More that one third of the Inc 500 founders we interviewed significantly altered their initial concepts, and another third reported moderate changes.
Identifying the riskiest assumptions is an excellent use of your time up front. Much better than building technology (which is where almost everyone wants to start). All that said, it doesn’t really matter how you keep track of this or think about it. Just that you actually do it.
Economic impact of risk factors
In How to Measure Anything, Douglass Hubbard analyzed variables that had potential economic impact on the success of an IT project in established companies. By economic impact, these are random occurrences which could happen with significant negative variability. They would be realized as an unexpected cost. These risk factors included things like: initial development costs, adoption rate, productivity improvement, revenue growth and so on.
He evaluated the usefulness of all of these variables and had the following observations:
The 60 or more major risk/return analyses I’ve done in the past 16 years consisted of a total of over 4,000 individual variables, or an average of a little over 60 variables per model. Of those, a little over 120 (about 2 per model) required further measurement according to the information value calculation.
This mirrors the pattern I’ve seen when working with startups and established companies launching new products. Here’s the pattern with respect to assumptions:
- Most of assumptions are completely trivial.
- A handful are important.
- And a few might be absolutely critical to getting your business off the ground.
In short, there are hundreds of potential metrics and numbers you could track. Most of them are irrelevant. Also there is a cost to checking/monitoring them, so in fact it’s better not to check and monitor them.
Approach 1: Tracking risk factors in spreadsheet
For example, when you do financial modelling for a traditional business plan, you have one tab that lists out the assumptions you’re making and feeding into the financial model.
You have to make some kind of revenue projections. What do you base that on? Instead of just operating in a vacuum, you can proactively try to figure out what assumptions you’re making, and then go run some experiments to validate whether these assumptions are true.
Well, in the case of a new product, you actually want to look at assumptions a bit wider than just the financial ones. Revenues and costs are simply easy to map out, because they’re very visible. You see money coming in or leaving. But there are a number of other assumptions which will make or break you.
In short it’s fine to use a spreadsheet, but go beyond just financial modelling. There are a lot of other assumptions you’re likely to be making–which can have a material impact your venture.
Approach 2: Business Modelling using a canvas tool
To wit, consider that revenues and costs are just 2 of 9 boxes on Strategyzer’s business model canvas:
If you don’t have clear customer segments and channels to acquire them, the financial assumptions are arguably irrelevant. In practice, you make assumptions with respect to all 9 boxes in your entire business model canvas. If you aren’t deliberate, you will make them implicitly. Which could be a problem…
Revenue is easy to explain, simply because you need revenue projections for a financial forecast. But in fact, all nine boxes are based on assumptions that you’d ideally make explicit and figure out if they’re true as you execute on your idea.
Looking across the entire business model, one assumption in any of those boxes can kill your entire new product. This is exactly why new product development is different than running an existing business. In an existing business, the assumptions underlying the business are proven. And you are just looking to optimize what’s already working. Here, you’re potentially starting from scratch. If any of these critical assumptions are wrong, then your business model and your plan won’t work. Or won’t work very well, if they’re less critical.
Approach 3: Going even wider doesn’t make sense at an early stage
You can look even wider at longer term trends or risks that might affect you. But for an organization that doesn’t exist yet, it’s just not a good use of time if you want to get something off the ground.
Let’s zoom back to the year 2001, the year of the dot com crash. The basic technology was already developed for web consumer companies. And it seemed like every idea ever had already been tried. I mean, even pets.com had a go. Who would have thought that you’d need to buy pet food and pet toys via a San Francisco based e-commerce entity? From a entrepreneurship standpoint, the early gold rush of putting everything which existed online had seemingly ended. And yet focussing on that fact would have been unproductive.
So while you don’t need to go through hundreds of variables and studies and groupings, focussing on a limited number of categories for your business, you get most of the benefit.
Approach 4: The most important boxes according to published research
If you want a pointer to focus certain areas, consider this observation by Tedd Ladd in Harvard Business Review:
In my research with cleantech entrepreneurs, I found that teams that focused their testing on the triumvirate of target customer segment, value proposition, and channel performed twice as well as teams that did not spend much attention on those three categories.
Notice that this isn’t “revenues and costs” as per the traditional approach. In fact, this is the best place to spend your time.
Strategyzer was clever enough to create a “mini-canvas” that helps focus attention on those boxes + the revenue box. I don’t think it’s available for download, but that was the gist of it.
It doesn’t matter where you keep track of assumptions as long as you do
All in all, it doesn’t really matter what tooling you use to keep track of this stuff. What matters is that you think it through, keep track of your thought process, finally gather data to prove & disprove your chosen key assumptions. If there are 2 variables which matter, even intuitively, then you’ll be in much better shape if you at least try to check them. If you can’t do it quantitatively, by all means do user interviews.
My favorite tool to get start is my own Hero Canvas. Because I work with a lot of technical people and inventors, they have the technology side nailed. But they haven’t even thought through who might be interested in their product. It maps to the customer box in the Strategyzer Busisness Model Canvas. It’s also one of the three Ladd seemed to suggest that are worth prioritizing. And ultimately, you’ll only have a business if you can convince prospects to give your product a try.
- You will make hundreds of assumptions to get started on your new business.
- Most of them will be irrelevant. A few of them will be absolutely critical. Think through what they are.
- Then document this and figure out how you can gather some data to validate those assumptions.