6 Ways to De-Risk Key Assumptions
Under lean startup methodology, founders attempt to eliminate as much uncertainty as possible to create some order out of the chaos involved in starting a company. Failures are inevitable; but, great founders know how to fail quickly and cheaply, rather than trying to take on boatloads of venture capital funding to solve a problem with an approach that doesn’t scale or, even worse, to solve a problem that does not exist or is not that painful.
When working with startups, Dreamit Managing Partner Steve Barsh uses the analogy of a mountain climber. What is the most basic critical assumption a climber makes? Probably, they are assuming that their rope will not break. If the rope breaks, they are done.
What are the key assumptions you are making as a founder? And how can you begin to test them as quickly and inexpensively as possible?
Here’s a business case showing the importance of testing key assumptions. Zappos is one of the most successful retail startups of all time; the online shoe retailer sold to Amazon for nearly $1 billion. Early in the company’s history, founder Nick Swinmurn approached his future co-founder Tony Hsieh about his idea to sell shoes online. Hsieh was initially skeptical, being under the assumption that people would not buy shoes online. Then he decided to test his assumptions, looking at the size of the footwear market ($40 billion at the time) and the percentage of the market already being sold by mail order (~5%). When data disproved his critical assumption, Hsieh decided to make the investment (and leap).
It’s critical to turn your assumptions into knowledge as quickly and cheaply as possible.
Similar to the scientific method taught in every grade school, founders must first form a hypothesis and then set up experiments. That’s what assumptions and de-risking are all about.
Biases to avoid when testing critical assumptions:
Congruence bias: This is the tendency to “place too much reliance on direct testing a hypothesis and then neglect indirect testing.” In other words, once you find a way to do something, your solution dominates your mind in such a way that you cannot even think of other solutions. If you think you’ve found the best solution to a problem and want to test it, consider other solutions you could test as well.
Confirmation bias: People tend to pay attention and give more weight to new pieces of information that confirm existing beliefs and to ignore information that challenges those beliefs. This prevents us from looking objectively at the problem we are trying to solve and could lead founders to find bits of data that confirm existing beliefs while ignoring other available data.
6 Ways to de-risk your key assumptions:
Interview potential buyers of your product or service.
Consult analysts and professionals in the target industry.
Prioritize which assumptions you want to test using a grid with likelihood on one axis and the severity of the problem on the other axis (see below).
Develop an MVP so you can actively measure and learn from real metrics.
Use the “5 Why’s Method” to get to the root of the critical assumption.
Research trends in your industry (remember the Zappos example!).
You can use a grid like the one above to prioritize which assumptions you’d like to test first. Prioritize those assumptions that fall in the top right quadrant.
Testing and de-risking key assumptions can save you time and money. Once you have gone through this process a few times, you can start applying this technique to any number of problems, both in your work life and your personal life. And instead of convincing co-workers or employees you are right by saying, “I think…”, you’ll now be able to convince them you are right by pointing to actual evidence, helping to reduce conflict and get more buy-in for the strategy you’re proposing.
In addition, the evidence you generate will either give you greater conviction you are right, help you pivot your idea, or decide your assumptions are wrong and you should move on. Finally, if you are raising capital, the evidence you may generate can shape the narrative when you discuss your concept with investors. Make sure to layer into that discussion what you see as your most critical assumptions, how you de-risked them, and what you learned from the process.