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Investment Company Business Plan Template

Written by Dave Lavinsky

investment company business plan

Investment Company Business Plan

Over the past 20+ years, we have helped over 1,000 entrepreneurs and business owners create business plans to start and grow their investment companies. On this page, we will first give you some background information with regards to the importance of business planning. We will then go through an investment company business plan template step-by-step so you can create your plan today.

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What Is a Business Plan?

A business plan provides a snapshot of your investment company as it stands today, and lays out your growth plan for the next five years. It explains your business goals and your strategy for reaching them. It also includes market research to support your plans.

Why You Need a Business Plan

If you’re looking to start an investment company, or grow your existing investment company, you need a business plan. A business plan will help you raise funding, if needed, and plan out the growth of your investment company in order to improve your chances of success. Your business plan is a living document that should be updated annually as your company grows and changes.

Sources of Funding for Investment Companies

With regards to funding, the main sources of funding for an investment company are bank loans and angel investors. With regards to bank loans, banks will want to review your business plan and gain confidence that you will be able to repay your loan and interest. To acquire this confidence, the loan officer will not only want to confirm that your financials are reasonable, but they will also want to see a professional plan. Such a plan will give them the confidence that you can successfully and professionally operate a business. Investors, grants, personal investments, and bank loans are the most common funding paths for investment companies.

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How to write a business plan for an investment company.

If you want to start an investment company or expand your current one, you need a business plan. Below we detail what you should include in each section of your own business plan:

Executive Summary

Your executive summary provides an introduction to your business plan, but it is normally the last section you write because it provides a summary of each key section of your plan.

The goal of your Executive Summary is to quickly engage the reader. Explain to them the type of investment company you are operating and the status. For example, are you a startup, do you have an investment company that you would like to grow, or are you operating investment companies in multiple markets?

Next, provide an overview of each of the subsequent sections of your business plan. For example, give a brief overview of the investment company industry. Discuss the type of investment company you are operating. Detail your direct competitors. Give an overview of your target customers. Provide a snapshot of your marketing plan. Identify the key members of your team. And offer an overview of your financial plan.  

Company Analysis

In your company analysis, you will detail the type of investment company you are operating.

For example, you might operate one of the following types of investment companies:

  • Closed-End Funds Investment Company : this type of investment company issues a fixed number of shares through a single IPO to raise capital for its initial investments.
  • Mutual Funds (Open-End Funds) Investment Company: this type of investment company is a diversified portfolio of pooled investor money that can issue an unlimited number of shares.
  • Unit Investment Trusts (UITs) Investment Company: this type of investment company offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time.

In addition to explaining the type of investment company you will operate, the Company Analysis section of your business plan needs to provide background on the business.

Include answers to question such as:

  • When and why did you start the business?
  • What milestones have you achieved to date? Milestones could include the number of investments made, number of client positive reviews, reaching X amount of clients invested for, etc.
  • Your legal structure. Are you incorporated as an S-Corp? An LLC? A sole proprietorship? Explain your legal structure here.

Industry Analysis

In your industry analysis, you need to provide an overview of the investment industry.

While this may seem unnecessary, it serves multiple purposes.

First, researching the investment industry educates you. It helps you understand the market in which you are operating.

Secondly, market research can improve your strategy, particularly if your research identifies market trends.

The third reason for market research is to prove to readers that you are an expert in your industry. By conducting the research and presenting it in your plan, you achieve just that.

The following questions should be answered in the industry analysis section of your business plan:

  • How big is the investment industry (in dollars)?
  • Is the market declining or increasing?
  • Who are the key competitors in the market?
  • Who are the key suppliers in the market?
  • What trends are affecting the industry?
  • What is the industry’s growth forecast over the next 5 – 10 years?
  • What is the relevant market size? That is, how big is the potential market for your investment company? You can extrapolate such a figure by assessing the size of the market in the entire country and then applying that figure to your local population.

Customer Analysis

The customer analysis section of your business plan must detail the customers you serve and/or expect to serve.

The following are examples of customer segments: companies or employees in specific industries, couples with double income, families with kids, small business owners, etc.

As you can imagine, the customer segment(s) you choose will have a great impact on the type of investment company you operate. Clearly, couples with families and double income would respond to different marketing promotions than corporations, for example.

Try to break out your target customers in terms of their demographic and psychographic profiles. With regards to demographics, include a discussion of the ages, genders, locations and income levels of the customers you seek to serve.

Psychographic profiles explain the wants and needs of your target customers. The more you can understand and define these needs, the better you will do in attracting and retaining your customers.

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Competitive Analysis

Your competitive analysis should identify the indirect and direct competitors your business faces and then focus on the latter.

Direct competitors are other investment companies.

Indirect competitors are other options that customers have to purchase from that aren’t direct competitors. This includes robo investors and advisors, company 401Ks, etc. You need to mention such competition as well.

With regards to direct competition, you want to describe the other investment companies with which you compete. Most likely, your direct competitors will be investment companies located very close to your location.

investment competition

For each such competitor, provide an overview of their businesses and document their strengths and weaknesses. Unless you once worked at your competitors’ businesses, it will be impossible to know everything about them. But you should be able to find out key things about them such as:

  • What types of clients do they serve?
  • What type of investment company are they and what certifications do they have?
  • What is their pricing (premium, low, etc.)?
  • What are they good at?
  • What are their weaknesses?

With regards to the last two questions, think about your answers from the customers’ perspective. And don’t be afraid to ask your competitors’ customers what they like most and least about them.

The final part of your competitive analysis section is to document your areas of competitive advantage. For example:

  • Will you provide better investment strategies?
  • Will you provide services that your competitors don’t offer?
  • Will you provide better customer service?
  • Will you offer better pricing?

Think about ways you will outperform your competition and document them in this section of your plan.  

Marketing Plan

Traditionally, a marketing plan includes the four P’s: Product, Price, Place, and Promotion. For an investment company, your marketing plan should include the following:

Product : In the product section, you should reiterate the type of company that you documented in your Company Analysis. Then, detail the specific products you will be offering. For example, in addition to an investment company, will you provide insurance products, website and app accessibility, quarterly or annual investment reviews, and any other services?

Price : Document the prices you will offer and how they compare to your competitors. Essentially in the product and price sub-sections of your marketing plan, you are presenting the services you offer and their prices.

Place : Place refers to the location of your company. Document your location and mention how the location will impact your success. For example, is your investment company located in a busy retail district, a business district, a standalone office, etc. Discuss how your location might be the ideal location for your customers.

Promotions : The final part of your investment company marketing plan is the promotions section. Here you will document how you will drive customers to your location(s). The following are some promotional methods you might consider:

  • Advertising in local papers and magazines
  • Commercials and billboards
  • Reaching out to websites
  • Social media marketing
  • Local radio advertising

Operations Plan

While the earlier sections of your business plan explained your goals, your operations plan describes how you will meet them. Your operations plan should have two distinct sections as follows.

Everyday short-term processes include all of the tasks involved in running your investment company, including researching the stock market, keeping abreast of all investment industry knowledge, updating clients on any new activity, answering client phone calls and emails, networking to attract potential new clients.

Long-term goals are the milestones you hope to achieve. These could include the dates when you expect to land your Xth client, or when you hope to reach $X in revenue. It could also be when you expect to expand your investment business to a new city.  

Management Team

To demonstrate your investment company’s ability to succeed, a strong management team is essential. Highlight your key players’ backgrounds, emphasizing those skills and experiences that prove their ability to grow a company.

Ideally you and/or your team members have direct experience in managing investment companies. If so, highlight this experience and expertise. But also highlight any experience that you think will help your business succeed.

If your team is lacking, consider assembling an advisory board. An advisory board would include 2 to 8 individuals who would act like mentors to your business. They would help answer questions and provide strategic guidance. If needed, look for advisory board members with experience in managing an investment company or successfully advised clients who have achieved a successful net worth.  

Financial Plan

Your financial plan should include your 5-year financial statement broken out both monthly or quarterly for the first year and then annually. Your financial statements include your income statement, balance sheet and cash flow statements.

Income Statement : an income statement is more commonly called a Profit and Loss statement or P&L. It shows your revenues and then subtracts your costs to show whether you turned a profit or not.

In developing your income statement, you need to devise assumptions. For example, will you take on one new client at a time or multiple new clients ? And will sales grow by 2% or 10% per year? As you can imagine, your choice of assumptions will greatly impact the financial forecasts for your business. As much as possible, conduct research to try to root your assumptions in reality.

Balance Sheets : Balance sheets show your assets and liabilities. While balance sheets can include much information, try to simplify them to the key items you need to know about. For instance, if you spend $50,000 on building out your investment company, this will not give you immediate profits. Rather it is an asset that will hopefully help you generate profits for years to come. Likewise, if a bank writes you a check for $50,000, you don’t need to pay it back immediately. Rather, that is a liability you will pay back over time.

Cash Flow Statement : Your cash flow statement will help determine how much money you need to start or grow your business, and make sure you never run out of money. What most entrepreneurs and business owners don’t realize is that you can turn a profit but run out of money and go bankrupt.

In developing your Income Statement and Balance Sheets be sure to include several of the key costs needed in starting or growing an investment company:

  • Cost of investor licensing..
  • Cost of equipment and supplies
  • Payroll or salaries paid to staff
  • Business insurance
  • Taxes and permits
  • Legal expenses

business costs

Attach your full financial projections in the appendix of your plan along with any supporting documents that make your plan more compelling. For example, you might include your office location lease or list of clients that you have acquired.  

Putting together a business plan for your investment company is a worthwhile endeavor. If you follow the template above, by the time you are done, you will truly be an expert. You will really understand the investment industry, your competition, and your customers. You will have developed a marketing plan and will really understand what it takes to launch and grow a successful investment company.  

Investment Company Business Plan FAQs

What is the easiest way to complete my investment company business plan.

Growthink's Ultimate Business Plan Template allows you to quickly and easily complete your Investment Company Business Plan.

What is the Goal of a Business Plan's Executive Summary?

The goal of your Executive Summary is to quickly engage the reader. Explain to them the type of investment company you are operating and the status; for example, are you a startup, do you have an investment company that you would like to grow, or are you operating a chain of investment companies?

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Investment Company Business Plan

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Investment Company

Executive summary executive summary is a brief introduction to your business plan. it describes your business, the problem that it solves, your target market, and financial highlights.">.

This sample plan was created for a hypothetical investment company that buys other companies as investments.  In this sample, the hypothetical Venture Capital firm starts with $20 million as an initial investment fund.  In its early months of existence, it invests $5 million each in four companies.  It receives a management fee of two percent (2%) of the fund value, paid quarterly.  It pays salaries to its partners and other employees, and office expenses, from the management fee.

The investments show up in the Cash Flow table as the purchase of long-term assets, which also puts them into the balance sheet as long-term assets.  You can see them in this sample plan, in the first few months.

In the third year, one of the target companies fails, so $5 million is written off as failure.  You’ll see how that looks as a $5 million sale of long-term assets in the cash flow, and a balancing entry of $5 million in costs of sales in the profit and loss, making for a loss and write-off that year.  The result is a tax loss, and the balance of investments goes to $15 million.

In the fifth year, one of the target companies is transacted at $50 million.  You’ll see in the sample how that shows up as a $45 million equity appreciation in the sales forecast, plus a $5 million sale of long-term assets in the cash flow.  At that point there’s been a $45 million profit, and the balance of long-term assets goes down to $10 million.

This is a simplified example.  The business model holds long-term assets and waits for them to appreciate.  It doesn’t show appreciation of assets until they are finally sold, and it doesn’t show write-down of assets until they fail.  Sales and cost of sales are the appreciation and write-down of assets, plus the management fees.

The explanation above has been broken down and copied into key topics in the outline that are linked to corresponding tables.  These topics are:

  • 2.2     Start-up Summary
  • 5.5.1  Sales Forecast
  • 6.4     Personnel
  • 7.4     Projected Profit and Loss
  • 7.5     Projected Cash Flow
  • 7.6     Projected Balance Sheet

Investment company business plan, executive summary chart image

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Company summary company overview ) is an overview of the most important points about your company—your history, management team, location, mission statement and legal structure.">.

Content has been omitted from this sample plan topic, and following sub-topics.  This sample plan has an abbreviated plan outline.  With the exception of the Executive Summary, only those topics linked to key tables have been used.

The focus of this sample plan is to show the financials for this type of company.  Brief descriptions can be found in the topics associated with key tables.

2.1 Start-up Summary

This hypothetical Venture Capital firm starts with $20 million as an initial investment fund.  The venture capital partners invest $100,000 as working capital needed to balance the cash flow from quarter to quarter. 

Investment company business plan, company summary chart image

Market Analysis Summary how to do a market analysis for your business plan.">

Strategy and implementation summary, sales forecast forecast sales .">.

Investment company business plan, sales forecast chart image

Management Summary management summary will include information about who's on your team and why they're the right people for the job, as well as your future hiring plans.">

7.1 personnel plan.

This hypothetical company pays salaries to its partners and other employees, and office expenses, from the management fee of two percent (2%).

Financial Plan investor-ready personnel plan .">

8.1 projected profit and loss.

Please note that in the third year one investment is written off as a failure, producing a $5 million cost which ends up showing a loss for the year of nearly $5 million.  The sale of equity at the end of the period enters the sales forecast and the profit and loss statement as a $45 million gain. 

You will also note that there may be gains or losses in the value of the assets held as equity investments, but these gains or losses don’t enter the accounting until there is a transaction.  The accounting treatment is identical to what an individual investor does with stocks: changes in the market price of a share of stock are irrelevant until that share is actually sold to somebody else, or, if the company ceases to exist, that stock is written off as having no value. 

Investment company business plan, financial plan chart image

8.2 Projected Cash Flow

The Cash Flow shows four $5 million investments made in the first few months of the plan. 

In the third year, one of the target companies fails, so $5 million is written off as failure.  You’ll see that shows as a $5 million sale of long-term assets in the cash flow, and a balancing entry of $5 million in costs of sales in the profit and loss, making for a loss and write-off that year.  The result is a tax loss, and the balance of investments goes to $15 Million.

In the fifth year, another investment is transacted at $50 million.  This shows up as a $5 million equity appreciation in the Sales Forecast, plus a $5 million sale of long-term assets in the Cash Flow.  At that point there’s been a $45 million profit and the balance of long-term assets goes down to $10 million. 

The partners invest an additional $100,000 in the fourth year as additional working capital to balance the cash flow of the company. 

Investment company business plan, financial plan chart image

8.3 Projected Balance Sheet

You can see in the balance sheet how the ending balances for long-term assets were not re-valued.  They remain at the original purchase price until they are sold, or written off as a complete loss.  There is a $5 million write-off in the third year, and a sale of $5 million worth of assets in the last year.  That sale of $5 million in assets produces the $5 million sale at book value plus the $45 million gain in the sales forecast and profit and loss table.

8.4 Business Ratios

The Standard Industry Code (SIC) for this type of business is 7389, Business Services.  The Industry Data is provided in the final column of the Ratios table. 

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business model for investment companies

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14 Business Model Types: Understanding and Choosing Where Your Business Fits

According to Weill and his co-authors , the four business activity typologies and the four asset typologies can be integrated into a chart that categorizes fourteen different possible business models.

business model for investment companies

Note:  Both Creator/Human Assets and Distributor/Human Assets categories are omitted from this model. This is because both categories are illegal and immoral. A Creator/Human Assets business model is where a person or business enslaves another human being and sells that person to a buyer. A Distributor/Human Assets business model is where a person or business buys and sells slaves. Both business models were practiced in the past, but are now considered highly illegal and morally repugnant in virtually all nations and cultures around of the world. In contrast, the two other “Human asset” categories are legal and widespread. People can rent out their time, effort and labor to others in a voluntary exchange (Contractor) or be a Broker between Contractors and prospective employers (temp agencies or headhunters).

The fourteen possible business model archetypes are examined below in detail.

1. Manufacturer – Creator of Physical Assets (products)

Creator makes physical assets and sells directly to the consumer

Description:  The business goal of this type of Manufacturer is to create physical products and sell them directly to customers. These manufacturers can sell their products directly to consumers through either a live salesperson, via ecommerce , or through a Broker. The keys to this business model are that 1) Manufacturers own the asset (product) until the end user purchases it from them and 2) the Manufacturers either own or control their participation in the sales channels they use to reach buyers.

Examples:  Oakley, Nike, Dell, Apple , Nintendo

Advantages:  Increased margins, brand building, and building personal relationships with customers. Apple is an example of a large, global company that sells its products directly to consumers through its Apple Stores.

Key Challenges:  Creating products that fill a customer need and effectively distributing those products to consumers. This means the business must focus on two big and often divergent missions (production and consumer marketing).

Creator makes physical assets and sells to Distributors or Retailers

Description:  The business goal of this type of Manufacturer is to create physical products and sell them to wholesale or retail intermediaries who then sell those products to consumers.

Examples:  Intel, Kimberly Clark, Sony, Chiquita, Johnson & Johnson

Advantages:  These Manufacturers have the ability to focus on creating and producing products efficiently. The Manufacturer can gain wide commercial exposure through multiple sales channels. The Manufacturer can also transfer the asset’s property rights to others quickly and move large volumes of product per sale. This strategy is often good for mass produced hit products or commodities.

Key Challenges:  Manufacturer must accept lower margins. Manufacturer has less control over its brand and customer relationships.

2. Inventor – Creator of Intangible Assets (Virtual or IP Products)

Creator sells directly to a customer

Description:  The business goal of this type of Creator is to create an intangible good and sell it to others. The sale of the Intangible Asset can be conducted directly by the Inventor or through Distributors or Brokers. The key aspect of this business model is the Inventor sells the absolute rights of ownership to the Intangible Asset to another (this is not a limited license or rental). This type of transaction sometimes happens when a company in financial distress (or bankruptcy) sells the intellectual property it created to stay or become solvent.

Examples:  This business model is virtually non-existent for a public company.

Advantages:  Potential for high margins.

Key Challenges:  Considerable business risk in terms of time, effort and money; often very difficult to find buyers; difficult to scale.

3. Entrepreneur

Description:  An Entrepreneur is either a company or individual that creates and sells companies. The individuals who create and sell companies are either “serial entrepreneurs” or active early-stage investors.  Entities that create and sell companies are incubators, venture capital firms and innovative companies. The measure of success in this category is maximizing ROIC – Return on Invested Capital. Founders of businesses who do not sell their companies are not counted in this business model.

Examples:  This business model ( creating a company then selling it ) is very rarely pursued by public companies as a business model.

Advantages:  Potentially, a successful entrepreneur can get fantastic returns on their investment of time and capital.

Key Challenges:  Risking significant equity assets in starting and growing a venture, overcoming barriers of entry; companies can be illiquid, possibility of bankruptcy.

4. Wholesaler/Retailer

Description:  A Wholesaler/Retailer is a Distributor who buys and sells physical assets without changing the fundamental nature of those assets. The value Wholesaler/Retailers bring to the marketplace is they specialize in connecting Manufacturers and consumers. Wholesaler/Retailers aggregate products from various Manufacturers, and use distribution and logistics economies of scale to offer those products and services to customers. The primary business goals of Wholesaler/Retailers are to create and execute superior logistics in order to maximize margins. The primary tension in this business is keeping product and service margins as high as possible while successfully competing against both established competitors and new market entrants.

Examples:  Wal-Mart, Nordstrom, Macy’s, Amazon

Advantages:  The barriers of entry for niche Wholesaler/Retailers are quite low; these business models can be systematized.

Key Challenges:  Barriers of entry to become a low-cost leader or differentiated Wholesaler/Retailer are often high due to the large infrastructure and logistics networks needed to leverage economies of scale and/or economies of scope.

5. Intellectual Property Trader

Description:  An Intellectual Property (IP) Trader buys and sells intangible assets. This may include firms that buy and sell copyrights, patents, trademarks, mobile device applications (mobile apps), digital currencies, domain names, etc. If a company uses this business model, it is more likely than not that company also uses the Intellectual Property Landlord business model.

Examples:  This business model is very rarely pursued by public companies as a business model.

Advantages:  Intellectual Property Traders can have low fixed costs.

Key Challenges:  Finding willing buyers and sellers of the intangible assets can be difficult and the transaction costs can be steep. The task of properly valuing intangible assets is quite difficult.

6. Financial Trader

Description:  A Financial Trader buys and sells financial assets without significantly altering them. Financial Traders mainly buy and sell stocks and securities. Financial Traders invest in a wide range of private or public companies and securities .

Examples:  Vanguard, Goldman Sachs, JP Morgan Stanley.

Advantages:  Financial Traders can achieve high profitability by recognizing undervalued or overvalued assets and employing an appropriate trading strategy to exploit these opportunities.

Key Challenges:  Financial Traders can suffer huge losses due to a systemic financial crisis. The majority of Financial Traders cannot achieve better sustained returns than the overall market.

7. Physical Landlord

Description:  Where a person or entity either creates or purchases a physical asset and sells (rent, lease or admission) a limited right to a customer to use that property. This is a widely used business model and prominent in the following industries: real estate rental and leasing, accommodation, transportation and entertainment or recreation.

Examples:  Hilton Hotels, Zipcar, Netflix, Hertz Rental Car.

Advantages:  Often the income from renting or leasing activities can be passive. Acquiring physical assets can be a significant barrier of entry for market entrants. Real estate asset prices can rise over time and can be used as a source of financing for business operations.

Key Challenges:  The capital costs of acquiring assets to rent or lease to others is usually significant and is a substantial barrier of entry for a new market entrant. Furthermore, the assets to be rented or leased must have and maintain steady market demand.

8. Intellectual Property Landlord

An Intellectual Property Landlord is a person or entity that either creates or buys intellectual property assets (trademarks, patents, trade secrets, copyrights…) and then sells a limited right to use that intellectual property to customers. There are three major subtypes of this business model:

a. Publisher

Description:  Publishers provide limited use of information assets (software, video, audio, databases…) in return for a purchase price, subscription or license fee. The Publisher grants the customer certain limited rights to use a copy of an information asset (the limitation could be time, scope or amount). The Publisher retains the right to make and sell additional copies of the information asset to other customers.

Examples:  Disney, HBO, Random House, Microsoft, Apple (iTunes).

Advantages:  The costs to create additional copies of an information asset are usually small to negligible. Copyrights and trademarks provide some legal protection for the information assets.

Key Challenges:  Generating information products is usually labor intensive. Attracting and retaining customers is critical for success as a Publisher.

b. Brand Manager – Franchisor

Description:  A Brand Manager (Franchisor) leases the limited use of a trademark or other elements of a brand (trade secrets, process knowledge) to a customer (Franchisee).

Examples:  McDonald’s, Wendy’s, Curves.

Advantages:  The Brand Manager business model can allow a successful company clone their business model, allowing their brand to expand rapidly and extract continuing rents from franchisees.

Disadvantages:  Franchisors lack direct ownership of their Franchisees’ assets. Franchisors lack direct control over their Franchisees and must rely on contracts to constrain their business decisions.

c. Attractor

Description:  An Attractor publishes information IP products to gain the attention of potential customers. Once the Attractor has the attention of potential customers, it taps one or more revenue models to monetize that customer attention (advertising, freemium…).

Examples:  New York Times, NBC.

Advantages:  This is a potentially lucrative business model for Attractors who develop and offer valuable or popular content.

Disadvantages:  An Attractor relies on network effects and multi-sided platforms where one customer segment subsidizes the other. It is often difficult for a company to correctly gauge how one customer segment should subsidize the activities of the other.

9. Financial Landlord

A Financial Landlord lends liquid financial assets (cash) to a customer under certain conditions that the customer promises to fulfill. There are two major subtypes of this business model.

Description:  A lender provides cash to a customer on the condition that, within a predetermined timeframe, the customer agrees to pay back the amount borrowed plus a fee (interest). In a sense, a Lender rents money to a borrower. Often the Lender

Examples:  Bank of America, Wells Fargo, Lending Tree.

Advantages:  A Lender can hedge its risk in lending to a borrower by requiring the borrower to pledge collateral (or other terms) to protect against a potential loan default by the borrower. If a borrower meets all of its loan obligations, the Lender will earn a predictable stream of cash flows.

Key Challenges:  Lenders must be experts in determining the credit worthiness of a borrower. There is generally a high level of competition among companies who use this business model. Interest rate risk can erode profits. This is a highly regulated industry and its regulatory framework could be a significant barrier of entry for a new market entrant.

b. Insurance

Description:  Insurers provide their customers conditional financial reserves in exchange for a fee (premium). A customer cannot have access to these monies unless the customer sustains a predetermined category of loss.

Examples:  AIG, Farmers.

Advantages:  Steady and predictable cash flows.

Key Challenges:  Risk management – catastrophic events and natural disasters can overwhelm an insurer. Also this industry is heavily regulated and could present a significant barrier of entry for a new market entrant.

10. Contractor – Landlord of Human Labor

Description:  A Contractor sells a service provided primarily by people to a customer. Common contractor services are, but not limited to: consulting, construction, education, tax and legal services, personal care, package delivery, live entertainment and healthcare . Customers pay Contractors usually on a fee-for-service basis where the fee is usually (but not always) based on the amount of time the services require. In a sense, all employees are contractors.

Examples:  Accenture, Federal Express.

Advantages:  Often low barriers of entry; potentially low capital intensity.

Key Challenges:  Companies that employ this business model are usually difficult to scale. Credentials and certifications can be a significant barrier of entry. Businesses that employ this business model are employee-centric (their labor generates the revenue) and sometimes difficult to organize and manage.

Note:  A Contractor and Physical Landlord can be confused – Physical Landlords can provide human services that are necessary for their assets’ value propositions. The differentiator between the two business models is what kind of asset is essential to the nature of the service being provided.  For example, a bus company such as Greyhound would be classified as a physical landlord because the essence of the service is to transport people from one place to another. Conversely, a maritime shipping company would be classified as a contractor because the essence of the service provided is the transportation of goods from one place to another.

11. Financial Broker

Description:  Financial Brokers match buyers and sellers of financial assets. This business model includes insurance brokers, large stock brokerage firms, and large investment banks that underwrite IPOs.

Examples:  Etrade, Charles Schwab, Ameritrade, Goldman Sachs.

Advantages:  Market participants can be highly profitable; there are huge opportunities for economies of scale using this business model.

Disadvantages:  The success of this business model requires network effects – the more people who use the platform increases the overall value of the platform. This can be exceedingly difficult to establish for a new market entrant.

12. Physical Broker

Description:  A Physical Broker matches buyers and sellers of physical assets. A physical broker may connect buyers and sellers of physical assets (eBay) or owners and renters of physical assets (Airbnb).

Examples:  eBay, Priceline, Century 21, Airbnb.

Advantages:  There is a significant opportunity to create market opportunities using this business model for Physical Brokers who facilitate exchanges between owners of physical assets and people who want to rent those assets. Network effects can establish powerful barriers of entry for an established Physical Broker firm.

Disadvantages:  New firms who attempt to use this business model may face significant barriers of entry due to the network effects of established brokerage firms.

13. Intellectual property (IP) Broker

An Intellectual property (IP) Broker matches buyers and sellers of intangible assets or owners and renters of intangible assets.

Examples:  Valassis. There are very few large firms who employ this business model.

Advantages:  There are future market opportunities for using this business model because new and different types of IP assets are being created all the time. An example of a relatively new form of IP that can be brokered is phone apps.

Disadvantages:  It is difficult to determine the value of intangible assets . Buyers and sellers of intellectual property have a hard time agreeing on IP asset prices. This can inhibit deal volume for IP Brokers.

14. Human Resources (HR) Broker

A Human Resources (HR) Broker matches buyers and sellers of human services.

Examples:  LinkedIn, GlassDoor, Odesk.

Advantages:  This business model benefits from the increasing trend of companies hiring contractors for project work. Network effects can create a hugely profitable business through facilitating the buying and selling of labor.

Disadvantages:  New market entrants can have great difficulty overcoming established firm’s barriers of entry (network effects).

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How Venture Capitalists Make Decisions

  • Paul Gompers,
  • Will Gornall,
  • Steven N. Kaplan,
  • Ilya A. Strebulaev

business model for investment companies

For decades now, venture capitalists have played a crucial role in the economy by financing high-growth start-ups. While the companies they’ve backed—Amazon, Apple, Facebook, Google, and more—are constantly in the headlines, very little is known about what VCs actually do and how they create value. To pull the curtain back, Paul Gompers of Harvard Business School, Will Gornall of the Sauder School of Business, Steven N. Kaplan of the Chicago Booth School of Business, and Ilya A. Strebulaev of Stanford Business School conducted what is perhaps the most comprehensive survey of VC firms to date. In this article, they share their findings, offering details on how VCs hunt for deals, assess and winnow down opportunities, add value to portfolio companies, structure agreements with founders, and operate their own firms. These insights into VC practices can be helpful to entrepreneurs trying to raise capital, corporate investment arms that want to emulate VCs’ success, and policy makers who seek to build entrepreneurial ecosystems in their communities.

An inside look at an opaque process

Over the past 30 years, venture capital has been a vital source of financing for high-growth start-ups. Amazon, Apple, Facebook, Gilead Sciences, Google, Intel, Microsoft, Whole Foods, and countless other innovative companies owe their early success in part to the capital and coaching provided by VCs. Venture capital has become an essential driver of economic value. Consider that in 2015 public companies that had received VC backing accounted for 20% of the market capitalization and 44% of the research and development spending of U.S. public companies.

  • PG Paul Gompers is the Eugene Holman Professor of Business Administration at Harvard Business School and a research associate at the National Bureau of Economic Research.
  • WG Will Gornall is an assistant professor at the University of British Columbia Sauder School of Business.
  • SK Steven N. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance and the Kessenich E.P. Faculty Director of the Polsky Center for Entrepreneurship at the University of Chicago.
  • IS Ilya A. Strebulaev is a professor at the Stanford Graduate School of Business and a research associate at the National Bureau of Economic Research.

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How Investment Banks Can Transform Their Business Models - Financial Institutions

Related Expertise: Financial Institutions , Digital, Technology, and Data , Digital Transformation

  • How Investment Banks Can Transform Their Business Models

May 17, 2016  By  Charles Teschner ,  Will Rhode ,  Shubh Saumya ,  Carsten Gubelt ,  Michael Strauß ,  Gwenhaël Le Boulay ,  Laila Worrell ,  Philippe Morel , and  Andre Veissid

Investment banks need to transform themselves to compete in tomorrow’s capital markets industry.

Global Capital Markets 2016

  • The Value Migration
  • How Value Is Shifting in the Capital Markets Ecosystem

The Six Pillars

In our view, six pillars—vision, distribution, client centricity, IT and operational excellence, organizational vitality, and financial and risk control—are critical to building a comprehensive strategy for business model transformation.

Vision.  Banks must identify which parts of the capital markets revenue ecosystem they wish to participate in. They must harness the resources and potential sources of competitive advantage at their disposal, then figure out the most effective charging mechanism to optimize revenues. Leadership and vision can come only from the top, and clarity of purpose will be imperative for transformational success.

Distribution. Explicit charging models for both research and value creation are needed. Banks must also explore dynamic pricing for capital-light agency services versus balance-sheet-intensive principal-based services. Digital functionality will be needed both to improve the customer experience and to invigorate distribution. Areas of primary markets that depend chiefly on human talent—such as high-margin, low-capital-intensive M&A teams—are under less of a threat than more capital-intensive trading businesses.

Moreover, front-office head count, compensation, and technical specialization must all be aligned with client-coverage strategies and product-offering needs. With trading head count representing 30% to 50% of costs (depending on the asset class), aggressive front-office reduction will be required as markets become increasingly electronic. Distribution via electronic channels, which in turn should be consolidated with standardized connectivity, must also be pursued. Moreover, since shifts in trading execution can also impact revenue-model dynamics, serious thought will be required about whether, for certain asset classes, a move toward an agency model—as opposed to an outright exit—would be beneficial. Commitment to a few key asset classes and to building electronic scale through powerful internalization engines will be critical, as will big-data-driven customer analytics in those areas. Broker, clearing, and exchanges costs will need to be tightly controlled in order for an electronic market-making business to succeed.

Client Centricity. An improved understanding of client profitability, share of wallet, and segmentation will significantly help firms understand the balance of trade between themselves and their customers. Banks will have to move away from supplying products to providing services. Only by helping their clients to succeed can they expect to generate revenues.

At the same time, by focusing on how best to serve the client tail and conduct share-of-wallet analyses, firms will be able to ensure that they are being adequately rewarded for the services and resources they provide. Best-in-class banks are already implementing predictive modeling to trigger cross-selling opportunities and developing fully tailored product solutions. Further, to minimize costs, banks have started to simplify their client onboarding processes. Smooth onboarding, amid growing compliance and regulatory requirements, has become an important part of successfully serving clients.

IT and Operational Excellence. Simplifying IT, as well as exploring more advanced financial technology (fintech) alternatives, will enable banks to modernize their operations and reduce costs. This means streamlining legacy systems and eliminating non-value-creating complexity. Focusing on governance, location strategy, and sourcing optimization allows for more rational and efficient architectures. Many banks have complex, highly customized legacy platforms that have evolved to meet changing business requirements. Establishing a target process and technology architecture, as well as a strong governance process to make sure that new development and customization adhere to target architectural standards, can help reduce complexity and the long-term cost of ownership. What’s more, utility models offer the opportunity to share the cost of new development across parties for greater efficiency and return on investment. Some players may opt to leverage a two-speed approach to IT in order to ensure that the digital agenda can still be pursued in an agile fashion alongside IT development programs that require longer lead times. Partnerships with fintech firms can offer significant efficiencies, depending on where institutions are in the process of transforming their technology operations to support the front office. The deeper this process goes, the greater the potential savings. For the moment, the focus of the industry is primarily on data and analytics, as well as on trading software and platforms. (See the exhibit.)

business model for investment companies

Within operations, process and organizational simplification will play a key role. Model optimization and redesign, together with a digital process layer, can improve efficiency and accuracy. With regard to structure, several banks have been aligning functions with physical locations and have become increasingly savvy on their sourcing strategies. Shared functions across the entire group are highly correlated with below-average cost per trade. Combined with significant use of utilities, firms can expect to generate IT and operational cost savings of up to 70%—currently equivalent to approximately 17% of total operating costs.

Organizational Vitality. It is also imperative that investment banks reshape their organizations according to their target operating models. Delayering across the entire organization, for example, will ensure shortened hierarchical lines. In the front office, organizational effectiveness requires a lean structure for both producers and nonproducers, as well as across electronic trading and in coverage sales. To ensure that banks attract and retain talent—particularly technology talent—they should continue to align compensation with new roles and responsibilities. A change in behavior and culture is also required. A set of smart rules must be defined and integrated into leadership, engagement, and cooperation models, as well as into rollout plans. These rules can involve training, coaching, incentives, and organizational adjustments.

Financial and Risk Control. Regulatory mandates continue to impact investment banking businesses, making it harder to develop consistent governance. Banks must also explore cost mutualization opportunities—outsourcing duplicated back-office functions that add little value—and accelerate capital mitigation efforts to offset the impact of FRTB. To be sure, investment banks have still not done enough to reduce their capital exposure. They must also achieve efficient allocation of group costs—such as litigation, finance, and cybersecurity—in order to reduce their own overhead. (See the sidebar.)

LITIGATION : A COST OF DOING BUSINESS

Fines and litigation have become persistent and onerous operating costs for banks. Fines related to capital markets activities have generated 38% of total fines over the past eight years—about $108 billion, compared with $176 billion at the group level. It appears that such charges can no longer be viewed as one-off events but must be considered as ongoing, annual costs. (See the exhibit below.)

The good news is that the amount of fines related to US mortgage activity, totaling $51 billion since 2008, has tailed off as the majority of cases have been settled. Nonetheless, a new wave of fines related to market manipulation (for example the FX and LIBOR probes), a total of $26 billion for 2014 and 2015 combined, is now likely as individual prosecutions and bank fines make their way through legal and regulatory systems.

Regulatory fines related to capital markets activity remained significant in 2015, making up 10%, on average, of top-line investment banking revenues for 2014 and 2015 combined. In addition, overall costs for investment banks have risen by 4% since 2010 despite a reduction of $8 billion in operating expenses. Once again, the combination of regulatory capital requirements and a renewed focus on market enforcement—including compliance, tighter oversight of trader behavior, and the like—has mitigated much of the savings achieved by investment banks.

The Journey

Needless to say, transformation does not happen overnight. Banks must decide on their vision and explore initiatives that will result in quick wins to fund the journey. Medium-term success must be realized through a series of transformational steps. A leadership team that personifies the target organization and culture, combined with a sense of urgency, will ultimately enable full-scale transformation and long-term success.

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Direct Sales

Franchise model, freemium model, subscription model, the bottom line.

  • Fundamental Analysis

Which Business Model Is Best? Depends on the Industry

business model for investment companies

A company's business model is an important representation of how a company does business. Despite the size of the business or the industry in which a business operates, a business model details how an organization creates and delivers products or services, specific business processes, infrastructure, customer acquisition strategies, and the intended customer base. Business models come in a variety of forms. Direct sales, franchise, freemium , and subscription models are among the common kinds.

Key Takeaways

  • There are several ways for a business to make a buck, but a handful of tried-and-true business models dominate the market.
  • They include direct sales, subscription-based, freemium, and the franchise model.
  • Depending on what your business makes or does, one of those revenue-generating models will probably rise to the top as the most appropriate way to run your business.

Under a direct sales business model, sales of products or services generate revenue through a network of salespeople, who sell directly to customers. Typically, no fixed retail location exists under a direct sales business model. Instead, individual salespeople are connected with a large parent company and given the tools to become individual entrepreneurs .

Direct sales take place through presentations or demonstrations of the product or service in a one-on-one setting or during a hosted party at a prospect's home or business. Business owners in direct sales earn a portion of their sales, while the company providing the product retains the remaining revenue. Companies such as Avon, Arbonne, and Herbalife are examples of the direct sales business model.

Under a franchise business model, business owners purchase another organization's business strategy. Instead of creating a new product and the distribution chain to deliver that product to consumers, the franchisee purchases an ownership stake in a business model that has already been successfully developed. The company offering its proprietary product or service, its business processes and its brand is known as the franchisor, and it benefits from a reduction in capital output used to build new locations.

Franchise owners earn a portion of the revenue generated by their locations, and the franchisor collects licensing fees in addition to a percentage of sales revenue from the franchisee. Popular companies that depend on the franchise business model for growth include McDonald's and Subway.

For companies that offer personal or business services via the internet, the freemium business model is common. Under a freemium model, a business gives away a service at no cost to the consumer as a way to establish the foundation for future transactions. By offering basic-level services for free, companies build relationships with customers, eventually offering them advanced services, add-ons, or an ad-free user experience for an extra cost. The freemium model tends to work well for Internet-based businesses with small customer acquisition costs , but high lifetime value. Spotify and Skype both operate under a freemium business model.

Businesses that operate in an industry with high customer acquisition costs may opt for a subscription or recurring revenue business model. The objective of a subscription business model is to retain customers under a long-term contract and secure recurring revenue from the repeat purchase of a product or service.

Online subscription business models usually require the customer to sign up for automatic payment plans. They may charge a cancellation fee for a contract that ends before the preset time frame. Credit monitoring organizations, such as Experian and Equifax, use a subscription business model, as do utility and phone companies.

There are as many types of business models as there are types of business. Direct sales, franchising, advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrids as well, such as businesses that combine internet retail with brick-and-mortar stores, or sporting organizations like the  NBA .

But not every industry lends itself to all types of business models. Moreover, within these broad categories, each business plan is unique. Consider the shaving industry. Gillette is happy to sell its Mach3 razor handle at cost or lower in order to get steady customers for its more profitable razor blades. The business model rests on giving away the handle to get those blade sales. This twist on the broader freemium business model is now known as the  razor-razorblade model ; but it can also apply to companies in any business that sells a product at a deep discount in order to supply a dependent good at a considerably higher price. The bottom line is pick the business model that makes the most sense for the products or services that you offer.

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Business models innovation in investment banks: a resilience perspective

  • Open access
  • Published: 17 June 2020
  • Volume 39 , pages 51–78, ( 2022 )

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  • Boumediene Ramdani   ORCID: orcid.org/0000-0002-0201-5738 1 ,
  • Ahmed Binsaif 2 ,
  • Elias Boukrami   ORCID: orcid.org/0000-0002-4081-5023 3 &
  • Cherif Guermat   ORCID: orcid.org/0000-0002-0754-0152 4  

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Firms frequently change their business models in order to respond to internal and external challenges. This study aims to explore how investments banks adjust their business models in response to internal and external challenges. Based on a qualitative data from ten major investment banks operating in the largest financial market in the Middle East, we show that investment banks can achieve resilience by adjusting their business models through continuous activity changes in response to internal and external challenges. Specifically, investment banks adjust their business models through deploying alternative combinations of activities from a broad repertoire of activities. Within the same bank, divisions that respond to external challenges tend to sustain their performance, whereas resilient divisions that respond to both internal and external challenges tend to bounce back or achieve substantial increase in performance levels. This study contributes to the literature by proposing resilience as an alternative approach to business model innovation and by providing insight into how firms adjust their business models by altering specific activities in response to both internal and external challenges.

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Firms frequently change their business models (BMs) in order to respond to internal and external challenges. While some firms need to respond to internal challenges such as organisational capabilities (Teece, 2018 ), and learning processes (Futterer, Schmidt, & Heidenreich, 2018 ), other firms need to address external challenges such as changing demands of stakeholders (Amit & Zott, 2015 ), new technology (Cozzolino, Verona, & Rothaermel, 2018 ), and deregulation (Casadesus-Masanell & Ricart, 2010 ). Business Model Innovation (BMI) has been suggested as a way to respond to these challenges by adjusting BMs, and as a new source of innovation that goes beyond product and process innovation (Osiyevskyy & Dewald, 2015 ). Although there is no commonly recognised definition of a BM, scholars tend to agree that a BM is about the value proposition the enterprise delivers to its customers, how it creates that value, and how it captures a portion of it (Wirtz, Pistoia, Ullrich, & Göttel, 2016 ; Massa, Tucci, & Afuah, 2017 ; Foss & Saebi, 2017 ). Moreover, researchers are increasingly becoming interested in how BM evolves over time (Saebi, Lien, & Foss, 2017 ).

There is an ongoing debate regarding what constitutes a BMI. Some scholars claim that BMI constitutes varying degrees of innovation. As Khanagha et al. ( 2014 : p. 324) put it “ activities can range from incremental changes in individual components of business models, extension of the existing business model, introduction of parallel business models, right through to disruption of the business model, which may potentially entail replacing the existing model with a fundamentally different one ”. Researchers advocating this inclusive definition highlight that BMI could be new to the firm as well as new to the industry. Studies show that BMI may affect only a single component (e.g. Schneider & Spieth, 2013 ), “one or more” components (e.g. Sorescu, Frambach, Singh, Rangaswamy, & Bridges, 2011 ), “two or more” components (e.g. Lindgardt, Reeves, Stalk, & Deimler, 2009 ), or the entire BM components and the links between the components (e.g. Velamuri, Bansemir, Neyer, & Möslein, 2013 ). However, other scholars stress that BMI has to be new to the industry (e.g. Aspara, Hietanen, & Tikkanen, 2010 ). Innovation here is typically disruptive where a completely new BM is introduced. In differentiating the types of BMI, Foss and Saebi ( 2017 ) use two dimensions of BMI, namely the degree of novelty (new to a firm vs. new to an industry), and scope of innovation (modular vs. architectural change). As a result, they suggest four types of BMI: evolutionary (fine-tuning process), adaptive (changes in the overall BM that are new to a firm), focussed (changes within one area of the BM), and complex (change the entire BM).

The BMI literature suggests that firms can adjust their BMs through adaptation, which is “ the process by which management actively aligns the firm’s business model to a changing environment ” (Saebi et al., 2017 , p. 569). Some studies focus on how firms adapt their BMs suggesting several approaches namely trial-and-error (Morris, Schindehutte, & Allen, 2005 ), learning (Teece, 2010 ), fine-tuning process (Demil & Lecocq, 2010 ), and continuous adjustments (Landau, Karna, & Sailer, 2016 ). Other studies focus on the conditions facilitating BMI. Firms are more likely to adapt their BMs under conditions of perceived threat than under conditions of perceived opportunities (Saebi et al., 2017 ). Despite the numerous studies on the drivers (e.g. Saebi et al., 2017 ), processes (e.g. Landau et al., 2016 ), and consequences (e.g. McNamara, Peck, & Sasson, 2013 ) of BM adaptation, there is still limited knowledge of how firms adjust their BMs.

Another less explored avenue for adjusting BMs is resilience, which is the ability “ to respond more quickly, recover faster or develop more unusual ways of doing business under duress than others ” (Linnenluecke, 2017 : p. 4). Dewald and Bowen ( 2010 ) suggest that “ resilience depends on a simultaneous internal and external evaluation of the situation ” (p. 212). This line of research stops short of disclosing how firms adjust their BMs in response to internal and external challenges. To fill this gap, our study aims to explore how investments banks can achieve resilience by adjusting their BMs in response to both internal and external challenges.

We choose to study investment banks for at least two reasons. First, Crotty ( 2009 ) argues that investment banking is a complex and risky business, and investment banks face continuous shift in market and regulatory environments. For instance, five of the largest independent investment banks in the US lost their independence in 2008: Bear Stearns and Lehman Brothers failed, Merrill Lynch was taken over by Bank of America, and Goldman Sachs and Morgan Stanley became bank holding companies to qualify for bailout money (Crotty, 2009 ). One of the main reasons for their failure has been attributed to the ambiguity and complexity of their BMs. This could be due to running multiple divisions (i.e. Asset Management, Brokerage, Investment Banking, and Custody Services) independently with ‘Chinese Wall arrangements’ (Lipton & Mazur, 1975 ) to avoid conflicts of interest. Second, investment banks throughout the world have made significant changes to their BMs after the 2008 financial crisis as they were forced by regulators to entirely abandon their old BMs by maintaining lower levels of leverage and accepting lower risk and lower returns (Teece, 2010 ).

Political and economic instabilities are real challenges for businesses in general and investment banks in particular throughout the Middle East. Saudi Arabia, as well as the Gulf region, has been hit by at least three major crises in the past three decades. The first crisis was the invasion of Kuwait by Iraq in August 1990, and the ensuing Gulf war that threatened not only the economies of the Gulf states but also their very existence (Finlan, 2003 ). The second major crisis was the 2006 IPO crisis in Saudi Arabia. This crisis was caused by an oversubscription to company shares on the Saudi stock market (Jeambey, 2007 ). From a peak on 25 February 2006, the Saudi stock market index fell by about 65% (Lerner, Leamon, & Dew, 2017 ). The crisis was felt across the entire Gulf economies. The third crisis was the 2008 global financial crisis, which caused the Saudi stock market to fall even further than it had in 2006 (Lerner et al., 2017 ). In addition, the Middle East region is well-known for its political instability; ranging from the Iraq-Iran war, the Arab Spring, to the current wars in Yemen, Syria and Libya.

Since the 1980s, the financial sector in Saudi Arabia has been given a priority as part of the Saudi government diversification policy away from the dependence on oil revenues (Samargandi, Fidrmuc, & Ghosh, 2014 ). As a result, the government has built financial markets, an efficient banking system, and a competitive insurance sector. Recently, the government launched the National Transformation Program (Saudi Vision 2030). Evidence suggests that although Saudi Arabia still depends on the oil sector, investment in Saudi stock market boosts Saudi economic growth (Jawadi & Ftiti, 2019 ). The shift in the Saudi policy makers towards a more sustainable economy and away from oil dependence makes investment banks an ideal context to study how firms adjust their BMs in response to internal and external challenges.

Theoretical background

Business model resilience.

An emerging body of research in BMI advocates that firms respond to internal and external challenges through resilience. According to Lengnick-Hall and Beck ( 2005 ), resilience is an organisational capacity to adjust routines in order to overcome challenges. BM resilience has emerged as one of the key themes in a recent review of resilience in business and management research (Linnenluecke, 2017 ). Research in this area posits that firms are able to respond to challenges through continuously adjusting, adapting and reinventing their BMs. However, “ the boundaries of organizational resilience have been ill defined and wide ranging ” (Dewald & Bowen, 2010 : p. 199). This field has included studies that range from continuous adjustment (Hamel & Valikangas, 2003 ), surviving an industry attack (Gittell, Cameron, Lim, & Rivas, 2006 ), and adoption or resistance of new disruptive BMs (Dewald & Bowen, 2010 ).

Resilient firms maintain a broad repertoire of options to effectively respond to challenges (Boisot & Child, 1999 ; Lengnick-Hall & Beck, 2005 ). Having a flexible inventory of alternatives enables firms to take a different path from that which is the usual (Sutcliffe & Vogus, 2003 ), adopt unexpected and timely responses to market shifts (Ferrier, Smith, & Grimm, 1999 ), and increase the odds of success (Eisenhardt & Tabrizi, 1995 ). Using the resilience perspective, this study will show the repertoire of options available to investment banks. To do that, it is necessary to outline the BMI challenges and dimensions.

BMI challenges

Firms adjust their BMs in response to challenges (Egfjord and Sund, 2020 ), antecedents (Amit & Zott, 2015 ), and/or barriers (Bocken & Geradts, 2019 ). These challenges have been argued to impact organisational outcomes including influencing business performance (Aversa, Furnari, & Haefliger, 2015 ), financial sustainability (Santos, Pache, & Birkholz, 2015 ), future growth (Gilbert, Eyring, & Foster, 2012 ), firm’s value (Eyring, Johnson, & Nair, 2011 ), competitive advantages (Tallman, Luo, & Buckley, 2018 ), and strategic flexibility (George & Bock, 2011 ). A full review of the BMI literature undertaken by the authors reveals two internal (challenges top management, and organisational culture) and seven external challenges, namely crises, regulations, client demands, new technologies, competitive pressure, industry, and service providers. Table 1 gives detailed explanation on each of the nine identified challenges. Relevant references are also provided for each challenge.

Activity-based approach

In BMI research both element-based and activity-based approaches have been used (Clauss, Kesting, & Naskrent, 2019 ; Spieth, Schneider, Clauß, & Eichenberg, 2019 ). The former is a high abstraction approach that views BMI as a change of BM elements. Although restrictive, this approach has been used to help communicate changes in BMs (e.g. Aversa et al., 2015 ). However, the latter approach views BMI as a change in BM activities (e.g. Tykkyläinen & Ritala, 2020 ). This view goes beyond identifying specific innovation components to by detailing the change in activities performed when adjusting BMs. Based on this view, we use Ramdani, Binsaif, and Boukrami ( 2019 ) activity-based framework (Fig.  1 ). This framework consists of four dimensions and 16 sub-dimensions. Unlike previous conceptualisations that identify the elements associated with BMI, this framework could be used to detail the activity changes within each sub-dimension.

figure 1

BMI Framework (Ramdani et al., 2019 ). Ramdani et al., 2019 . Business model innovation: a review and research agenda. New England Journal of Entrepreneurship, 22 (2): 89–108

The four top level dimensions of BM identify different facets of the firm’s business. The following is a brief review of these four dimensions:

Value proposition : firms adjust their BM activities by rethinking what a firm sells, exploring new customer needs, acquiring target customers, and ensuring the benefits offered will be perceived by their customers. Prior studies in BMI research show that firms adjust their BMs by exploring various alternatives of core offering (Clauss, 2017 ), meeting unsatisfied needs in other markets (Eyring et al., 2011 ), altering activities in the value chain to acquire target customers (Kiron et al., 2013 ), and articulating a value proposition that is attractive for price-sensitive customers (Wu, Ma, & Shi, 2010 ).

Operational Value : firms adjust their BM activities through configuring key assets and sequencing activities to deliver the value proposition, establishing links with key partners and suppliers, and exposing the various means by which a company reaches out to customers. Studies in BMI research highlight that firms can adjust their BMs through integrating various assets (Al-Debei & Avison, 2010 ), developing new processes (Mason & Spring, 2011 ), forming new partnerships (Clauss, 2017 ), and adopting new distribution channels (Cao, 2014 ).

Human Capital : firms adjust their BM activities by experimenting with new ways of doing business, tapping into the skills and competencies (Hock-Doepgen, Clauss, Kraus, & Cheng, 2020 ) needed for the new BMs through motivating and involving individuals in the innovation process. Prior studies in BMI research show that firms can adjust their BMs through learning from previous experiences (Yunus, Moingeon, & Lehmann-Ortega, 2010 ), changing the level of participation in performing the activities (Sorescu et al., 2011 ), adopting different compensation and incentive policies (Brea-Solís, Casadesus-Masanell, & Grifell-Tatjé, 2015 ), and assembling cross-functional teams (Michel, 2014 ).

Financial Value : firms adjust their BM activities by capturing value through alternative revenue streams, changing the price-setting mechanisms, and assessing the financial viability and profitability. Studies in BMI research highlight that firms can adjust their BMs through introducing new cost structures and revenue models (Clauss, 2017 ), exploring ways to manage cash-flows, and generating more profit (Sorescu et al., 2011 ).

Research method

In order to explore how investment banks adjust their BMs, this study employs a qualitative approach (Yin, 2014 ). Multiple in-depth case studies are adopted because research in this field is still in its infancy and researchers are seeking new perspectives (Eisenhardt, 1989 ). Purposive sampling was used to select investment banks that operate all four divisions (i.e. Asset Management, Brokerage, Investment Banking, and Custody Services). As a result, our final sample is 10 fully-licenced investment banks operating in Saudi Arabia.

To ensure the trustworthiness, the authors addressed credibility, transferability, dependability and confirmability based on the criteria developed by Guba ( 1981 ). Credibility refers to the internal validity of the data. This was established through the use of triangulation. Primary data collected through semi-structured interviews was verified with the available secondary data (annual reports, financial statements, websites, and brochures). Transferability refers to external validity, which was achieved through the audio recording and transcription of interviews as well as through the purposeful sampling to collect the data from various top management positions where participants included chairman, executives, heads of division and heads of department. Dependability refers to reliability, which was established through ensuring that participants reflect on their experiences covering events that occurred up to 3 years prior to the interviews as well as recent events. Finally, confirmability refers to the objectivity of the data, which was achieved through independently auditing the findings, comparing and refining the interpretations among the authors.

Semi-structured interviews were conducted with participants that had key positions in all four divisions (see the Appendix – Table 6 ). The participants were asked questions on their banks’ goals and strategy, followed by a set of questions focusing on BM activities relating to value proposition, operational value, human capital and financial value, and questions on the their responses to current internal and external challenges. Interviews were recorded and transcribed to develop the full cases. The data was triangulated (Jick, 1979 ; Gibbert, Ruigrok, & Wicki, 2008 ) by cross checking the data with internal documents and publicly available information including the Capital Market Authority (CMA), the Saudi Arabian Monetary Authority (SAMA), the Saudi Stock Exchange (Tadawul) and the Ministry of Finance. In total, we conducted 29 interviews, each of which lasted between 46 and 140 min.

Using the validated transcripts, case studies were compiled for each investment bank. Then, the data was coded by two researchers independently (Mayring, 2014 ). After that, each case was analysed using thematic content analysis to explore how firms adjust their BMs. By analysing the content relating to challenges and the associated changes in activities, the authors were able to link what makes firms change their BMs and how they adjust them. Cross-case analysis (Eisenhardt, 1989 ) was conducted with two researchers present looking at comparing BMs as well as the challenges and activity changes for each division. The researchers went through several iterations between literature, data and findings until a consistent map was drawn for all BMs. Using the resilience perspective, a repertoire of activities was developed to show all possible activity changes.

One of the main findings of this paper is a map that describes the various options available to investment banks to respond to internal and external challenges. Table 2 presents this repertoire of specific activities for all four divisions. The first column shows the BM four dimensions starting with value proposition. The second column shows the four sub-dimensions for each of the four dimensions. For instance, the first sub-dimension for Operational Value is “Key Assets”. The remaining four columns show the actual activities available as a means to respond by adjusting their BM to potential challenges. For example, a Brokerage division under the “Distribution Channels” sub-dimension has four activities (online, mobile, direct calls and branches). This means that if an investment bank identifies that a threat can best be dealt with from the ‘Operational Value-Distribution Channels’ side, it can use the online activity alone or in combination with the other three tools (mobile, direct calls and branches). Of course, the managers can see a solution as a combination of many dimensions, sub-dimensions and activities.

Table 2 reveals three important aspects of resilience. First, we note the richness and diversity of activities that can help BMs to navigate through difficult terrain. Although some cells (as represented by an individual cell in the table) have one or two activities only, the vast majority of cells contain five activities. The second aspect is the specificity of various activities to the division and BM sub-dimension. Except from a single case (Direct communication under “Perceived Customer Value”), activities do not repeat across divisions or across sub-dimensions. The third aspect is that some divisions have a richer set of activities than others. The highest is Asset Management with 59 activities, followed by Investment Banking and Brokerage with 49 and 46 activities respectively. Custody Services has the least activities, with 31 activities only.

Table 3 summarises the main findings of this paper. The rows of the table show the BM dimensions and sub-dimensions that have been impacted. The columns show the challenges influencing each of the four divisions. Finally, the cells show whether, for a particular cross between BM sub-dimension and challenge, the firm uses activities intensively, moderately or not at all. In the following, we focus only on the most utilised activities.

We begin by highlighting the type of challenges to which divisions are subjected to. First, different divisions have different types and numbers of challenges. For example, the Asset Management and Investment Banking divisions have the highest number of challenges (five each). Custody Services has the least challenges with two only. The type of challenges varies across the four divisions, with two divisions sharing no more than two types of challenges. For example, Asset Management and Brokerage share “Client Demands” which no other division has. There is one exception. The “Crises” challenge is shared by three divisions, which makes it the most important challenge to investment banks. Second, out of the 16 challenges reported by interviewees, only three are internal (shaded columns), and these are found in Asset Management and Investment Banking divisions.

The pattern of results shown in Table 3 can be summarised as follows. First, different divisions deploy different sets of activities even for the same challenge. For example, if we take the “Client Demands” challenge, Asset Management uses “Revenue Stream” activity, while Brokerage uses “Key Assets” activities (but they use the same three other activities). Second, different divisions have different intensities of activity. By far the most activities deployed are for Asset Management, which totals 44 different activities. This division outshines the other three divisions, with the closest being Brokerage with 14 activities only.

Third, there is a significant difference as to what dimensions of the BM are given priority in overcoming the various challenges. Here we notice one dominant BM dimension and two dominant sub-dimensions. The most important dimension is Value Proposition with 31 sub-dimensions involved throughout the firm. Operational and Financial Value dimensions are also important with 19 and 16 sub-dimensions respectively. The human capital dimension is virtually inexistent, having only 3 out of the possible 64 sub-dimensions involved.

The most important sub-dimension is “Core Offering” which is involved in 15 out of the possible 16 challenges throughout the firm. The second and fourth highest sub-dimensions are “Customer Needs” and “Target Customers” with 9 and 7 challenges respectively. All three sub-dimensions form the core “Value Proposition” dimension. The third most important sub-dimension is “Revenue Stream”, with involvement in 8 challenges. The table also reveals that there are five unimportant sub-dimensions (zero challenges), and three weak sub-dimensions (3 or 2 challenges in total).

Overall, depending on the challenge faced, investment banks respond by adjusting their BM through deploying alternative combinations of activities from the repertoire. In Asset Management division, Table 3 shows that investment banks respond to the six challenges by altering eight sub-dimensions with a total of 44 activities.

To obtain further insights as to what kind of specific activities are used by investment banks, we produce detailed activity responses to the challenges faced by each division. We will focus here on presenting the activity responses to challenges in the Asset Management division (highlighted in Table 4 ). Activity responses to challenges faced by other divisions are included in the Appendix. Within the Asset Management division, two main sub-dimensions are dominant, namely the “Core Offering” and “Revenue Stream”. Within “Core Offering”, innovative investment is used as an activity against all five threats, whereas under “Revenue Stream” the fees-based model is dominant.

In the Asset Management division, investment banks respond to five challenges with a repertoire of activities. Top management push asset managers to create new investment products and alter both current revenue streams and overall margins. Asset managers respond to clients’ demands by creating new investment products to meet needs for new categories of customers, and adopting a new revenue model that is based on sharing the returns. In response to financial crisis, asset managers created a new offering with low margins and low returns to meet the demands of the new customer base that have fixed income and low-risk profile. To adhere to regulations and maintain the division’s performance, asset managers created new funds to target international investors and modified the fee structure of some funds to absorb the regulator’s imposed costs. Finally, asset managers responded to competitive pressure by hiring new asset managers, expanding the portfolio of investment products, charging lower fees for niche investment products.

For the remaining divisions, the repertoire of utilised activities is detailed in the Appendix (Tables  8 , 9 , 10 ). The Brokerage division responds to four challenges, namely competitive pressure, new technologies, client demands, and crises. As the competition intensifies this division invests in its brokerage system to approve margin lending (loans for trading) online, and deploy multi-brokerage models where clients are charged either through trading commissions or lending revenues. The technology challenges were dealt with by improving the brokerage system to allow clients to trade via online platforms or through smartphones. Investment banks also deployed multi-channel communication tools as a means to change some of the key processes such as opening online accounts. This led to reducing the staff and branch costs, but increased the IT costs. Clients’ demands were responded to by improving their brokerage systems to facilitate access and transactions for active traders. After the 2008 financial crisis, investment banks introduced margin lending to encourage trading. However, after the market stabilised, investment banks changed the parameters for margin lending to increase returns by charging trading commissions.

Investment Banking divisions face both internal and external challenges, including top management, service providers, organisational culture, new technologies, and crises. The response to top management challenges led to diversifying portfolio of investment services to attract new customers internationally such as corporates and government institutions interested in buying family-owned businesses. This meant that revenue streams (such as fixed, transaction-based, and success fees) were negotiated depending on the deal. One of the teams responsible for IPOs suggested changing a labour intensive process. A software was developed to automate the process, which led to reducing staff costs, quickening the process of delivering services, and finishing the deal faster for corporates in order to go public. Because banking advisory services depends on the participation of other parties such as accountants, legal firms, commercial banks, and underwriters, services may not be delivered in a timely fashion. Thus, in response to service providers’ challenges, Investment Banking divisions change their partnerships with legal firms and hire experienced investment banks that are able to deliver reliable services. The response to new technologies focused on new online and mobile distribution channels to make it easier for clients to access services, monitor their progress, and provide them with reports. Finally, during times of fluctuations in the market, this division focuses more on advisory services where non-listed firms prepare their IPOs or preferred private equities and only go public if the market conditions are favourable.

In Custody Services division, investment banks respond to two external challenges, namely industry demands and regulations. Custody Services division responded to industry demands by offering their services to non-listed firms, investment banks, and mutual investment funds. Technical investment banks partners were established to perform custody services at a lower cost and deliver these services to other banks bringing in new revenues. Finally, to adhere to new local regulations, investment banks were forced to assign an independent custodian to carry out safekeeping and administration, which meant that some banks were consuming these services locally through other investment banks or outsourcing these activities to an international partner. By improving their custody systems, investment banks incurred new IT costs.

To assess the performance of each division for 2016 and 2017, revenue growth data is highlighted in Table 5 . Looking at the cumulative growth for each division, the data suggest that divisions responding to only external challenges tend to sustain their performance levels as highlighted in Brokerage and Custody Services divisions. However, divisions responding to both internal and external challenges (i.e. Asset Management and Investment Banking) tend to bounce back in the Asset Management division and increase growth substantially in the Investment Banking division.

Firms respond to internal and external challenges through adaptation and/or resilience. The adaptation perspective focuses on responding to external challenges (Saebi et al., 2017 ), whereas the resilience perspective focuses on responding to both internal and external challenges. All divisions responded to external challenges. This may explain the focus of previous studies on responding to external challenges through adaptation. However, this study shows that resilience can be achieved by responding to both internal and external challenges. As a result, revenue growth bounced back in the Asset Management divisions, and increased substantially for Investment Banking divisions.

In their response to internal challenges, both divisions responded to top management. Asset managers withheld periodical meetings to discuss performance and review new trends in the industry in order to develop new investment products. In the Investment Banking division, financial advisory and arrangements were delivered with guarantees from the top in terms of execution and professionalism. Different management challenges are posed when carrying out BMI (Foss & Saebi, 2017 ). Moreover, Investment Banking responded to the challenge of organisational culture. By embracing an innovative culture, Investment Banking division was able to capitalise on new ideas emerging from internal teams. In short, creative culture has positive effects on firms undertaking BMI (Bock et al., 2012 ).

In their response to internal and external challenges, investment banks maintain a broad repertoire of activities that are used to adjust their BMs. Firms keep a broad repertoire of options to overcome challenges (Boisot & Child, 1999 ; Lengnick-Hall & Beck, 2005 ). Although previous studies claim that firms are able to respond to challenges through continuously adjusting their BMs (Landau et al., 2016 ), it is not clear how such a continuous adjustment of BMs takes place. We demonstrate how investment banks continuously adjust their BM through deploying alternative combinations of activities from the repertoire in response to specific internal and/or external challenge.

To adjust their BMs, investment banks modify a combination of activities. Previous studies in BMI have shown that firms adjust their BMs by changing a single component to replacing the entire BM (Saebi et al., 2017 ). This study shows that investment banks deploy a variety of activities. While the most important set of activities are found within the value proposition, followed by the operational value and the financial value dimensions, the lowest activity changes occur in the human capital dimension. This could be due to the challenges faced, the nature of the industry, and the context. This study shows that investment banks tend to mainly respond to external challenges including clients’ demands, crises and competitive pressure. In their response, investment banks focus more on rethinking their value proposition through expanding their core offering and meeting customer needs. Previous studies have focused on modifying the value proposition due to external challenges (e.g. Demil & Lecocq, 2010 ). Moreover, the nature of the financial services industry could have influenced which activity changes investment banks must focus on. The operational value and financial value activities remain less changeable than value proposition due to the maturity of the industry as well as the stringency of the regulatory environment. Also, it is a well-known practice that investment banks attract the highest talents because they can afford them. This may explain why human capital activity changes are the lowest changed compared to other activities. According to Chivers ( 2011 ), training in investment banks tend to be more “informal and on-the-job in nature”. He argues that this informal learning was “ad hoc, poorly recorded, and limited in scope”. Also, he claims that investment bankers prefer learning by doing. This may explain why human capital activity changes are the lowest changed compared to other activities. Previous studies show the particularity of certain industries (e.g. Aversa et al., 2015 ). Finally, the context of this study might have influenced activity changes. This study is conducted in an emerging economy, where the BMs are usually replications of existing BMs in developed economies rather completely new BMs. This could explain why activity changes focus more on the value proposition to adapt their replicated BMs (Landau et al., 2016 ).

Theoretical implications

By revealing how investment banks adjust their BMs in response to internal and external challenges, this study makes at least four contributions to BMI literature. First, it confirms that firms adjust their BMs not only in response to external challenges (Amit & Zott, 2015 ), but also in response to internal challenges (Teece, 2018 ). In this paper, we summarise and list the internal and external challenges that influence firms to change their existing BMs. Also, we show that resilience can be achieved by responding to both internal and external challenges. Second, this study provides important insights into how firms change their existing BM using a repertoire of activities. Using the resilience perspective, this study provides insight into how firms adjust their BMs by altering specific activities, an area that has not been sufficiently covered. This study captures activity changes by empirically examining the BMI framework. Third, this study brings together internal and external perspectives of the BMI literature, and provides evidence on the challenges and the associated activity changes for each of the four investment banking divisions. Fourth, this study adds evidence to industry-focused BMI by examining BMI in an understudied industry context (i.e. investment banks).

Managerial implications

This study has several implications for senior executives, analysts and regulators. It provides senior executives with a repertoire of activities that can be used to adjust their BMs. The repertoire can be used in conjunction with internal and external challenges to navigate BMI. This repertoire can be used not only by executives working in investment banks, but also by executives in other sectors to develop their own repertoire of potential BMs. Moreover, this study provides analysts and investors with a tool to help them understand investment banks BMs. The repertoire could be used by investors and financial analysts to complement their financial, industry and company analyses. By using this repertoire, analyst could demystify the complexity of activities, identify risks for each activity, and rationalise the different financial and operational performances. Furthermore, this repertoire could be used by regulators to legislate based on informed understanding of activity changes. This repertoire could help regulators navigate activity changes, communicate these changes with investment banks, and legislate accordingly.

Limitations and future research

Apart from the typical limitations that apply to qualitative studies, we highlight three areas for future research. First, this study fills a significant gap in our understanding of the internal challenges (Foss & Saebi, 2017 ) by demonstrating that firms need to respond to top management and organizational culture. Future research should further unravel other internal challenges such as organisational capabilities. Second, this study demonstrates that investment banks achieve resilience through continuously adjusting their BMs by maintaining a repertoire of activity changes. Future studies should explore flexible repertoires of options in other industries and how they compare to the findings of this study. Also, it will be interesting to track the sequence of activity changes, which was not captured in our study. Another avenue for future research is to investigate the levels of resilience among a group of firms facing similar internal and external challenges. Third, although this study showed how firms adjust their BMs in response to internal and external challenges and the associated performance levels for divisions, more research is needed to show activity changes and link them to performance levels. It would be interesting to further examine the association between BM changes and firm performance.

The aim of this study was to explore how investments banks adjust their BMs in response to internal and external challenges. Using the resilience perspective, case evidence from ten investment banks operating in the largest financial market in the Middle East was qualitatively analysed. The findings of this study suggest that investment banks adjust their BM through continuous activity changes in response to internal and external challenges. To overcome challenges, investment banks maintain a broad repertoire of activities that are used to adjust their BMs. Investment banks respond by adjusting their BMs through deploying alternative combinations of activities from the repertoire in response to specific internal and/or external challenges. In their response to internal and external challenges, investment banks deploy a variety of activities. While the most important set of activities are related to the value proposition, followed by the operational value and the financial value dimensions, the lowest activity changes occur in the human capital dimension.

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Acknowledgements

We thank the senior editor Dr. Seung-Hyun Lee and two anonymous reviewers for their insightful and constructive comments.

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Boumediene Ramdani

Riyadh, Saudi Arabia

Ahmed Binsaif

Regent’s University London, London, UK

Elias Boukrami

University of the West of England, Bristol, UK

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Ramdani, B., Binsaif, A., Boukrami, E. et al. Business models innovation in investment banks: a resilience perspective. Asia Pac J Manag 39 , 51–78 (2022). https://doi.org/10.1007/s10490-020-09723-z

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Published : 17 June 2020

Issue Date : March 2022

DOI : https://doi.org/10.1007/s10490-020-09723-z

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The Business Models Investors Prefer

New research suggests that the stock market particularly values business models based on innovation and intellectual property.

  • Business Models

business model for investment companies

Image courtesy of Flickr user alvazer.

Why are investors so bullish on companies like Apple and Disney? Is it financial metrics, great management, industry prowess, good investor relations or good timing? Probably all of these. But something else may be at work, too. In research we conducted at the MIT Sloan School of Management, we found that the stock market consistently values certain types of business models more highly than others. Specifically, we found that in recent years, investors have favored business models focusing on licensing intellectual property (such as Walt Disney’s business model) and a certain kind of highly innovative manufacturing (such as Apple’s).

We developed a framework that includes 14 types of business models. (Surprisingly, we found there is no universally accepted definition of the important concept of a business model.) Then, using data from Compustat, we classified all the more than 10,000 companies that are publicly traded on U.S. exchanges within the framework by identifying the percentage of each company’s revenue generated through each of the 14 business models; we used a combination of manual classification and a custom-developed rule-based software program. By classifying companies’ revenue into these 14 business models, a new picture emerged of not only individual companies, but businesses more generally. The individual classifications were then aggregated to construct an index for each business model. Those indices then allowed us to compare total stock market returns — as measured by changes in stock price plus dividends — for different business models in the U.S. markets over a 12-year period, from 1997 through 2009. The results provide insight into investor treatment of various business models. In particular, the findings underscore the importance of innovation and intellectual property in the U.S. economy.

Related Research

Our business model framework is based on defining the types of assets a company sells and the rights it grants customers to use those assets. We define four asset types and four ways companies manage asset rights to generate revenue. The four asset types are:

Financial assets, which include cash as well as securities like stocks, bonds and insurance policies that give their owners rights to potential future cash flows;

Physical assets, which include durable items such as computers, as well as nondurable items such as food;

Intangible assets, which include intellectual property such as patents and copyrights, as well as other intangible assets like knowledge, goodwill and brand value;

Human assets, which include people’s time and effort. People of course cannot be legally bought and sold, but their time and knowledge can be “rented out” for a fee.

The four ways companies manage assets rights to generate revenue are as:

Creators , which sell ownership of products they have created by transforming or assembling raw materials or components. Ford, 3M and Intel are examples of this type of company;

Distributors such as Wal-Mart or Amazon.com’s retail business, which sell ownership of products they bought but did not substantially change, except by transporting, repackaging or marketing;

Landlords , which sell only the right to use assets for a specified period of time; Marriott, Hertz, Accenture and Citigroup are examples of the landlord model. We included in this category companies that employ licenses or subscriptions to sell limited rights to use their intellectual property (IP) assets — companies such as Microsoft and The New York Times;

Brokers , which receive a fee for matching buyers and sellers without ever taking ownership or custody of the product; examples include Charles Schwab, eBay and realtors.

The Business Model Framework

business model for investment companies

View Exhibit

business model for investment companies

One of the advantages of this framework is that we can compare companies that have similar business models and thus require similar capabilities but operate in different industries. For example, a physical landlord can sell the use of a broad range of assets including hotel rooms, plane seats, software, information or rental cars. We can also assess what business models investors prefer at different times and how a company’s business model has changed over time. For example, Disney has dramatically shifted its business model over the last 20 years from renting physical assets like theme parks (65% of revenue in 1984 but only 30% in 2009) to licensing intellectual property (15% of revenue in 1984 but 63% in 2009), with clear investor buy-in for this strategic shift. Disney stock outperformed the S&P 500 stock index over the last five years and beat that index by more than 20% in the two-year period ending December 31, 2010.

Business models provide a cross-industry lens for analyzing how a company is managed and the resulting stock market total return. The differences in the stock market total return of companies deriving revenue from different business models are striking — with returns for different types of business models ranging from about 145% to 240% over the 12 years we studied. An interesting picture emerges:

  • Eighty-one percent of total revenue from companies listed on U.S. exchanges comes from physical assets. Manufacturing — creating physical assets — generated about 57% of all company revenues. Manufacturers are generally highly valued by investors, with manufacturers who innovate even more highly valued.
  • Twenty-eight percent of all company revenues derives from landlord type transactions but with major differences in total stock market returns. Financial and physical landlords were the poorest performing of the common business models, while IP landlords were the second-highest performing. Contractors — a model that includes consulting firms and other businesses that primarily “rent out” human assets — had performance in the middle of the pack.

Market Performance of the Most Common Business Models

business model for investment companies

Innovative manufacturers — which we define as those who invest more than their industry average in research and development — are the top performers in the market. Apple is an example of an innovative manufacturer. Apple’s business model in 2008 was 86% manufacturer, 7% contractor and 7% IP landlord, and the results — products like the iPhone, iPhone apps, iPad, MacBook Air, iTunes — have paid big dividends. This is a powerful combination from an investor perspective.

Returning to Disney, we see that the company’s shift in business models over time has played directly into the sentiment of investors. Disney has reduced revenues from one of the least valued business models, physical landlord, while increasing its reliance on one of the most valued business models, IP landlord. And Disney has also retained innovative manufacturing, the more highly valued part of the manufacturing business model.

Key Questions for Company Leaders to Answer

Of course, the business models that investors value most today may not be the ones they will favor 10 years from now. But the concept of business model provides a fundamental tool for analyzing many important strategic decisions. For example, companies can use our framework to help decide when to dispose of one business unit, when to invest in another one and where to look for potential acquisitions. In making these decisions, the framework helps you analyze your business, not just in the context of your own industry, but also in the context of companies in very different industries that have similar business models.

We suggest that leaders should consider the following key questions:

  • What are our business models today, and how have they changed over the last 10 years?
  • How do our business models compare with those of our traditional and nontraditional competitors?
  • How can we adjust our overall business model to include more revenue from the models that are most highly valued today (such as IP landlord and innovative manufacturer) or that we believe will be most highly valued in the future?
  • To make any change in our business model, what competencies do we need to further develop, and what strategic experiments can we do today to test new business models for tomorrow?

About the Authors

Peter Weill is a senior research scientist and chairman of the Center for Information Systems Research at the MIT Sloan School of Management. Thomas W. Malone is the Patrick J. McGovern Professor of Management and the founding director of the MIT Center for Collective Intelligence at the MIT Sloan School of Management. Thomas G. Apel is a research affiliate with the Center for Information Systems Research. The research team also included George Herman, Stephanie L. Woerner, Steve Kahl, Richard K. Lai, Victoria T. D’Urso and more than 20 MIT undergraduate, graduate and postgraduate students. This research was funded by the National Science Foundation (grant number IIS-0085725), the MIT Center for Collective Intelligence and the MIT Center for Information Systems Research.

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Investment Company Business Plan Template

Written by Dave Lavinsky

Investment Company Business Plan

You’ve come to the right place to create your Investment Company business plan.

We have helped over 1,000 entrepreneurs and business owners create business plans and many have used them to start or grow their Investment Companies.

Below is a template to help you create each section of your Investment Company business plan.

Executive Summary

Business overview.

NovaGrowth Investments is a startup investment company located in Aurora, Colorado. The company is founded by Thom Anderson, an investment broker from Colorado Springs, Colorado, who has amassed millions of dollars for his clients over ten years while working at Clear River Investments. Because Thom has gained an extensive following of clients who have already indicated they will follow him to his new investment company, he has made the initial steps into forming NovaGrowth Investments. Thom plans on recruiting a team of highly-qualified professionals to help manage the day-to-day operations of a premier investment company in every aspect of marketing and advising in the land acquisition investment company.

NovaGrowth Investments will provide a wide array of services for investors, in particular those related to the optimal attention and time needed to secure valuable investments on their behalf. Investors can feel confident and secure, knowing that Thom and his team are looking out for their interests in every aspect of the land acquisition process. What’s more, NovaGrowth offers customized guarantees of investment performance that are singular within the investment company industry.

Product Offering

The following are the services that NovaGrowth Investments will provide:

  • Analysis and expansive vetting of land acquisition opportunities up to 5M acres
  • Extensive market research that secures in-depth findings
  • Consistent and competitive returns while managing risk effectively
  • Full spectrum wealth management
  • Comprehensive array of software tools/programs to capture critical intelligence
  • Unique strategies tailored for each individual client
  • “New investor” welcome package with goal-setting seminar included
  • “Boots on the Ground” team of investment analysts who visit each location under consideration and offer a full report plus video capture of the land
  • Oversight and management of each portfolio and customized suggestions

Customer Focus

NovaGrowth Investments will target individual investors. They will also target corporate investors who are seeking land acquisitions. They will target fast-growing companies known to be seeking additional tracts of land. NovaGrowth Investments will target industry partners (cattle ranchers, horse breeders, etc) that could benefit from land acquisition as an investment.

Management Team

NovaGrowth Investments will be owned and operated by Thom Anderson. He recruited Jackson Byers and Kylie Carlson to manage the day-to-day operations of the investment company and oversee human resources.

Thom Anderson is a graduate of Cambridge University in the U.K., where he graduated with an International Business bachelor’s degree. He spent five years in the U.K. sourcing land for a large investment firm as an entry-level investment advisor.

Upon his return to the U.S.,Thom obtained his investment broker’s license and was employed by Clear River Investments in Colorado Springs, Colorado. Within one year, Thom secured over 5M in investments for his clients and, within five years, he amassed over 25M in land acquisition investments on behalf of his clients.

Jackson Byers is a graduate of the University of Illinois, where he graduated with a master’s degree in Accounting. His former role at Clear River Investments was as the Associate Accountant, where he managed the normal business accounting processes for the firm. He will serve as the Staff Accountant in the startup company and will assist in overseeing the day-to-day operations of the firm.

Kylie Carlson was hired by Thom Anderson as his Assistant and worked for him at Clear River Investments for over ten years. Her new role will be the Human Resources Manager, overseeing personnel and the processes that are regulated and required by Colorado.

Success Factors

NovaGrowth Investments will be able to achieve success by offering the following competitive advantages:

  • Friendly, knowledgeable, and highly-qualified team of NovaGrowth Investments
  • “Boots on the Ground” team of investment analysts who visit each location under consideration and offer a full report plus video capture of the land.
  • NovaGrowth Investments offers outstanding value for each client in both their management fees and land acquisition percentages. Their pricing denotes quality and value and their results continually substantiate it.

Financial Highlights

NovaGrowth Investments is seeking $200,000 in debt financing to launch its NovaGrowth Investments. The funding will be dedicated toward securing the office space and purchasing office equipment and supplies. Funding will also be dedicated toward three months of overhead costs to include payroll of the staff, rent, and marketing costs for the marketing costs. The breakout of the funding is below:

  • Office space build-out: $20,000
  • Office equipment, supplies, and materials: $10,000
  • Three months of overhead expenses (payroll, rent, utilities): $150,000
  • Marketing costs: $10,000
  • Working capital: $10,000

The following graph outlines the financial projections for NovaGrowth Investments.

NovaGrowth Investments Pro Forma Projections

Company Overview

Who is novagrowth investments.

NovaGrowth Investments is a newly established, full-service investment company in Aurora, Colorado. NovaGrowth Investments will be the most reliable, effective and value-driven choice for private and commercial investors in Aurora and the surrounding communities. NovaGrowth Investments will provide a comprehensive menu of portfolio and land acquisition services for any potential investor to utilize. Their full-service approach includes a comprehensive seminar and helpful introductory information for first-time investors.

  NovaGrowth Investments will be able to manage the investments and acquire new investments for their clients. The team of professionals are highly qualified and experienced in investment brokerage and land acquisitions. NovaGrowth Investments removes all headaches and issues of trying to locate safe and secure investments and ensures all issues are taken care of expeditiously while delivering the best customer service.

NovaGrowth Investments History

Thom Anderson is a graduate of Cambridge University in the U.K., where he graduated with an International Business bachelor’s degree. He spent five years in the U.K. sourcing land for a large investment firm as an entry-level investment advisor. Upon his return to the U.S.,Thom obtained his investment broker’s license and was employed by Clear River Investments in Colorado Springs, Colorado. Within one year, Thom secured over 5M in investments for his clients and, within five years, he amassed over 25M in land acquisition investments on behalf of his clients.

Since incorporation, NovaGrowth Investments has achieved the following milestones:

  • Registered NovaGrowth Investments, LLC to transact business in the state of Colorado.
  • Has a contract in place for a 10,000 square foot office at one of the midtown buildings
  • Reached out to numerous contacts to sign on with NovaGrowth Investments.
  • Began recruiting a staff of seven and four office personnel to work at NovaGrowth Investments

NovaGrowth Investments Services

The following will be the services NovaGrowth Investments will provide:

Industry Analysis

The investment company industry is expected to grow over the next five years to over $1.3 trillion. The growth will be driven by ongoing vast opportunities for individuals and organizations seeking to grow their wealth The growth will be driven by new technology that navigating the complexities of the financial markets The growth will be driven by an increase in the interest of individuals in “making their own way” in the world The growth will be driven by the stability of land ownership as an on-going and important element in investment portfolios.

Costs will likely be reduced as technology continues to advance, allowing better-informed acquisition interest and supplemental risk mitigation Costs will likely be reduced as younger investors, such as Gen Z and millennials, continue to express an interest and desire for land acquisition investments, which indicates an increased number of sellers will enter the market due to favorable conditions.

Customer Analysis

Demographic profile of target market.

NovaGrowth Investments will target those potential individual investors in Aurora, Colorado. They will target businesses with a track record of land investments or a need for land due to company growth. NovaGrowth Investments will target industry partners (cattle ranchers, horse breeders, etc) that could benefit from land acquisition as an investment.

Customer Segmentation

NovaGrowth Investments will primarily target the following customer profiles:

  • Individual investors
  • Businesses with a record of land investments or those seeking land due to internal growth
  • Industry partners seeking additional land for livestock or farming purposes

Competitive Analysis

Direct and indirect competitors.

NovaGrowth Investments will face competition from other companies with similar business profiles. A description of each competitor company is below.

CapitalMax Advisors

CapitalMax Advisors is a startup investment company in Colorado Springs, Colorado. The owner, Barry Jackson, is a graduate of Purdue University and has been an investment advisor for over ten years. He recently launched Capital Max Advisors to meet what he coined, “The Great Asset Allocation” investment opportunities within the city of Colorado Springs. Barry has hired ten associates from his former employer’s company to seek investors who are primarily interested in asset allocation investments and the company is promising reduced portfolio management rates for the first six months of business.

CapitalMax Advisors is a full-service investment company with a strong following of investors who were delighted by Barry’s performance on their behalf at his former employer. The expectation is that CapitalMax Advisors will live up to their primary purpose, which is to oversee and direct asset allocation to maximize returns in substantial numbers.

WealthWise Investments

Owned by Tamara and Loren Downs, WealthWise Investments is known for it’s assertive actions on behalf of clients. The company was founded in 2010 and currently offers a diverse range of investment products and services. They specialize in ETFs, mutual funds, and alternative investments. WealthWise Investments is known for its expertise in risk management, technology-driven investment strategies, and statewide reach beyond it’s home city of Colorado Springs.

WealthWise Investments offers excellent services to clients; however, clients have noted publicly that the fees and service charges are high in tandem with the asset allocation gains. There have been two complaints noted with the state regulatory agencies. Meanwhile, Tamara and Loren Downs continue to employ efforts to bring technology-driven tools into the investment company that will trim staff and distribute higher rates on behalf of investors.

FinTech Capital Management

FinTech Capital Management is a five-year-old company located in Denver, Colorado. The focus of the company is on financial technology investments on behalf of their client investors. Currently, the company has recorded stable and growing levels of profitability and has been tagged as an investment management firm known for its expertise in mutual funds and retirement planning They offer a sizable range of investment strategies, including equity, fixed income, and asset allocation funds. They are tech-driven and focus on research-driven investment decisions to fulfill the goals of their clients in long-term wealth creation.

In addition to tech acquisitions, FinTech Capital Management is also directed toward senior investors, with brokerage, retirement planning, wealth management, and mutual funds in their services offered. They provide a range of investment options, from individual stocks and bonds to managed portfolios and retirement accounts, many of which are perfect for those investors who have amassed a sizable portfolio, but are becoming risk-averse as they age. FinTech Capital Management is owned by The Thurgood Family Trust with the Thurgood brothers, Jonathan and Regis, responsible for day-to-day management. It has been recently suggested that the firm may be sold if the right buyers were to approach.

Competitive Advantage

NovaGrowth Investments will be able to offer the following advantages over their competition:

Marketing Plan

Brand & value proposition.

NovaGrowth Investments will offer the unique value proposition to its clientele:

  • Unique investment strategies tailored for each individual client

Promotions Strategy

The promotions strategy for NovaGrowth Investments is as follows:

Word of Mouth/Referrals

Thom Anderson has built up an extensive list of contacts over the years by providing exceptional service and expertise to former clients and potential investors. The contacts and clients will follow him to his new company and help spread the word of NovaGrowth Investments.

Professional Associations and Networking

The executives within NovaGrowth Investments will begin networking in professional associations and at events within the city-wide industry groups. This will bring the new startup into focus for other companies, providing a path to increased clients and strategic partnerships within the city.

Social Media Marketing

NovaGrowth Investments will target their primary and secondary audiences with a series of text announcements via social media. The announcements will be invitations to the opening of the company, with a champagne reception and information regarding the services available at NovaGrowth Investments. The social media announcements will continue for the three weeks prior to the launch of the company.

Website/SEO Marketing

NovaGrowth Investments will fully utilize their website. The website will be well organized, informative, and list the services that NovaGrowth Investments provides. The website will also list their contact information and biographies of the executive group. The website will engage in SEO marketing tactics so that anytime someone types in the Google or Bing search engine “Investment company” or “Investment opportunities near me,” NovaGrowth Investments will be listed at the top of the search results.

The pricing of NovaGrowth Investments will be moderate and on par with competitors so customers feel they receive excellent value when purchasing their services.

Operations Plan

The following will be the operations plan for NovaGrowth Investments. Operation Functions:

  • Thom Anderson will be the owner and President of the company. He will oversee all staff and manage client relations. Thom has spent the past year recruiting the following staff:
  • Jackson Byers will provide all client accounting, tax payments and monthly financial reporting. His title will be Staff Accountant.
  • Kylie Carlson will provide all employee onboarding and oversight as she assumes the role of Human Resources Manager.

Milestones:

NovaGrowth Investments will have the following milestones completed in the next six months.

  • 5/1/202X – Finalize contract to lease office space
  • 5/15/202X – Finalize personnel and staff employment contracts for NovaGrowth Investments
  • 6/1/202X – Finalize contracts for NovaGrowth Investments clients
  • 6/15/202X – Begin networking at industry events
  • 6/22/202X – Begin moving into NovaGrowth Investments office
  • 7/1/202X – NovaGrowth Investments opens its doors for business

Financial Plan

Key revenue & costs.

The revenue drivers for NovaGrowth Investments are the fees they will charge to clients for their investment acquisition and portfolio management services.

The cost drivers will be the overhead costs required in order to staff NovaGrowth Investments. The expenses will be the payroll cost, rent, utilities, office supplies, and marketing materials.

Funding Requirements and Use of Funds

NovaGrowth Investments is seeking $200,000 in debt financing to launch its investment company. The funding will be dedicated toward securing the office space and purchasing office equipment and supplies. Funding will also be dedicated toward three months of overhead costs to include payroll of the staff, rent, and marketing costs for the print ads and association memberships. The breakout of the funding is below:

Key Assumptions

The following outlines the key assumptions required in order to achieve the revenue and cost numbers in the financials and in order to pay off the startup business loan.

  • Number of Clients Per Month: 175
  • Average Revenue per Month: $437,500
  • Office Lease per Year: $100,000

Financial Projections

Income statement, balance sheet, cash flow statement, investment company business plan faqs, what is an investment company business plan.

An investment company business plan is a plan to start and/or grow your investment company business. Among other things, it outlines your business concept, identifies your target customers, presents your marketing plan and details your financial projections.

You can easily complete your Investment Company business plan using our Investment Company Business Plan Template here .

What are the Main Types of Investment Company Businesses? 

There are a number of different kinds of investment company businesses , some examples include: Closed-End Funds Investment Company, Mutual Funds (Open-End Funds) Investment Company, and Unit Investment Trusts (UITs) Investment Company.

How Do You Get Funding for Your Investment Company Business Plan?

Investment Company businesses are often funded through small business loans. Personal savings, credit card financing and angel investors are also popular forms of funding.

What are the Steps To Start an Investment Company Business?

Starting an investment company business can be an exciting endeavor. Having a clear roadmap of the steps to start a business will help you stay focused on your goals and get started faster.

1. Develop An Investment Company Business Plan - The first step in starting a business is to create a detailed investment company business plan that outlines all aspects of the venture. This should include potential market size and target customers, the services or products you will offer, pricing strategies and a detailed financial forecast. 

2. Choose Your Legal Structure - It's important to select an appropriate legal entity for your investment company business. This could be a limited liability company (LLC), corporation, partnership, or sole proprietorship. Each type has its own benefits and drawbacks so it’s important to do research and choose wisely so that your investment company business is in compliance with local laws.

3. Register Your Investment Company Business - Once you have chosen a legal structure, the next step is to register your investment company business with the government or state where you’re operating from. This includes obtaining licenses and permits as required by federal, state, and local laws.

4. Identify Financing Options - It’s likely that you’ll need some capital to start your investment company business, so take some time to identify what financing options are available such as bank loans, investor funding, grants, or crowdfunding platforms.

5. Choose a Location - Whether you plan on operating out of a physical location or not, you should always have an idea of where you’ll be based should it become necessary in the future as well as what kind of space would be suitable for your operations.

6. Hire Employees - There are several ways to find qualified employees including job boards like LinkedIn or Indeed as well as hiring agencies if needed – depending on what type of employees you need it might also be more effective to reach out directly through networking events.

7. Acquire Necessary Investment Company Equipment & Supplies - In order to start your investment company business, you'll need to purchase all of the necessary equipment and supplies to run a successful operation.

8. Market & Promote Your Business - Once you have all the necessary pieces in place, it’s time to start promoting and marketing your investment company business. This includes creating a website, utilizing social media platforms like Facebook or Twitter, and having an effective Search Engine Optimization (SEO) strategy. You should also consider traditional marketing techniques such as radio or print advertising. 

Learn more about how to start a successful investment company business:

  • How to Start an Investment Company

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Investment Company Business Plan

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The possibility for substantial financial gains is one of the main advantages of an investment company. As the company expands and gains customers, it has the potential to generate large fees and commissions based on investment portfolios.

Are you looking for the same rewards? Then go on with planning everything first.

Need help writing a business plan for your investment company? You’re at the right place. Our investment company business plan template will help you get started.

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How to Write An Investment Company Business Plan?

Writing an investment company business plan is a crucial step toward the success of your business. Here are the key steps to consider when writing a business plan:

1. Executive Summary

An executive summary is the first section planned to offer an overview of the entire business plan. However, it is written after the entire business plan is ready and summarizes each section of your plan.

Here are a few key components to include in your executive summary:

Introduce your Business:

Start your executive summary by briefly introducing your business to your readers.

Market Opportunity:

Products and services:.

Highlight the investment company services you offer your clients. The USPs and differentiators you offer are always a plus.

Marketing & Sales Strategies:

Financial highlights:, call to action:.

Ensure your executive summary is clear, concise, easy to understand, and jargon-free.

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business model for investment companies

2. Business Overview

The business overview section of your business plan offers detailed information about your company. The details you add will depend on how important they are to your business. Yet, business name, location, business history, and future goals are some of the foundational elements you must consider adding to this section:

Business Description:

Describe your business in this section by providing all the basic information:

Describe what kind of investment company you run and the name of it. You may specialize in one of the following investment businesses:

  • Mutual fund companies
  • Venture capital funds
  • Private equity funds
  • Asset management companies
  • Pension fund managers
  • Describe the legal structure of your investment company, whether it is a sole proprietorship, LLC, partnership, or others.
  • Explain where your business is located and why you selected the place.

Mission Statement:

Business history:.

If you’re an established investment company, briefly describe your business history, like—when it was founded, how it evolved over time, etc.

Future Goals:

This section should provide a thorough understanding of your business, its history, and its future plans. Keep this section engaging, precise, and to the point.

3. Market Analysis

The market analysis section of your business plan should offer a thorough understanding of the industry with the target market, competitors, and growth opportunities. You should include the following components in this section.

Target market:

Start this section by describing your target market. Define your ideal customer and explain what types of services they prefer. Creating a buyer persona will help you easily define your target market to your readers.

Market size and growth potential:

Describe your market size and growth potential and whether you will target a niche or a much broader market.

Competitive Analysis:

Market trends:.

Analyze emerging trends in the industry, such as technology disruptions, changes in customer behavior or preferences, etc. Explain how your business will cope with all the trends.

Regulatory Environment:

Here are a few tips for writing the market analysis section of your investment company business plan:

  • Conduct market research, industry reports, and surveys to gather data.
  • Provide specific and detailed information whenever possible.
  • Illustrate your points with charts and graphs.
  • Write your business plan keeping your target audience in mind.

4. Products And Services

The product and services section should describe the specific services and products that will be offered to customers. To write this section should include the following:

Describe your services:

Mention the investment company services your business will offer. This list may include services like,

  • Portfolio management
  • Financial planning
  • Investment research and analysis
  • Wealth management
  • Mutual funds and exchange-traded funds

Investment advisory services:

Additional services:.

In short, this section of your investment business plan must be informative, precise, and client-focused. By providing a clear and compelling description of your offerings, you can help potential investors and readers understand the value of your business.

5. Sales And Marketing Strategies

Writing the sales and marketing strategies section means a list of strategies you will use to attract and retain your clients. Here are some key elements to include in your sales & marketing plan:

Unique Selling Proposition (USP):

Define your business’s USPs depending on the market you serve, the equipment you use, and the unique services you provide. Identifying USPs will help you plan your marketing strategies.

Pricing Strategy:

Marketing strategies:, sales strategies:, customer retention:.

Overall, this section of your investment company business plan should focus on customer acquisition and retention.

Have a specific, realistic, and data-driven approach while planning sales and marketing strategies for your investment business, and be prepared to adapt or make strategic changes in your strategies based on feedback and results.

6. Operations Plan

The operations plan section of your business plan should outline the processes and procedures involved in your business operations, such as staffing requirements and operational processes. Here are a few components to add to your operations plan:

Staffing & Training:

Operational process:, equipment & software:.

Include the list of equipment and software required for investment business, such as servers & data storage, network equipment, trading platforms, customer relationship management software, portfolio management software, etc.

Adding these components to your operations plan will help you lay out your business operations, which will eventually help you manage your business effectively.

7. Management Team

The management team section provides an overview of your investment business’s management team. This section should provide a detailed description of each manager’s experience and qualifications, as well as their responsibilities and roles.

Founders/CEO:

Key managers:.

Introduce your management and key members of your team, and explain their roles and responsibilities.

Organizational structure:

Compensation plan:, advisors/consultants:.

Mentioning advisors or consultants in your business plans adds credibility to your business idea.

This section should describe the key personnel for your investment company, highlighting how you have the perfect team to succeed.

8. Financial Plan

Your financial plan section should provide a summary of your business’s financial projections for the first few years. Here are some key elements to include in your financial plan:

Profit & loss statement:

Cash flow statement:, balance sheet:, break-even point:.

Determine and mention your business’s break-even point—the point at which your business costs and revenue will be equal.

Financing Needs:

Be realistic with your financial projections, and make sure you offer relevant information and evidence to support your estimates.

9. Appendix

The appendix section of your plan should include any additional information supporting your business plan’s main content, such as market research, legal documentation, financial statements, and other relevant information.

  • Add a table of contents for the appendix section to help readers easily find specific information or sections.
  • In addition to your financial statements, provide additional financial documents like tax returns, a list of assets within the business, credit history, and more. These statements must be the latest and offer financial projections for at least the first three or five years of business operations
  • Provide data derived from market research, including stats about the industry, user demographics, and industry trends.
  • Include any legal documents such as permits, licenses, and contracts.
  • Include any additional documentation related to your business plan, such as product brochures, marketing materials, operational procedures, etc.

Use clear headings and labels for each section of the appendix so that readers can easily find the necessary information.

Remember, the appendix section of your investment firm business plan should only include relevant and important information supporting your plan’s main content.

The Quickest Way to turn a Business Idea into a Business Plan

Fill-in-the-blanks and automatic financials make it easy.

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This sample investment company business plan will provide an idea for writing a successful investment company plan, including all the essential components of your business.

After this, if you still need clarification about writing an investment-ready business plan to impress your audience, download our investment company business plan pdf .

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Frequently asked questions, why do you need an investment company business plan.

A business plan is an essential tool for anyone looking to start or run a successful investment business. It helps to get clarity in your business, secures funding, and identifies potential challenges while starting and growing your business.

Overall, a well-written plan can help you make informed decisions, which can contribute to the long-term success of your investment company.

How to get funding for your investment company?

There are several ways to get funding for your investment company, but self-funding is one of the most efficient and speedy funding options. Other options for funding are:

Small Business Administration (SBA) loan

Crowdfunding, angel investors.

Apart from all these options, there are small business grants available, check for the same in your location and you can apply for it.

Where to find business plan writers for your investment company?

There are many business plan writers available, but no one knows your business and ideas better than you, so we recommend you write your investment company business plan and outline your vision as you have in your mind.

What is the easiest way to write your investment company business plan?

A lot of research is necessary for writing a business plan, but you can write your plan most efficiently with the help of any investment company business plan example and edit it as per your need. You can also quickly finish your plan in just a few hours or less with the help of our business plan software .

About the Author

business model for investment companies

Upmetrics Team

Upmetrics is the #1 business planning software that helps entrepreneurs and business owners create investment-ready business plans using AI. We regularly share business planning insights on our blog. Check out the Upmetrics blog for such interesting reads. Read more

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Five ways that ESG creates value

Your business, like every business, is deeply intertwined with environmental, social, and governance (ESG) concerns. It makes sense, therefore, that a strong ESG proposition can create value—and in this article, we provide a framework for understanding the five key ways it can do so. But first, let’s briefly consider the individual elements of ESG:

  • The E in ESG, environmental criteria , includes the energy your company takes in and the waste it discharges, the resources it needs, and the consequences for living beings as a result. Not least, E encompasses carbon emissions and climate change. Every company uses energy and resources; every company affects, and is affected by, the environment.
  • S , social criteria , addresses the relationships your company has and the reputation it fosters with people and institutions in the communities where you do business. S includes labor relations and diversity and inclusion. Every company operates within a broader, diverse society.
  • G , governance , is the internal system of practices, controls, and procedures your company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Every company, which is itself a legal creation, requires governance.

Just as ESG is an inextricable part of how you do business, its individual elements are themselves intertwined. For example, social criteria overlaps with environmental criteria and governance when companies seek to comply with environmental laws and broader concerns about sustainability. Our focus is mostly on environmental and social criteria, but, as every leader knows, governance can never be hermetically separate. Indeed, excelling in governance calls for mastering not just the letter of laws but also their spirit—such as getting in front of violations before they occur, or ensuring transparency and dialogue with regulators instead of formalistically submitting a report and letting the results speak for themselves.

ESG-oriented investing has experienced a meteoric rise—global sustainable investment now tops $30 trillion.

Thinking and acting on ESG in a proactive way has lately become even more pressing. The US Business Roundtable released a new statement in August 2019 strongly affirming business’s commitment to a broad range of stakeholders, including customers, employees, suppliers, communities, and, of course, shareholders. 1 See “Statement on the purpose of a corporation,” Business Roundtable, 2019, opportunity.businessroundtable.org. The stakeholder approach is elaborated upon in Witold J. Henisz, Corporate Diplomacy: Why Firms Need to Build Ties with External Stakeholders (Routledge, November 2016); John Browne, Robin Nuttall, and Tommy Stadlen, Connect: How Companies Succeed by Engaging Radically with Society (PublicAffairs, March 2016); and Colin Mayer, Prosperity: Better Business Makes the Greater Good (Oxford University Press, January 2019). Of a piece with that emerging zeitgeist, ESG-oriented investing has experienced a meteoric rise. Global sustainable investment now tops $30 trillion—up 68 percent since 2014 and tenfold since 2004. 2 Global Sustainable Investment Review 2018 , Global Sustainable Investment Alliance, 2018, gsi-alliance.org. The acceleration has been driven by heightened social, governmental, and consumer attention on the broader impact of corporations, as well as by the investors and executives who realize that a strong ESG proposition can safeguard a company’s long-term success. The magnitude of investment flow suggests that ESG is much more than a fad or a feel-good exercise.

So does the level of business performance. The overwhelming weight of accumulated research finds that companies that pay attention to environmental, social, and governance concerns do not experience a drag on value creation—in fact, quite the opposite (Exhibit 1). A strong ESG proposition correlates with higher equity returns, from both a tilt and momentum perspective. 3 Mozaffar Khan, George Serafeim, and Aaron Yoon, “Corporate sustainability: First evidence on materiality,” The Accounting Review , November 2016, Volume 91, Number 6, pp. 1697–724, ssrn.com; Zoltán Nagy, Altaf Kassam, and Linda-Eling Lee, “Can ESG add alpha? An analysis of ESG tilt and momentum strategies,” Journal of Investing , Summer 2015, Volume 25, Number 2, pp. 113–24, joi.pm-research.com. Better performance in ESG also corresponds with a reduction in downside risk, as evidenced, among other ways, by lower loan and credit default swap spreads and higher credit ratings. 4 See, for example, Witold J. Henisz and James McGlinch, “ESG, material credit events, and credit risk,” Journal of Applied Corporate Finance , July 2019, Volume 31, pp. 105–17, onlinelibrary.wiley.com; Sara A. Lundqvist and Anders Vilhelmsson, “Enterprise risk management and default risk: Evidence from the banking industry,” Journal of Risk and Insurance , March 2018, Volume 85, Number 1, pp. 127–57, onlinelibrary.wiley.com; Erik Landry, Mariana Lazaro, and Anna Lee, “Connecting ESG and corporate bond performance,” MIT Management Sloan School and Breckinridge Capital Advisors, 2017, mitsloan.mit.edu; and Mitch Reznick and Michael Viehs, “Pricing ESG risk in credit markets,” Hermes Credit and Hermes EOS, 2017, hermes-investment.com. Similar benefits are found in yield spreads attached to loans; see Allen Goss and Gordon S. Roberts, “The impact of corporate social responsibility on the cost of bank loans,” Journal of Banking and Finance , July 2011, Volume 35, Number 7, pp. 1794–810, sciencedirect.com; Sudheer Chava, “Environmental externalities and cost of capital,” Management Science , September 2014, Volume 60, Number 9, pp. 2111–380, pubsonline.informs.org; Sung C. Bae, Kiyoung Chang, and Ha-Chin Yi, “The impact of corporate social responsibility activities on corporate financing: A case of bank loan covenants,” Applied Economics Letters , February 2016, Volume 23, Number 17, pp. 1234–37, tandfonline.com; and Sung C. Bae, Kiyoung Chang, and Ha-Chin Yi, “Corporate social responsibility, credit rating, and private debt contracting: New evidence from syndicated loan market,” Review of Quantitative Finance and Accounting , January 2018, Volume 50, Number 1, pp. 261–99, econpapers.repec.org.

But even as the case for a strong ESG proposition becomes more compelling, an understanding of why these criteria link to value creation is less comprehensive. How exactly does a strong ESG proposition make financial sense? From our experience and research, ESG links to cash flow in five important ways: (1) facilitating top-line growth, (2) reducing costs, (3) minimizing regulatory and legal interventions, (4) increasing employee productivity, and (5) optimizing investment and capital expenditures (Exhibit 2). Each of these five levers should be part of a leader’s mental checklist when approaching ESG opportunities—and so should be an understanding of the “softer,” more personal dynamics needed for the levers to accomplish their heaviest lifting.

Five links to value creation

The five links are a way to think of ESG systematically, not an assurance that each link will apply, or apply to the same degree, in every instance. Some are more likely to arise in certain industries or sectors; others will be more frequent in given geographies. Still, all five should be considered regardless of a company’s business model or location. The potential for value creation is too great to leave any of them unexplored.

1. Top-line growth

A strong ESG proposition helps companies tap new markets and expand into existing ones. When governing authorities trust corporate actors, they are more likely to award them the access, approvals, and licenses that afford fresh opportunities for growth. For example, in a recent, massive public–private infrastructure project in Long Beach, California, the for-profit companies selected to participate were screened based on their prior performance in sustainability. Superior ESG execution has demonstrably paid off in mining, as well. Consider gold, a commodity (albeit an expensive one) that should, all else being equal, generate the same rents for the companies that mine it regardless of their ESG propositions. Yet one major study found that companies with social-engagement activities that were perceived to be beneficial by public and social stakeholders had an easier go at extracting those resources, without extensive planning or operational delays. These companies achieved demonstrably higher valuations than competitors with lower social capital. 5 Sinziana Dorobantu, Witold J. Henisz, and Lite J. Nartey, “Spinning gold: The financial returns to stakeholder engagement,” Strategic Management Journal , December 2014, Volume 35, Number 12, pp. 1727–48, onlinelibrary.wiley.com.

A strong ESG proposition helps companies tap new markets and expand into existing ones.

ESG can also drive consumer preference. McKinsey research has shown that customers say they are willing to pay to “go green.” Although there can be wide discrepancies in practice, including customers who refuse to pay even 1 percent more, we’ve found that upward of 70 percent of consumers  surveyed on purchases in multiple industries, including the automotive, building, electronics, and packaging categories, said they would pay an additional 5 percent for a green product if it met the same performance standards as a nongreen alternative. In another study , nearly half (44 percent) of the companies we surveyed identified business and growth opportunities as the impetus for starting their sustainability programs.

The payoffs are real. When Unilever developed Sunlight, a brand of dishwashing liquid that used much less water than its other brands, sales of Sunlight and Unilever’s other water-saving products proceeded to outpace category growth by more than 20 percent in a number of water-scarce markets. And Finland’s Neste, founded as a traditional petroleum-refining company more than 70 years ago, now generates more than two-thirds of its profits from renewable fuels and sustainability-related products.

Valuation seventh edition

Valuation: Measuring and Managing the Value of Companies. The new 7th edition.

2. cost reductions.

ESG can also reduce costs substantially. Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research  has found can affect operating profits by as much as 60 percent. In the same report, our colleagues created a metric (the amount of energy, water, and waste used in relation to revenue) to analyze the relative resource efficiency of companies within various sectors and found a significant correlation between resource efficiency and financial performance. The study also identified a number of companies across sectors that did particularly well—precisely the companies that had taken their sustainability strategies the furthest.

A major water utility achieved cost savings of almost $180 million per year thanks to lean initiatives.

As with each of the five links to ESG value creation, the first step to realizing value begins with recognizing the opportunity. Consider 3M, which has long understood that being proactive about environmental risk can be a source of competitive advantage. The company has saved $2.2 billion since introducing its “pollution prevention pays” (3Ps) program, in 1975, preventing pollution up front by reformulating products, improving manufacturing processes, redesigning equipment, and recycling and reusing waste from production. Another enterprise, a major water utility, achieved cost savings of almost $180 million per year thanks to lean initiatives aimed at improving preventive maintenance, refining spare-part inventory management, and tackling energy consumption and recovery from sludge. FedEx, for its part, aims to convert its entire 35,000-vehicle fleet to electric or hybrid engines; to date, 20 percent have been converted, which has already reduced fuel consumption by more than 50 million gallons. 6 Witold J. Henisz, “The costs and benefits of calculating the net present value of corporate diplomacy,” Field Actions Science Reports , 2016, Special Issue 14.

3. Reduced regulatory and legal interventions

A stronger external-value proposition can enable companies to achieve greater strategic freedom, easing regulatory pressure. In fact, in case after case across sectors and geographies, we’ve seen that strength in ESG helps reduce companies’ risk of adverse government action. It can also engender government support.

The value at stake may be higher than you think. By our analysis, typically one-third of corporate profits are at risk from state intervention. Regulation’s impact, of course, varies by industry. For pharmaceuticals and healthcare, the profits at stake are about 25 to 30 percent. In banking, where provisions on capital requirements, “too big to fail,” and consumer protection are so critical, the value at stake is typically 50 to 60 percent. For the automotive, aerospace and defense, and tech sectors, where government subsidies (among other forms of intervention) are prevalent, the value at stake can reach 60 percent as well (Exhibit 3).

4. Employee productivity uplift

A strong ESG proposition can help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase productivity overall. Employee satisfaction is positively correlated with shareholder returns. 7 Alex Edmans, “Does the stock market fully value intangibles? Employee satisfaction and equity prices,” Journal of Financial Economics , September 2011, Volume 101, Number 3, pp. 621–40, sciencedirect.com. For example, the London Business School’s Alex Edmans found that the companies that made Fortune ’s “100 Best Companies to Work For” list generated 2.3 percent to 3.8 percent higher stock returns per year than their peers over a greater than 25-year horizon. 8 Alex Edmans, “The link between job satisfaction and firm value, with implications for corporate social responsibility,” Academy of Management Perspectives , November 2012, Volume 26, Number 4, pp. 1–9, journals.aom.org. Moreover, it’s long been observed that employees with a sense not just of satisfaction but also of connection perform better. The stronger an employee’s perception of impact on the beneficiaries of their work, the greater the employee’s motivation to act in a “prosocial” way. 9 Adam M. Grant, “Does intrinsic motivation fuel the prosocial fire? Motivational synergy in predicting persistence, performance, and productivity,” Journal of Applied Psychology , January 2008, Volume 93, Number 1, pp. 48–58, psycnet.apa.org; Adam M. Grant, “Relational job design and the motivation to make a prosocial difference,” Academy of Management Review , April 2007, Volume 32, Number 2, pp. 393–417, journals.aom.org; and J. Stuart Bunderson and Jeffery A. Thompson, “Violations of principle: Ideological currency in the psychological contract,” Academy of Management Review , October 2003, Volume 28, Number 4, pp. 571–86, journals.aom.org.

Positive social impact correlates with higher job satisfaction—when companies “give back,” employees react with enthusiasm.

Recent studies have also shown that positive social impact correlates with higher job satisfaction, and field experiments suggest that when companies “give back,” employees react with enthusiasm. For instance, randomly selected employees at one Australian bank who received bonuses in the form of company payments to local charities reported greater and more immediate job satisfaction than their colleagues who were not selected for the donation program. 10 Jan-Emmanuel de Neve et al., “Work and well-being: A global perspective,” in Global Happiness Policy Report , edited by Global Council for Happiness and Wellbeing, New York, NY: Sustainable Development Solutions Network, 2018.

Just as a sense of higher purpose can inspire your employees to perform better, a weaker ESG proposition can drag productivity down. The most glaring examples are strikes, worker slowdowns, and other labor actions within your organization. But it’s worth remembering that productivity constraints can also manifest outside of your company’s four walls, across the supply chain . Primary suppliers often subcontract portions of large orders to other firms or rely on purchasing agents, and subcontractors are typically managed loosely, sometimes with little oversight of workers’ health and safety.

Farsighted companies pay heed. Consider General Mills, which works to ensure that its ESG principles apply “from farm to fork to landfill.” Walmart, for its part, tracks the work conditions of its suppliers, including those with extensive factory floors in China, according to a proprietary company scorecard. And Mars seeks opportunities where it can deliver what it calls “wins-wins-wins” for the company, its suppliers, and the environment. Mars has developed model farms that not only introduce new technological initiatives to farmers in its supply chains, but also increase farmers’ access to capital so that they are able to obtain a financial stake in those initiatives. 11 Katy Askew, “‘Extended supply chains are broken’: Why Mars thinks the commodities era is over,” June 6, 2018, Food Navigator, foodnavigator.com.

5. Investment and asset optimization

A strong ESG proposition can enhance investment returns by allocating capital to more promising and more sustainable opportunities (for example, renewables, waste reduction, and scrubbers). It can also help companies avoid stranded investments that may not pay off because of longer-term environmental issues (such as massive write-downs in the value of oil tankers). Remember, taking proper account of investment returns requires that you start from the proper baseline. When it comes to ESG, it’s important to bear in mind that a do-nothing approach is usually an eroding line, not a straight line. Continuing to rely on energy-hungry plants and equipment, for example, can drain cash going forward. While the investments required to update your operations may be substantial, choosing to wait it out can be the most expensive option of all. The rules of the game are shifting: regulatory responses to emissions will likely affect energy costs and could especially affect balance sheets in carbon-intense industries. And bans or limitations on such things as single-use plastics or diesel-fueled cars in city centers will introduce new constraints on multiple businesses, many of which could find themselves having to catch up. One way to get ahead of the future curve is to consider repurposing assets right now—for instance, converting failing parking garages into uses with higher demand, such as residences or day-care facilities, a trend we’re beginning to see in reviving cities.

Taking proper account of investment returns requires that you start from the proper baseline. When it comes to ESG, a do-nothing approach is usually an eroding line, not a straight line.

Foresight flows to the bottom line, and leaning into the tailwinds of sustainability presents new opportunities to enhance investment returns. Tailwinds blow strongly in China, for example. The country’s imperative to combat air pollution is forecast to create more than $3 trillion in investment opportunities through 2030, ranging across industries from air-quality monitoring to indoor air purification and even cement mixing.

The personal dynamic

The five links to value creation are grounded in hard numbers, but, as always, a softer side is in play. For leaders seeking out new ESG opportunities or trying to nudge an organization in directions that may feel orthogonal to its traditional business model, here are a few personal points to keep in mind.

Get specific

It’s important to understand the multiple ways that environmental, social, and governmental factors can create value, but when it comes to inspiring those around you, what will you really be talking about? Surprisingly, that depends. The individual causes that may inspire any one of us are precisely that—individual. That means that the issues most important to executives on your team could incline in different directions. Large companies can have dozens of social, community, or environmental projects in motion at any time. Too many at once can be a muddle; some may even work at cross-purposes.

In our experience, priority initiatives should be clearly articulated, and the number should be no more than five. To decide on which ones and to get the most out of them, let the company be your lodestar. For one leading agribusiness, that means channeling its capabilities into ameliorating hunger. The company taps its well-honed competencies to work with farmers in emerging regions to diversify their crops and adopt new technologies, which increases production and strengthens the company’s ties with different countries and communities.

Even within the same industry, different companies will have different ESG profiles depending on their position in the corporate life cycle. Attackers typically have high upside potential to drive growth from ESG initiatives (for instance, the craft brewer BrewDog donates 20 percent of its annual profits), while longer-established competitors simply don’t have that choice. For some companies, such as coal businesses or tobacco manufacturers, ESG will be more effectively geared to maintaining community ties and prioritizing risk avoidance. Regardless of your company’s circumstances, it will be the CEO’s role to rally support around the initiatives that best map to its mission.

Get practical

Value creation should be the CEO’s core message. Anything else could sound off-key. Managers, especially more senior ones, are usually assessed based on performance targets. Under those conditions, top-down ESG pronouncements can seem distracting  or too vague to be of much use; “save the planet” won’t cut it. To get everyone on board, make the case that your company’s ESG priorities do link to value, and show leaders how, ideally with hard metrics that feed into the business model (for example, output per baseline electricity use, waste cost in a given plant or location per employee, or revenue per calorie for a food-and-beverage business).

‘Don’t be the villain’: Niall Ferguson looks forward and back at capitalism in crisis

‘Don’t be the villain’: Niall Ferguson looks forward and back at capitalism in crisis

The case will be simpler if you’ve done the hard work to analyze what matters along your value chain, where the greatest potential lies, and which areas have the most impact for your company. Proactive companies carefully research potential initiatives, including by tapping thought leaders and industry experts, iterate their findings with internal and external stakeholders, and then publish the results. Making the case publicly—not least to investors—enforces rigor and helps ensure that practical actions will follow.

An honest appraisal of ESG includes a frank acknowledgment that getting it wrong can result in massive value destruction. Being perceived as “overdoing it” can sap a leader’s time and focus. Underdoing it is even worse. Companies that perform poorly in environmental, social, and governance criteria are more likely to endure materially adverse events. Just in the past few years, multiple companies with a weak ESG proposition saw double-digit declines in market capitalization in the days and weeks after their missteps came to light. 12 Witold J. Henisz and James McGlinch, “ESG, material credit events, and credit risk,” Journal of Applied Corporate Finance , July 2019, Volume 31, Number 2, pp. 105–17, onlinelibrary.wiley.com. Leaders should vigilantly assess the value at stake from external engagement (in our experience, poor external engagement can typically destroy about 30 percent of value) and plan scenarios for potential hits to operating profits. These days, the tail events can seem to come out of nowhere, even from a single tweet . Playing fast and loose with ESG is playing to lose, and failure to confront downside risk forthrightly can be disastrous.

Being thoughtful and transparent about ESG risk enhances long-term value—even if doing so can feel uncomfortable and engender some short-term pain.

Conversely, being thoughtful and transparent about ESG risk enhances long-term value—even if doing so can feel uncomfortable and engender some short-term pain. Ed Stack, the CEO of North American retailer Dick’s Sporting Goods, said he expected that the company’s 2018 announcement to restrict gun sales would alienate some customers, and he was right: by his own estimate, the announcement cost the company $150 million in lost sales, or slightly less than 2 percent of yearly revenue. Yet the company’s stock climbed 14 percent in a little over a year following the shift.

ESG for the long term

Who says that a strong environmental, social, and governance (ESG) proposition cannot create value for companies and their shareholders? Not Milton Friedman. “It may well be in the long-run interest of a corporation,” the economist wrote a half-century ago, “to devote resources to providing amenities to [its] community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill ... or have other worthwhile effects.” 1 Milton Friedman, “A Friedman doctrine—The social responsibility of business is to increase its profits,” New York Times Magazine , September 13, 1970.

Shareholders and stakeholders do not compete in a zero-sum game. Quite the opposite: building a strong connection with broad elements of society creates value, not least because it builds resilience into the business model. Compromising your connections with stakeholders simply to make earnings targets, on the other hand, destroys value. It’s the essence of short-termism, measurably and overwhelmingly harmful to most shareholders’ economic interests. Research shows that firms that make significant investments for longer-term payoffs have future cash flows that are discounted less by investors than the cash flows of firms that allocate a smaller portion of their cash for the long term; immediate-minded fixes such as share repurchases (which arguably divert cash from investments that generate longer-term returns) correlate with increased discounting as well. 2 Rachelle C. Sampson and Yuan Shi, “Are US firms becoming more short-term oriented? Evidence of shifting firm time horizons from market discount rates, 1980-2013,” forthcoming in Strategic Management Journal (available at SSRN, ssrn.com). Businesses need to play the long game. That means they need to satisfy the needs of their customers, employees, and communities—these days, often a global community—in order to maximize value creation. Thriving businesses concerned with long-term horizons fuel a virtuous cycle. They create jobs, increase tax revenue, and raise standards of living. ESG helps generate wealth, and wealth is not a fixed pie.

But just as it’s wrong to assume that shareholders’ interests must perforce come at stakeholders’ expense, one should not assume that shareholders’ and stakeholders’ interests cannot conflict. Of course they can! Should companies pay employees more than is necessary to keep them engaged and productive, even if doing so would place employee interests above those of the company as a whole and its shareholders in particular?

The question isn’t theoretical—shareholders have sued management on that very issue. While US courts have typically looked to the business-judgment rule, which affords directors wide discretion to decide such matters, judges have even weighed in about shareholder value maximization. For example, in 2010, when the directors of classifieds site Craigslist admittedly sought to run their business without a shareholder-maximization objective, putting the interests of the community above “the business of stockholder wealth maximization, now or in the future,” the Delaware courts—the most important jurisdiction in the United States for matters of corporate law—insisted that corporations exist to promote value for shareholders. (“The ‘Inc.’ after the company name,” the deciding court said, “has to mean at least that.”) The ruling thus proceeded to invalidate a poison pill that would have allowed Craigslist’s board to execute “a business strategy that openly eschews stockholder wealth maximization.” 3 eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010).

Different countries come to different conclusions about the purpose of business. But across legal systems, maximizing wealth for the long term demands that managers consider trade-offs. In a system such as that of the United States, where shareholder wealth maximization can have the force of law, executives can meet their shareholder-minded mission through an approach that economist Michael Jensen calls an “enlightened value maximization.” 4 Michael C. Jensen, “Value maximization, stakeholder theory and the corporate objective function,” Business Ethics Quarterly , April 2002, Volume 12, Number 2, pp. 235–56, cambridge.org. Under that framework, managers “spend an additional dollar on any constituency provided the long-term value added to the firm from such expenditure is a dollar or more.” That enforces a cost-benefit analysis for ESG investments, just as companies would do when allocating capital for any other purpose and keeping long-term value creation in mind.

One reason for the resilience of Dick’s Sporting Goods may be that gun sales were already a declining part of the company’s portfolio. Another reason was that it remained stubbornly committed to its sense of purpose. Researchers have found that the market capitalization of firms increases with stakeholder support, particularly in times when peer stakeholders criticize or attack firm operations. 13 Sinziana Dorobantu, Witold J. Henisz, and Lite Nartey, “Not all sparks light a fire: Stakeholder and shareholder reactions to critical events in contested markets,” Administrative Science Quarterly , January 2017, Volume 72, Number 3, pp. 561–97, journals.sagepub.com. Holding to your company’s central values is particularly essential today as polarized forces widen the social gyre. “Fueled in part by social media, public pressures on corporations build faster and reach further than ever before,” BlackRock’s Larry Fink observed in his highly influential 2019 letter to CEOs . Fink argued that “[a]s divisions continue to deepen, companies must demonstrate their commitment to the countries, regions, and communities where they operate.” Walking the talk on purpose strengthens the company and its community. “Profits,” Fink notably concluded, “are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked.” (For more about foundational perspectives, see sidebar, “ESG for the long term.”)

The linkage from ESG to value creation is solid indeed. Five levers in particular, across the bottom and top lines, can be difference makers. In a world where environmental, social, and governmental concerns are becoming more urgent than ever, leaders should keep those connections in mind.

Tim Koller is a partner in McKinsey’s Stamford office, and Robin Nuttall is a partner in the London office. Witold Henisz is a professor at the Wharton School of the University of Pennsylvania.

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18 Business Model Example Explained

  • July 29, 2020

business model example

Ever wonder how your business will make money? Generating income by selling your products is the basic idea that comes to our mind. While this certainly is one of the types of business models. There are more than 50 different business models.

The blog discusses 18 examples of business models widely used by some top startups giving you an idea about which one and when to opt for.

Most profitable startups never invented new business models. They prefer to borrow it from other organizations & yes it works.

The Razor and Blades model have been highly profitable for Adobe document readers and Verizon’s cell phone business. The cheap-chic business model works for IKEA in the home furnishing business & Trader Joe’s in the grocery business.

Today, the type of business model depends on the usage of technology and innovation. Sometimes, one little twist in a present business model can deliver strong results in a new industry.

So, why do people choose Facebook? It is simply because they can chat and connect with other people around the world (operating model) and do not even charge for it (revenue model).

In this blog, starting with a short description of what exactly is a business model, I will discuss 18 Business Model Examples opted by startups and established firms. I will help you analyze which one works for you.

What is a Business Model?

A business model is a logical structure that supports the feasibility of the business. Designing a business model requires deep thought and analysis.

A business model provides a reason for the customer to choose the offering provided by your company over others. Business models focus on core strategy, customer interface, value network, and resources.

“All it really meant was how you planned to make money” — Michael Lewis

How do you write a business model?

Business Models are created with the help of a business model canvas . In more simple terms, every business model has three parts –

  • designing and manufacturing the product
  • From finding the right customers to selling and distributing the product
  • how the customer will pay and how the company will generate income

As you can see, a successful business model just needs to collect more money from customers than it costs to make the product. You can lower costs during design and manufacturing, finding more effective methods of marketing and sales & figuring out an easy way for customers to pay.

You don’t have to come up with a new business model, you could take an existing business model and offer it to different customers. For example, restaurants mostly work on a standard business model and focus their strategy by targeting different kinds of customers.

Business Model Example

Many people associate business models with lengthy documents but business models do not need to be a long document. A concise, visual document is required to distill the key elements of your strategy and ensure everyone understands the high-level approach. So let’s discuss the various business models with their examples.

1. Subscription Business Model

In the subscription business model, customers pay a fixed amount of money on fixed time intervals to get access to the product or service provided by the company. The major problem is user conversion; how to convert the users into paid users.

When & Why you should opt for the Subscription Business Model.

The subscription model is used because of its pricing structure, in which a business will charge customers a recurring fee to access their product or service.

This model should be used by those companies in which the revenue strategy depends on a customer paying multiple (recurring) and subscription based payments  for prolonged access to a good or service.

So let’s see how this model works for Netflix . Netflix is a subscription service providing online streaming videos that work on a membership-based model. The clients pay every month for access to TV shows, documentaries, motion pictures, and other media content in various qualities.

Subscription Business Model

2. Freemium Business Model 

“Freemium” means “Free” and “Premium” service. It offers two types of services to the customers, ‘free service’ and ‘paid service’. The free service users have limited access to the basic features whereas the premium services are unlocked when the person buys the paid service.

When & Why you should opt for the Freemium Business Model.

The Freemium model should be adopted by companies when they are looking to grow their business and brand quickly. This model is preferred because everybody likes free stuff, and nobody wants to pay money for something they’re not sure will work for them.

So, the freemium model addresses that by providing such an enticing offer: giving users the ability to experience a new product without any risk.

For instance, MailChimp is an email marketing platform that began as a paid service and later added a freemium option in 2009. MailChimp allows the users to collect email list subscribers, create autoresponder series, send regular email updates, and automate their marketing.

Its free plan allows the users to have 2,000 subscribers and 12,000 emails per month, whereas the priced plans give more advanced features. The regular user mostly turns into a paid user as it would be hectic to change the platform once you have 2,000 listed subscribers.

Freemium Business Model 

3. Open Source Business Model

Open source business model provides service/product offered for free, and a business/enterprise version which is paid. In the freemium and business model, the free product is built, developed, and maintained by the company centrally.

In the open-source model, the free product is built, developed, and in part, maintained by an open community of developers. Those developers are a part of an independent community.

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When & Why you should opt for the Open Source Business Model.

Open source business models should be used by a company when they have an aim to create a superior product, which immediately has a competitive advantage, and which generates multiple scalable revenue streams.

The open-source business model relies on shifting the commercial value away from the actual products and generating revenue through ancillary services like systems integration, support, tutorials, and documentation.

Let’s discuss the open-source business model of Fastly.Inc which is an American cloud computing services provider. Fastly leverages an active community of developers and a good chunk of revenue is spent on sales and marketing processes. For a monthly fee, customers get access to the platform & account management with enhanced customer support.

Freemium Business Model 

4. Consulting Business Model

Unlike traditional businesses that have a clearly defined product or tool to sell, a consulting or agency business model provides a specific set of services for a fee. While this business model can be applied to almost any industry, the main drawback of consulting business models is that you should have expertise and authority around your brand.

When & Why you should opt for the Consulting Business Model.

Companies adopt consulting business models as they don’t have either the time or expertise to do specific tasks. This business model should be followed by those companies whose unique value proposition is based on the knowledge and expertise of its people.

For example, Alcor Fund which is a global private equity fund that acts as an advisory with a strong knowledge of the investment market. It offers fund and asset management, merger and acquisition, private equity, and corporate finance.

  It operates through its investment bank & its consulting wing under ALCOR Advisors that advise the clients to take their companies on a rapid growth path through a focused strategy.

  Neil Patel . Neil Patel Digital is the SEO and digital marketing agency that allows Neil Patel to monetize its traffic by offering free basic content marketing tools while charging for the premium.

  The idea was simply that you generate enough qualified leads, set up a team to manage those projects, and grow the agency based on on-coming projects.

Consulting Business Model

5. Distributor Business Model 

A distribution-based business model focuses on a company’s ability to have one or a few key distribution channels to connect to its final user or customer.

When & Why you should opt for the Distributor Business Model.

This model should be adopted when the survival of a company depends on its ability to have one or a few key distribution channels to connect to its final user or customer. In a distribution model, you don’t need to manufacture products of your own, you can comfortably engage in the distribution of the products of a company or several companies at the same time.

Unilever spends its major part of revenue in maintaining a proper distribution. The company is providing a proper distribution network to its brands by working with thousands of retailers and wholesaler suppliers across the world, with a massive supply chain.

Big companies like Unilever having a large turnover, focus on their distribution strategy. They spent most of their resources to tap into channels that can prove to be successful to scale up their business.

Distributor Business Model 

6. Aggregator Business Model 

An aggregator business model involves an aggregator that might act as a middleman. In an aggregator model, it’s the aggregator that keeps interacting with the two or more parties involved.

When & Why you should opt for the Aggregator  Business Model.

Aggregator business model should be followed by a company in which it is not just a mediator but a firm with a brand for providing the goods/services from smaller providers. This model allows a company to connect with different goods/service providers and sell its goods/services under its brand.

For instance, Google shows users a search result page, and the same Google handles the ad inventors. Hence users and advertisers don’t interact with each other to set the price. Google as a search engine is more of an aggregator, where the company centrally enriches its index and builds up its rankings.

Aggregator Business Model 

7. Conceptual Business Model 

A conceptual business model is a diagram that demonstrates to us how an industry or business functions. It shows an essential element in the business and tells how those elements relate to each other.

When & Why you should opt for the Conceptual Business Model.

Businesses should adopt a conceptual business model if their business often requires concepts and ideas to create innovative products. This model defines project scope, establishes entities with concepts, and provides a high level of understanding in different product development cycles.

For example, Maruti Suzuki a car company might create a conceptual model of a new car to be introduced in the market. This model is based on several or a single concept in design.

Conceptual models often require research to generate ideas into more specific concepts. Companies should perform consumer research to get an idea for what appeals most to consumers.

Conceptual Business Model 

8. Razor and Blade Business Model

In the razor and blade model, the basic product (hook) is offered cheaply or free while the complementary product or refill (bait) is sold expensively. We cannot use the basic product without a corresponding product. It is easy to attract customers with the “bait” product because it seems to them like they are getting a bargain. This model is one of the Small business strategy examples.

When & Why you should opt for the Razor and Blade Business Model.

Razor & Blade models are applied by companies when they have a complementary product that encourages repeat purchases. This business model allows the companies to sell their initial product for little to no profit & relying instead on the initial sale to cover their customer acquisition costs.

Companies like Apple use an inverse razor and blade, business model. Apple has created platforms like the iTunes and App Store, which sell songs, apps, movies, or web series at an appropriate price. Apple also charges premium prices on its devices like the iPhone, iPad, and Mac.

Razor and Blade Business Model

9. SaaS Business Model

SaaS or Software as a Service business model is a centrally-hosted software that is hosted on a cloud infrastructure. Customers pay a subscription fee to utilize the software.

Zendesk is a customer service ticketing system famous for its usability by small, medium, and even large businesses. It provides a better customer service experience.

XERO is a huge SaaS model and a popular choice of many accountants to manage their clients.  Auditox Accountancy  uses around 5 different accountancy SaaS programmes but Xero is the one that they say most people feel comfortable with. This is a classic example of something used on mass markets with a high margin of return.

SaaS Business Model

10. Direct Sales Business Model 

When it comes to the small business model, the direct sales business model involves selling a product directly to the targeted customer. chubbies adopted a direct sales model.

Direct Sales Business Model 

11. Advertising Business Model

The advertising model works by providing a free product or service that people want to consume. Later, it displays ads to those readers or viewers. Youtube is following the ad-based business model.

Advertising Business Model

12. Affiliate Marketing Business Model

An affiliate business model allows a firm to sell the products of other companies on their website. Like this company named Khojdeal is selling bluestone products with the help of discount coupons or the famous  Amazon Affiliate Program  follows the affiliate marketing business model.

Affiliate Marketing Business Model

13. Peer to Peer Business Model

A P2P business is a platform between consumers and individual service providers. It provides revenue by taking a percentage of all sales made through their platform.

Airbnb follows a peer to peer business model by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%.

Peer to Peer Business Model

14. Franchise Business Model

A franchise exists when a parent corporation creates a unique product, a strong brand, and a replicable business model. Later, it sells it to others to own and operate independently. Starbucks is a retail company that sells coffee-related beverages.

Franchise Business Model

15. Amazon Business Model

The Amazon model includes online stores (which account for 52% of Amazon revenues), as well as physical store locations. It also includes AWS services like site hosting, subscription services, third-party sellers, and advertising revenue.

Jeff Bezos famously said “Your margin is my opportunity”

Amazon Model

16. Ecommerce Business Model

The eCommerce model focuses on selling products by creating a web-store on the internet (online shop). Amazon, Alibaba , ebay , olx , and Walmart are some of the big companies that have adopted an e-commerce business model.

Ecommerce Model

17. On-Demand Business Model

The on-demand business model is based on “Access is better than ownership rule”. The products & services are easily accessible to the customer in less time. On-demand laundry & dry cleaning service of uber is evolving & has radically mixed well.

business model for investment companies

18. Uber Business Model

Uber runs according to a ‘two-sided’ marketplace business model. The company acts as the middleman or broker between the drivers and those who need a ride. The company earns profits from each transaction, taking a percentage from gross booking.

Uber Model

Before we conclude, I would like to share an important factor to keep in mind that the most successful business models are dynamic and repeatedly evolving. Brands operate with more than one business model. The business model examples can help entrepreneurs find the formula to build a successful company.

Business models are helpful for analysis to understand how businesses work. Though they have found customers, the model fails because of lack of resources. According to Bill Gross, the founder of Idealab, “ timing is the most important factor ”.

The success of a business model depends on the timing, context, and market conditions. Successful and profitable business models generally have substantial brand equity with a strong distribution network.

We at Alcor help founders build their idea from scratch to the growth stage. Explore your fundraising options with us on Venture capital , private equity, debt funding and more.

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How a century-old investment firm with $288 billion in assets identifies the companies set to dominate much of the stock market's outperformance, according to one of its fund managers

  • Baillie Gifford's Long Term Global Growth Fund utilizes a bottom-up investment approach.
  • The fund's core strategy focuses on business outcomes over a five-year period and beyond.
  • It's top holdings are Nvidia, Amazon, PDD Holdings, ASML, and Atlassian.

Quarterly earnings are among several inflection points for stocks in the short term. Wall Street bets on companies that either meet, miss, or beat expectations. Then, there are the macro trends, economic data, and the Federal Reserve's hawkish or dovish take on interest rates, which can trigger the market to move in different directions.

And in an environment where the consensus is split regarding whether the central bank will begin cutting rates , deciphering between various indicators can be challenging.

It's also a short-sighted approach as far as Baillie Gifford, an investment management firm with $288 billion under management, is concerned. The firm started as an investment trust in 1908 — before World War I was fought. It touts itself as taking a long view when making bets on companies.

For the most part, macroeconomic and political considerations don't top the list of the most important variables that impact Baillie Gifford's long-term strategy.

"Our investment approach is bottom up," said Gemma Barkhuizen, an investment manager at the firm and one of the decision-makers on the Baillie Gifford Long Term Global Growth Fund. "So we're interested in company characteristics. It's not top-down, it's not thematic."

It's a part of the investing corner where there's less competition from other investors and more fundamental analysis at play. In other words, if a company's fundamentals are strong enough, it can overpower weak sentiments or macroeconomic conditions. Barkhuizen pointed to one of their portfolio holdings as an example of how a company's resilience can weather macro storms: PDD Holdings (PDD), a Chinese agriculture online retailer, has been a top contributor in returns despite weak sentiment and a weaker macro environment in China, she said. As of February 21, the stock had gained 55% over the previous 12 months.

The Long Term Global Growth strategy, which has $43 billion under management, was launched in 2004 and has since returned 797% net of fees; its benchmark, the MSCI ACWI, returned 358% as of December. The fund's annualized return over the same period is 12.5%, as opposed to its benchmark at 8%. In 2014, its mutual fund counterpart was launched and has had an annualized return of 14% versus its benchmark's 8%.

At the core of the strategy is a focus on business outcomes over five years and beyond rather than quarterly outcomes. This alleviates the challenge of trying to compete with others and, instead, assesses the same information market players are looking at from a different perspective, she said.

For instance, tough margins in one quarter for a particular stock might be why many investors want to sell, but the same headwind could be a buy signal if there are worthwhile payoffs over five years, she added.

Another example is Nvidia, which is the largest holding within the long-term fund at 8.2%. Exposure to the mega-tech company was not made as part of a thematic AI prediction, Barkhuizen noted. It has been part of the portfolio for seven years because of underlying characteristics and dominance within the GPU market, which opened it up to capitalize on opportunities in accelerated computing.

"The starting point of the long-term global growth strategy is the observation that it is a very small minority of companies that are going to account disproportionately for outperformance. And this outsized impact of a small number of companies is something that we've long observed within Baillie Gifford's investment strategies."

Companies that use new business models to expand market share have also been "a rich vein to tap," irrespective of industry or country, she said. A great example is when a company deploys user-generated content like YouTube or TikTok. Roblox has done something similar by applying it to the gaming industry and allowing players to build their own games on the platform. This makes it uniquely scalable, she said.

"The gaming industry is defined by billions of dollars of capital investment required to support individual games, which then end up being very hit-driven. And what the user-generated content model of Roblox does is it offloads all of that risky, capital-intensive development onto its users, and that's allowed it to actually be much more scalable," Barkhuizen said. "And we have actually seen that it's been able to sustain growth over periods where traditional gaming companies have struggled."

A bottom-up, stock-picking strategy

The research framework that is the bedrock of the filtering process for the long-term fund looks at 10 key variables. They include:

Is there room to at least double sales over the next 5 years?

What happens over 10 years and beyond?

What is the competitive advantage?

Is the business culture clearly differentiated? Is it adaptable?

Why do customers like the company? What societal considerations are most likely to prove material to the long-term growth of the company?

Are the returns worthwhile?

Will they rise or fall?

How does the company deploy capital?

How could it be worth five times as much, or more?

Why doesn't the market realize this?

Barkhuizen noted that one core consideration that isn't always clear on a company balance sheet is whether the organization has an aligned management team focused on optimizing over a long-term period.

For example, salaried CEOs in their position for three years aren't incentivized to optimize company value over five years and beyond, she said. Characteristics that tend to secure this alignment are still founder-led companies or leaders with skin in the game by having a large proportion of inside ownership. In other words, much of their wealth is tied to the company's success. She added that these factors make it more likely that management teams will make the necessary investments required to deliver longer-term payoffs even when it's at odds with this quarter or next quarter.

Another consideration that isn't always apparent on the balance sheet is an adaptable business culture, she noted. Clues about culture can be found in how it's structured. For example, a company could have a CEO making capital allocation decisions across several mini companies or divisions that each exercise a degree of autonomy over the areas they oversee. This makes for an adaptable structure. Conversely, a more rigid structure is when the CEO governs with a top-down approach. This setup typically makes adaptability more difficult. Another example of a flexible system is decentralized structures, such as the online gaming platform Roblox, which allows users to develop their own games.

The top five holdings within the fund are Nvidia (NVDA), held since 2016, Amazon (AMZN), PDD Holdings (PDD), ASML (ASML), and Atlassian (TEAM).

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Watch: The head of investment themes at UBS explains the big trends every investor should know

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JUST RELEASED: View the 2024 Franchise 500 Ranking

Which Franchise Model Is Right for You? Here's How to Choose There are thousands of brands and concepts, but franchises generally fall under two business models: "brick-and-mortar" and "service-based." Which is the best choice for you?

By David Busker • Feb 13, 2024

Key Takeaways

  • If you're ready to buy a franchise, there are two business models to consider: brick-and-mortar and service-based. Deciding between the two may be hard, but it doesn't have to be.
  • The investment cost, potential for scalability, location and three other components below will help you decide which one you should choose.

Opinions expressed by Entrepreneur contributors are their own.

A major decision potential business owners must make when considering a franchise is determining what type of business they should run. There are thousands of brands and concepts, but franchises generally fall under two business models: "brick-and-mortar" and " service-based ."

Think about a franchise you know. Any franchise. Possibly one that offers services that you use consistently. Is it a hair salon? A fitness studio? A lawn care company? Maybe a moving service?

All of these are franchises, but in terms of a business model, the hair salon and fitness studio fall under one umbrella — location-based businesses with retail storefronts where the customer receives the service at a fixed-base location. Meanwhile, the lawn care company and moving service fall under another umbrella — service-based brands — which do not have a storefront or customer-facing real estate and the service is provided at the customer's location.

Here are some of the key differences between brick-and-mortar and service-based businesses, as well as the criteria to build one, so you are more informed when choosing a franchise model.

Related: 7 Essential Questions to Ask Yourself Before Starting a Franchise

1. Investment cost

Real estate is what usually drives franchising investment costs . The more real estate intensive, the greater the investment level. Location-based, brick-and-mortar franchises generally have higher initial investments. Building the retail space can be pricey. Picture a fitness studio — you need equipment, like bikes or pilates machines, but also a high-tech sound system, televisions, changing rooms, showers, etc. Not to mention the flooring, interior architecture (walls, stage, various rooms), trade dress and more.

On the other hand, a service-based brand doesn't necessarily require real estate (some may even operate from a home office). Some service-based brands require storage space to house vehicles or equipment that are deployed at the customer's location. Less visible and lower-cost industrial spaces are ideal for these franchises. Typically, these spaces require few leasehold improvements compared to a customer-facing retail space.

So what can you expect the investment costs to be for each of these options for a single unit or territory?

Although it isn't definitive (there are always exceptions), common ranges are:

  • Brick-and-mortar: $250,000+
  • Service-based brands: under $300,000

2. Ramp-up time

Ramp-up time goes hand-in-hand with investment costs. The time it takes to ramp up to a monthly positive cash flow and establish repeat business both indicate important benchmarks for any sustainable business. In terms of speed, service-based brands are more likely to ramp up quickly because of a lower investment cost upfront and lower fixed overhead costs . Let's consider a moving service brand. Once you have the equipment and employees in place, the month-over-month operation costs are more closely linked to revenue growth; thus, these models can often grow to cash flow more quickly.

Alternatively, a brick-and-mortar brand (like a salon) will have high upfront investment costs (retail space, individual stations, chairs, mirrors, hair wash/dry stations, etc.) and will likely take time to establish a strong customer base in a particular community. However, they tend to have more repeat business and durable income streams over time.

Related: The Rise of Click and Mortar — Why Online Businesses Should Consider Opening a Physical Store

3. Scalability

Brick-and-mortar businesses are typically more scalable . Once you have a single successful franchise, it's easier to manage and build an empire by spreading costs over multiple locations. But remember, due to the costly initial investments, building costs will be similar each time you open a new location.

With a service-based brand, rather than building more physical locations to expand, you can expand your territory and drive more penetration within your territories. While this isn't without additional costs (consider gas money, employees to keep up with demand, more frequent equipment maintenance, etc.), it requires incremental investments since your revenue justifies it and creates economies of scale. By purchasing additional territories in a service-based brand, you scale your revenue and income multiplier without the same proportional increase in capital investment.

4. Technology

One area that is relatively equal in terms of usefulness and accessibility is technology. In recent years, technology has transformed the franchise world . Specifically, repeatable but necessary tasks have been streamlined and simplified through technology. For brick-and-mortar brands, it's common to see customers scheduling services directly (hair appointments, fitness class bookings, etc.). For service-based brands, customers can book service calls, and employees can perform tasks in real-time to keep business moving, such as ordering parts, creating estimates, etc.

5. Location risk

Location is key for brick-and-mortar franchise brands. It's often a balancing act of finding real estate that is within an acceptable price range and in a popular location that creates consistent repeat business. You will be offering services in a fixed location, so the further away you are from the customer, the less likely the customer will travel to your location. For example, a fitness studio needs to be convenient for customers to come to your location three to four times per week. The more frequently a customer would ideally like to visit your franchise, the higher density is needed for the same market radius.

For a service-based brand, location is not as important for overall success. Since you or your employees will be traveling to the customer's location, there is no site selection risk, and you are free to penetrate deeper and deeper into a market. However, it is worth noting that if you do expand to multiple territories, you may want to consider renting additional warehouse or storage space to optimize efficiency.

Related: Start Your Own Business or Buy a Franchise: Which Is Right For You?

6. Recession resistance

Lastly, one factor to consider lies in the recession resistance of your franchise. Brick-and-mortar brands often offer more discretionary services. These are everyday services, to be sure — hair care, nail salon, etc. — but they are not always considered everyday essential services. On the other hand, service-based brands often are essential everyday services that must be performed despite fluctuating market trends — think HVAC, plumbing, yard care or restoration.

At the end of the day, there is no one-size-fits-all franchise for every potential franchisee. But by understanding the basics of these umbrella categories, you can start to consider which business model type matches most closely with your business goals.

Entrepreneur Leadership Network® Contributor

Founder & Principal of FranchiseVision

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

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Nature Has Value. Could We Literally Invest in It?

“Natural asset companies” would put a market price on improving ecosystems, rather than on destroying them.

An illustration of a stack of $100 bills, with someone standing on top with a fishing pole, the line extending into Benjamin Franklin’s image on the top bill.

By Lydia DePillis

Picture this: You own a few hundred acres near a growing town that your family has been farming for generations. Turning a profit has gotten harder, and none of your children want to take it over. You don’t want to sell the land; you love the open space, the flora and fauna it hosts. But offers from developers who would turn it into subdivisions or strip malls seem increasingly tempting.

One day, a land broker mentions an idea. How about granting a long-term lease to a company that values your property for the same reasons you do: long walks through tall grass, the calls of migrating birds, the way it keeps the air and water clean.

It sounds like a scam. Or charity. In fact, it’s an approach backed by hardheaded investors who think nature has an intrinsic value that can provide them with a return down the road — and in the meantime, they would be happy to hold shares of the new company on their balance sheets.

Such a company doesn’t yet exist. But the idea has gained traction among environmentalists, money managers and philanthropists who believe that nature won’t be adequately protected unless it is assigned a value in the market — whether or not that asset generates dividends through a monetizable use.

The concept almost hit the big time when the Securities and Exchange Commission was considering a proposal from the New York Stock Exchange to list these “natural asset companies” for public trading. But after a wave of fierce opposition from right-wing groups and Republican politicians, and even conservationists wary of Wall Street, in mid-January the exchange pulled the plug.

That doesn’t mean natural asset companies are going away; their proponents are working on prototypes in the private markets to build out the model. And even if this concept doesn’t take off, it’s part of a larger movement motivated by the belief that if natural riches are to be preserved, they must have a price.

Beyond Philanthropy

For decades, economists and scientists have worked to quantify the contributions of nature — a kind of production known as ecosystem services.

By traditional accounting methods, a forest has monetary value only when it has been cut into two-by-fours. If a forest not destined for the sawmill burns down, economic activity actually increases, because of the relief efforts required in the aftermath.

When you pull back the camera, though, forests help us in many more ways. Beyond sucking carbon out of the air, they hold the soil in place during heavy rains, and in dry times help it retain moisture by shading the ground and protecting winter snowpack , which helps keep reservoirs full for humans. Without the tree-covered Catskills , for example, New York City would have to invest much more in infrastructure to filter its water.

Natural capital accounting, which U.S. statistical agencies are developing as a sidebar to their measurements of gross domestic product, puts numbers on those services. To move those calculations beyond an academic exercise, they need to be factored into incentives.

The most common way to do that is the social cost of carbon : a price per ton of emissions that represents climate change’s burdens on humanity, such as natural disasters, disease and reduced labor productivity. That number is used to evaluate the costs and benefits of regulations. In some countries — notably not the United States, at least on the federal level — it is used to set taxes on emissions. Efforts to remove carbon can then generate credits, which trade on open markets and fluctuate with supply and demand.

But carbon is just the simplest way of putting a price on nature. For the other benefits — wildlife, ecotourism, protection from hurricanes and so on — the revenue model is less obvious.

That’s what Douglas Eger set out to address. He wanted to work for an environmental group after college, but on his conservative father’s advice he instead made a career in business, running companies in pharmaceuticals, tech and finance. With some of his newly built wealth, he bought a 7,000-acre tract northwest of New York City to preserve as open space.

He didn’t think philanthropy would be enough to stem the loss of nature — a seminal 2020 report found that more than $700 billion was needed annually to avert a collapse in biodiversity. Government wasn’t solving the problem. Socially responsible investing, while making progress, wasn’t reversing damage to critical habitats.

So in 2017, Mr. Eger founded the Intrinsic Exchange Group with the goal of incubating natural asset companies, NACs for short. Here’s how it works : A landowner, whether a farmer or a government entity, works with investors to create a NAC that licenses the rights to the ecosystem services the land produces. If the company is listed on an exchange, the proceeds from the public offering of shares would provide the landowner with a revenue stream and pay for enhancing natural benefits, like havens for threatened species or a revitalized farming operation that heals the land rather than leaching it dry.

If all goes according to plan, investments in the company will appreciate as environmental quality improves or demand for natural assets increases, yielding a return years down the road — not unlike art, or gold or even cryptocurrency.

“All of these things, if you think about it, are social agreements to a degree,” Mr. Eger said. “And the beauty of a financial system is between a willing buyer and seller, the underlying becomes true.”

In discussions with like-minded investors, he found an encouraging openness to the idea. The Rockefeller Foundation kicked in about $1.7 million to fund the effort, including a 45-page document on how to devise an “ecological performance report” for the land enrolled in a NAC. In 2021, Intrinsic announced its plan to list such companies on the New York Stock Exchange , along with a pilot project involving land in Costa Rica as well as support from the Inter-American Development Bank and major environmental groups . By the time they filed an application with the S.E.C. in late September, Mr. Eger was feeling confident.

That’s when the firestorm began.

The American Stewards of Liberty, a Texas-based group that campaigns against conservation measures and seeks to roll back federal protections for endangered species, picked up on the plan. Through both grass-roots organizing and high-level lobbying, it argued that natural asset companies were a Trojan horse for foreign governments and “global elites” to lock up large swaths of rural America, particularly public lands. The rule-making docket started to fill up with comments from critics charging that the concept was nothing but a Wall Street land grab.

A collection of 25 Republican attorneys general called it illegal and part of a “radical climate agenda.” On Jan. 11, in what may have been the final straw, the Republican chairman of the House Natural Resources Committee sent a letter demanding a slew of documents relating to the proposal. Less than a week later, the proposal was scratched.

Unexpected Headwinds

Mr. Eger was dismayed. The most powerful forces arrayed against natural asset companies were people who wanted land to remain available for uses like coal mining and oil drilling, a fundamental disagreement about what’s good for the world. But opponents also made spurious arguments about the risks of his plan, Mr. Eger said. Landowners would decide whether and how to set up a NAC, and existing laws still applied. What’s more, foreign governments can and do buy up large tracts of land directly; a license to the land’s ecological performance rights would create no new dangers.

There is also pushback, however, from people who strongly believe in protecting natural resources, and worry that monetizing the benefits would further enrich the wealthy without reliably delivering the promised environmental upside.

“If investors want to pay a landowner to improve their soil or protect a wetland, that’s great,” said Ben Cushing, the director of the Sierra Club’s Fossil-Free Finance campaign. “I think we’ve seen that when that is turned into a financial asset that has a whole secondary market attached to it, it creates a lot of distortions.”

Another environmental group, Save the World’s Rivers, filed a comment opposing the plan partly because, it said, the valuation framework centered on nature’s use to humans, rather than other living things.

To Debbie Dekleva, who lives in Ogallala, Neb., the prospect that a natural asset company could enroll large tracts of land seems like a very real threat. For 36 years, her family has worked to commercialize milkweed, a wild plant that produces a strong fiber and is the only thing that the caterpillars of imperiled monarch butterflies will eat. Ms. Dekleva pays local residents to collect the pods from milkweed stands with permission from friendly landowners, and then processes them into insulation, cloth and other products.

That sounds like a type of business that might contribute to a NAC’s value. But Ms. Dekleva suspects that she wouldn’t be part of it — faraway investors and big companies might lock up the rights to milkweed on surrounding land, making it harder for her to operate.

“I think that whoever writes the rules wins,” Ms. Dekleva said. “So let’s say Bayer is doing regenerative agriculture, and they’re going to say, ‘And now we get these biodiversity credits, and we get this, and we get this, and we get this.’ How does someone like me compete with something like that?”

Such opposition — the kind that stems from deep skepticism about financial products that are marketed as solving problems through capitalism, and questions about who is entitled to nature’s gifts — may be hard to dislodge.

Mr. Eger said he built safeguards into the proposed rule to guard against concerns like Ms. Dekleva’s. For example, each company’s charter is supposed to include an “equitable benefit sharing policy” that provides for the well-being of local residents and businesses.

For now, Intrinsic will seek to prove the concept in the private markets. The company declined to disclose the parties involved before the deals are closed, but identified a few projects that are close. One is attached to 1.6 million acres owned by a North American tribal entity. Another plans to enroll soybean farms and shift them to more sustainable practices, with investment from a consumer packaged goods company that will buy the crop. (The pilot project in Costa Rica, which Intrinsic envisioned as covering a national park in need of funding to prevent incursions from arsonists and poachers, stalled when a new political party came to power.)

And the concept remains attractive to some landowners who’ve managed to wrap their heads around it. Take Keith Nantz, a cattle rancher who has been trying to build a vertically integrated, sustainable beef operation across the Pacific Northwest. He and a few partners would like to move to less chemically intensive grazing practices, but banks are hesitant to lend on a project that could reduce yields or jeopardize crop insurance coverage.

A natural asset company could be a piece of his financing puzzle. And to Mr. Nantz, the opposition comes mostly from a place of fear.

“There’s nothing being forced by a government or state or organization to be a part of this or not,” he said. “We can choose to be a part of this, and hopefully it’s a great opportunity to bring some capital.”

Catrin Einhorn contributed reporting.

Lydia DePillis reports on the American economy. She has been a journalist since 2009, and can be reached at [email protected]. More about Lydia DePillis

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