In 2014, a startup called Homejoy was making waves in the on-demand home cleaning market. It had raised over $40 million in venture funding, had a growing customer base, and seemed destined for success. Yet, just a year later, Homejoy shut down. The reason? A flawed business model – it relied heavily on discounts to attract users, suffered from high customer churn, and struggled with worker classification issues. Investors saw these cracks early on, but the founders didn’t address them in time.

This story is not unique. Many promising startups fail to secure funding – or worse, collapse post-investment – because of overlooked weaknesses in their business models. Investors are trained to spot these gaps quickly, and if founders don’t address them proactively, they risk losing credibility and funding opportunities.

The good news? Founders can systematically assess and fix their business models before pitching to investors. Using frameworks like the Lean Canvas, alongside real customer validation and financial modelling, startups can ensure their business is truly investment-ready. This article will explore the most common business model gaps, practical tools to identify them, and actionable steps to strengthen your business before investors walk away.

The Most Common Business Model Gaps

Investors are looking for startups with scalable, sustainable, and competitive business models. Here are the most frequent weaknesses that cause investor hesitation:

1. Unclear Customer Segments & Problem Definition

A startup’s success depends on solving a real problem for a clearly defined customer group. Yet, many founders define their audience too broadly or fail to validate their assumptions.

Red flag for investors:

• A founder claims their B2B SaaS startup serves “small businesses” but can’t specify which industry, company size, or decision-maker they target.
• A D2C skincare brand believes their product is “for everyone,” leading to inefficient marketing and high customer acquisition costs.

How to fix it:

• Conduct customer interviews and surveys to validate pain points.
• Use a Buyer Persona framework to define primary and secondary customer segments.
• Leverage data-driven market research to refine targeting.

Example: Airbnb initially marketed itself to budget-conscious travellers. However, after analysing user behaviour, it realised business travellers were a lucrative segment. By adding features like business travel bookings, Airbnb expanded its addressable market and strengthened its business model.

2. Weak Value Proposition

Investors constantly ask: Why would customers choose you over competitors? If a startup cannot clearly articulate its unique value, it won’t stand out in a crowded market.

Red flag for investors:

• A food delivery startup claims it’s better than Uber Eats but lacks clear differentiation.
• A fintech company says they offer “great customer service” but has no scalable advantage.

How to fix it:

• Use the Value Proposition Canvas to refine messaging.
• Focus on customer pain points and demonstrate how your product offers a 10x improvement over alternatives.
• Highlight unique features, partnerships, or technology that create a competitive moat.

Example: Revolut, a fintech unicorn, didn’t just promise “better banking.” It eliminated foreign exchange fees, a pain point traditional banks ignored. This clear differentiation helped it attract millions of customers.

3. Inconsistent or Unrealistic Revenue Model

Having an innovative product isn’t enough – investors need to see how revenue will be generated, sustained, and scaled.

Red flag for investors:

• A hardware startup adopts a subscription model without proving whether customers are willing to pay recurring fees.
• A marketplace startup charges unsustainably low commission rates to attract users but lacks a long-term pricing strategy.

How to fix it:

• Align the pricing model with market expectations and competitor benchmarks.
• Test different monetisation strategies with early adopters before scaling.
• Create financial projections that reflect realistic customer acquisition and retention assumptions.

Example: Netflix shifted from a DVD rental service to a subscription streaming model when it saw the potential for recurring revenue. This decision helped it dominate the entertainment industry.

4. Overlooked Costs & Poor Unit Economics

Investors will scrutinise whether a startup’s cost structure supports scalability. Many founders underestimate costs or fail to optimise their unit economics.

Red flag for investors:

• A D2C fashion brand spends £50 to acquire a customer, but their customer lifetime value (LTV) is only £30 – a fundamentally unviable model.
• A startup lacks clarity on gross margins, operational expenses, or CAC (Customer Acquisition Cost).

How to fix it:

• Conduct a unit economics analysis (CAC, LTV, gross margins).
• Optimise customer acquisition channels to improve efficiency.
• Model different financial scenarios to identify risks.

Example: Blue Apron, the meal-kit startup, struggled with high CAC and low customer retention. Investors flagged this early, but the company failed to fix it – leading to stock price collapse after IPO.

5. Lack of Competitive Differentiation

Investors need to see how a startup defends its market position. Many founders fail to define a sustainable competitive edge.

Red flag for investors:

• A B2B SaaS company has no patent protection, proprietary data, or significant network effects.
• A retail startup competes on “better service” rather than a defensible advantage.

How to fix it:

• Use a Competitive Positioning Map to identify market gaps.
• Strengthen differentiation through unique IP, exclusive partnerships, or superior technology.
• Build network effects or other scalable advantages.

Example: Shopify outcompeted traditional e-commerce platforms by focusing on ease of use, customisation, and an extensive app ecosystem, making it the go-to platform for small businesses.

Practical Tools to Identify Business Model Gaps

1. Lean Canvas – A one-page framework to map out key business assumptions.
2. Customer Discovery & Validation – Use surveys, user testing, and pre-sales to confirm demand.
3. Financial Modelling – Conduct sensitivity analysis on revenue scenarios.
4. Investor Feedback – Engage with potential investors early for constructive criticism.

Actionable Steps to Strengthen Your Business Model

• Conduct a self-audit using the Lean Canvas to challenge assumptions.
• Test pricing and revenue models with pilot programmes and early adopters.
• Validate with real customers to ensure product-market fit.
• Seek outside perspectives from mentors, advisors, and investors.

Conclusion

Investors expect rigorous business model validation before committing funds. By proactively identifying and fixing gaps in customer segmentation, value proposition, revenue models, and competitive positioning, startups can significantly improve their chances of securing investment.

Founders should leverage structured frameworks like the Lean Canvas, conduct real-world testing, and seek early investor feedback. Now is the time to audit your business model and ensure it’s built for growth – before an investor tells you what’s broken.