Friday, January 16, 2009

Passive Business Models

Different Business Models requires different amount of direct human attention and involvement once it has been set up. When the business model requires no or very limited attention I call it a Passive Business Model. A Passive Business Model always require an investment to build the assets from which value can be passively generated.

Two Passive Business Model examples
You invest your time in doing a PhD in the manufacturing of monolithically integrated wide bandgap semiconductor circuits giving you a unique edge in a new technology field. You discover a new way to produce wide bandgap semiconductor at very low cost and several companies show interest in your knowledge. You decide to start a company to exploit your intellectual assets. Using a consultancy-based business model, charging for each hour will require your direct attention for every generated dollar. Packaging your knowledge into a manual, software or patent and using a royalty based licensing business model, no or very limited direct human attention is needed once the agreement is set-up.

Another example is if you start a company based on your skills to illustrate things graphically, and instead of only illustrating on demand giving the ownership rights to your client, you create illustrations that you believe many companies will want to use and keep the ownership rights to yourself. With the ownership rights your company can make the illustrations available through a stock illustration clearinghouse and get paid a royalty whenever someone uses your illustrations. Another Passive Business Model would be to create a website with all your company's illustrations, using advertisements, surveys and polls, donations or other more or less passive business models for websites.

Are Passive Business Models better?
It depends. And using one business model does not exclude using another in parallel or in sequence at a later stage. In the first example above it is probably difficult to employ someone else with the unique edge to devote the attention needed for a consultancy-based business model. At the same time you perhaps want to continue to have your unique edge spending your time doing further research. In the second example, perhaps you decide to use a royalty-based business model for some illustrations while continuing to use the consultancy-based business model doing interesting projects for your clients.

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