Advantages of Asset Light Business Model

The asset-light business model has been the darling of the investment community as well as the entrepreneurs alike. There is an intense focus on going asset-light. However, companies are not able to determine what the optimal level of asset ownership is. In order to gauge this, they often conduct financial analysis which compares asset-light business models with regular business models.

Asset light business models have some distinct advantages over other models. These advantages have been elaborated in the article below:

1. Lower Upfront Investment: Asset-light business models can be started with significantly less capital. Most of the application-based business models only require the cost of application development and some customer acquisition costs, to begin with. This ability to generate higher revenues with lower investments allows the entrepreneurs and investors to begin small and hence dilute less equity at the founding stage.

2. Scalable: Asset-light business models are driven by intangible assets such as patents, brands, and other intellectual properties. Hence, when the business is expanded, the amount of money, as well as the time required, is very less. Asset light business models do not require the construction of factories or warehouses. Instead, they utilize the existing physical infrastructure by adding them to their service delivery network as and when required. This feature is very beneficial to investors. This is because venture capitalists generally provide a small amount of capital to a company.

   Once the company succeeds or shows signs of growing, more capital is pumped in. Venture capitalists are willing to pump in more capital to scale up the business of asset-light companies since the past records show that venture capitalists have gained greatly from this strategy.

3. Agility: The fact that asset-light business models can be scaled up quickly is also a testament to the fact that asset-light business models can be scaled down equally quickly as well. Hence, if a recession strikes and the revenue of the asset-light company starts to dwindle, the company can cut costs in order to stay competitive. The asset-light business model provides the entrepreneur as well as the investor with a lot of options to change the scale of the business and the resultant expenses at very short notice.

4. More Stable Profits: Investors are very inclined towards investing in businesses that can provide a stable cash flow. As we have mentioned above that the startup following the asset-light business model can change its expense structure at very short notice. Since most of the costs in the profit and loss statement of such startups are variable, the chances of loss are less.

   Startups lose a large amount of money if their business has a lot of overheads in the expense structure. In such cases, the revenues dwindle but the overhead expenses remain stable. This is unlikely to be the case with asset-light startup companies which is what makes them the darling of investors.

5. Higher Return on Investment: The asset-light business model focuses on controlling the business by having minimum ownership. Only the assets which are critical to the survival of the business are owned by the company. Lower ownership also means lower capital investment.

   Asset-light companies have a pay-as-you-go business structure. Hence, they are able to generate almost the same amount of revenue as companies with regular business models. However, since their ability to generate revenue is almost the same, these companies have a very high return on assets as well as return on investments. Asset light business models provide the company a form of leverage that they can use in order to maximize their profits. Investors and entrepreneurs are attracted to businesses with higher profit potential. Hence, they are keen on making investments in asset-light business models.

6. Avoids Diseconomies of Scale: When companies grow beyond a certain scale, management becomes quite difficult. For instance, when a company expands its last-mile connectivity, it is subject to a lot of issues.

   It is not easy to manage a network of hundreds or even thousands of points of sale. The management of these tasks can eat up a significant amount of resources of the company. However, asset-light business models can completely avoid this by delegating the task to the vendors. Managing vendors can also be difficult. However, the time and expense required are considerably less.

7. Transfer of Risks: The asset-light business model is based on the transfer of tasks from the business to external vendors. Companies tend to outsource their last-mile delivery, their computing requirements, and so on.

   It is important to note that whenever an activity is being transferred, the vendor is required to maintain a certain service level. Hence, the risk related to the activities is also transferred to the vendors. This is advantageous for the business since they are protected from many issues such as stockouts.

The bottom line is that there are several advantages to using an asset-light business model. This is the reason that many people refer to asset-light business models as being futuristic.

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