Disciplined Entrepreneurship Workbook
Page 21
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
WORKSHEET
Identify Key Overall Assumptions
# Assumption (in prioritized order) Related step(s) from the 24 Steps Risk level Potential impact if assumption is wrong
1
2
3
4
5
6
7
In many ways this is a “catch your breath and digest what you have produced” step. It does not involve a lot of new work, but it is important to set yourself up for the next step as well, which is to test these assumptions. It is nice to have a step that is a bit easier, isn’t it? You are getting close to the end now—hang in there!
STEP 21
Test Key Assumptions
WHAT IS STEP 21, TEST KEY ASSUMPTIONS?
Use a series of small and inexpensive experiments to test each of the individual assumptions you identified in the previous step. Be creative!
WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?
This scientific approach will allow you to understand which assumptions are valid, which ones are not, and which ones you can’t know for sure yet. As a result, you’ll have time to make adjustments to your planning while the cost and time to do so is much less than it will be in the very near future when you launch the product development process.
By the Book: See pages 225–228 of Disciplined Entrepreneurship for basic knowledge on this step.
See page 228–234 of Disciplined Entrepreneurship for examples of how different companies and teams have addressed this step.
Testing your individual assumptions may not always give you the answer you wanted, but it can be fun and rewarding--and much better to find your problems before your customer does!
PROCESS GUIDE
This step ties directly back to Step 20, Identify Key Assumptions. Now that you have identified the most critical individual assumptions, you will design experiments that test these assumptions. Your goal in each experiment is to test a specific variable, keeping all other factors as controlled as possible, so that the result of your experiment gives you insight into the validity of your assumption.
Designing good experiments requires that you be systematic and think creatively. There is an entire field of research, behavioral economics, that explains why people make the decisions they make and how to design proper and efficient experiments that will illuminate this behavior, so I won’t go into detail within the confines of this workbook. Instead, I suggest that you read some of the literature in this field. One book I find immensely useful in describing the value of well-designed experiments as well as the emerging field of behavioral economics and some of its basic principles is Think Like a Freak by Steven Levitt and Stephen Dubner, who are well-known for their bestselling book Freakonomics.
It should be fun to design the experiments that test your assumptions, and you don’t need a team of PhD economists, especially if you’re only testing one assumption in each experiment. If an experiment is more complex, such as one that tests multiple assumptions at the same time, it gets much more difficult and less fun. Hence, try to decouple assumptions and design your experiments carefully.
On the first worksheet provided, describe some detail about the experiments you plan to run, including which assumption(s) will be tested, what resources you need for the experiment, and most important, what outcomes will validate your assumption(s). If you don’t define your outcomes before the experiment, you will inevitably skew the experiment in favor of your assumptions, making the outcomes worthless as indicators of the strength of your new product’s plans.
After you conduct each experiment, use the second worksheet to make notes about each experiment, including the outcomes, whether your assumption(s) were validated, and what your next steps are based on those outcomes—whether that means revising work you did earlier in the 24 Steps, conducting additional experiments with revised variables, or taking other appropriate actions. Sometimes the result of a successful experiment is more experiments. You have to be patient.
See the bottom of this page for how student team Beehive approached some of the assumptions that I first showed you in the last step.
Notice how simple the tests can be. Some may be as simple as calling your vendors to validate your list of how much it costs for each part that goes into your product (the cost of goods sold), as that cost is often a key assumption. Or, if getting a certain highly influential customer in your chosen market segment is a crucial validation point, you’ll want to more energetically measure their commitment level. The expectations and commitment thresholds are still low because you should not be communicating to customers that you have a product being sold—you’re still in inquiry mode for a bit longer, which is a much better environment for experiments. Enjoy it while it lasts because it will be ending soon!
Make sure to also review the examples provided in Disciplined Entrepreneurship for this step, as some of my students have come up with very creative ways to test assumptions quickly and inexpensively.
Finally, remember that a valid assumption is still only an assumption, because only with paying customers do you truly know that your startup has a sustainable market. I will guide you through how to start determining whether customers will actually buy your product in Step 23, Show That “The Dogs Will Eat the Dog Food,” and in general, an experiment that invalidates an assumption will often tell you more than an experiment that validates an assumption. Nevertheless, the more you test in advance, the more problems you can identify while fixing problems is still relatively inexpensive.
GENERAL EXERCISE TO UNDERSTAND CONCEPT
Examples from Step 20, revisited: What tests could Segway have run to test some of the key assumptions? How about for the product you identified that did not do well in the market?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
WORKSHEET
Test Key Overall Assumptions
# Empirical test (in order from most important to least important, based on the risk levels of the related assumption[s]) Related assumption(s) Resources required for test What outcome(s) would validate your assumption(s)?
1
2
3
4
5
6
7
Results from Testing Key Assumptions
# What did you learn from the test? Did the test validate your assumption? (Yes, No, or Not Knowable At This Point) What will you do as a result of this test (e.g., revisions to work done in previous steps, additional testing of assumptions)?
1
2
3
4
5
6
7
After having completed this step and the previous step, you have de-risked your product at the level of individual assumptions as much as you reasonably can. This accomplishment does not mean that, when all the assumptions are put into one product, the fully assembled solution is assured of market success. In addition, some assumptions will never be able to be fully tested until there is a product and it is put into production. That testing comes in the next two steps.
STEP 22
Define the Minimum Viable Business Product (MVBP)
WHAT IS STEP 22, DEFINE THE MINIMUM VIABLE BUSINESS PRODUCT (MVBP)?
Determine what is the minimum product you can use to test whether your end user gets value from your product and whether the economic buyer is willing to pay.
WHY DO WE DO THIS
STEP, AND WHY DO WE DO IT NOW?
Once you ship a product, the stakes become much higher, but the quality of feedback becomes much, much better, too—in particular, feedback about whether customers are willing to pay you for your product. But to reduce the stakes, complexity, and investment, you don’t want to build out the entire product now. Keep the number of variables as low as possible by first developing a minimum product that starts an iterative feedback loop with your customers. All of the work from the previous steps builds up to this moment.
By the Book: See pages 235–237 of Disciplined Entrepreneurship for basic knowledge on this step.
See page 238–244 of Disciplined Entrepreneurship for examples of how different companies and teams have addressed this step.
It’s time! You have done all your homework, so now you have to give your customer a product, but keep it simple to start.
PROCESS GUIDE
To create an MVBP, your goal is to do the least amount of work possible to achieve three key objectives:
The customer gets value out of your product—that is, you validate your work from Step 8, Quantify the Value Proposition.
The economic buyer pays for the product—you’re probably not maximizing short-term profit yet, but you’re showing a willingness of the economic buyer to pay something greater than zero.
You start a meaningful feedback loop with your customer so you understand what about your product works, and what is missing or needs to be refined—as well as what priority to give the work you still need to do.
While the MVBP is minimal, the customer should see it as a product at this point (hence why “business product” is in the name) and not as simply a prototype for feedback. The prototypes could come into play in Steps 21 and 22, Identify and Test Key Assumptions, but unless the customer is paying for the prototypes, they do not meet the criteria to be a product. At the same time, you’re not trying to deliver a full-fledged version of your product; the MVBP is the smallest set of functionality and investment needed to get you started. Once you are successfully moving forward with regard to the three criteria above, you can then incrementally add more and more functionality.
One key tactic that startups have used to successfully demonstrate MVBPs is “concierging” elements of their solution. “Concierge” is a fancy word to say that rather than build out an efficient or comprehensive solution that requires a huge, time-consuming up-front investment, you instead deliver a labor-intensive solution that can’t scale when you get larger, but requires no or minimal up-front investment. Or you outsource a noncustomer-facing part of your solution to a company that has the infrastructure in place to do so, even if you lose money by outsourcing. You could call it “fake it until you make it.”
One of the greatest examples is how Amazon.com got started. Jeff Bezos and his team started by selling books, but they didn’t have an inventory of books or even an agreement to resell them. That did not stop them from setting up a simple website collecting book orders. When someone bought a book, they ran out to a nearby bookstore and bought the book, almost always at a higher price than what they had advertised, and then ran to the post office to ship it. They lost money on each book.
So why did they do it if they lost money? Because it validated that the market was worth making investments in inventory and back-end logistics. The money they lost in the concierge stage was invaluable market data and education in what value customers got from their service, and what features they needed to build for their customers.
The level of detail needed for an MVBP will vary depending on your industry. I have heard software entrepreneurs say that if you are not embarrassed when you ship your first product, you shipped too late. That ethos might work well for some software, but it doesn’t translate well to every situation. If you are making a product for brain surgery, for instance, your MVBP’s core minimal reliability better be rock solid! It can and should have a narrow scope in terms of features and functions, but it can’t fail. Much is written about software entrepreneurship and then extrapolated to other industries, so use common sense when applying startup advice to the particular demands of your industry.
To get started on defining your MVBP, first review the work you did in Step 7, High-Level Product Specification. Visually describe your MVBP on the first worksheet provided. Then, on the second worksheet, define how your MVBP meets the three key objectives for an MVBP. Finally, consider any opportunities to concierge elements of your MVBP so that you can minimize development time and focus on testing what your customers think of your product.
GENERAL EXERCISE TO UNDERSTAND CONCEPT
Concierging an MVBP: Do an Internet search to find an example of a company that concierged elements of their MVBP. (Make sure you find an example where the product fulfills all three criteria of an MVBP—customer gets value, economic buyer pays for it, you engage customer in a feedback loop.) What is their value proposition? What elements of the MVBP did they concierge? How did they plan to automate those functions in a later release? How effective was their strategy? What would you have done differently?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
WORKSHEET
Update Your High-Level Product Specification
Updating Step 7, High-Level Product Specification, what features and functions do you really need for the MVBP? Will these features and functions achieve the three objectives of an MVBP? Visually describe your MVBP.
How Your Proposed MVBP Meets the Three Objectives of an MVBP
Objectives How, specifically, does your MVBP meet this objective?
1.Value: Provides value to end user consistent with Step 8
2.Pay: Prove that the economic buyer will pay something for the product placement
3.Feedback: Creates meaningful feedback loop with customer (end user, economic buyer, and champion)
Minimizing Investment and/or Speeding Time to Market—Concierge Opportunities
Is there anything in your MVBP that can be concierged to reduce the initial investment required to achieve the above three objectives and/or decrease time to get to market with an MVBP? Time may be even more important than money.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
STEP 23
Show That “The Dogs Will Eat the Dog Food”
WHAT IS STEP 23, SHOW THAT “THE DOGS WILL EAT THE DOG FOOD”?
Offer your Minimum Viable Business Product (MVBP) to your target customer and obtain quantitative metrics regarding the adoption rate of the product, the value the customer is getting from the product, and that someone is paying for the product.
WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?
Numbers don’t lie. Entrepreneurs have an ability to create great passion for a vision, but now is the time for reality, to show concrete evidence that your product, and specific features of it, are succeeding. Qualitative informati
on and conceptual logic are not sufficient. You do this step now because you finally have the MVBP and you need to validate it before moving forward.
By the Book: See pages 245–248 of Disciplined Entrepreneurship for basic knowledge on this step.
See page 248–252 of Disciplined Entrepreneurship for examples of how different companies and teams have addressed this step.
The customer is the final arbiter of success, so now you will build a scoreboard to show whether the customer accepts the MVBP.
PROCESS GUIDE
Entrepreneurial ventures usually fall into one of two varieties. The most common state is that they are blindly optimistic that everything is going great and getting even better. The other state is one of paranoia where the team is overly pessimistic about the launch of their first product. In either case, the entrepreneurs suffer from some of the same biases I spoke about in the primary market research chapter, and as such they don’t collect sufficient appropriate quantitative postlaunch data to override the confirmation bias that kicks in to validate their original point of view. As a result, they overreact or underreact to how the market responds.