is different from removing uncertainty, or randomness, entirely – that’s impossible. But by mitigating some of the guesswork around the sensitivity of a business plan to various external fluctuations, an entrepreneur can now focus uncertainty management skills on a smaller area and apply those skills more intensely.”
Read the original case study here.