I have been a culprit of discussing a lot of ideas, without ever executing them. And now I understand the reason why.
6 years ago when I heard a garbage truck backing up right below my bedroom window every Sunday at 4 AM, I had an epiphany (pun intended!) – there should be a rating on each apartment rather than the entire apartment complex as a whole. This time I was adamant that I was going to execute it. At this point, I hadn’t really built any websites, but I had done tons of programming (C++) and databases (don’t worry if you don’t know what databases are, I am going to talk about it in a future post), but no websites. So I naturally started sketching out the database design for this idea. I thought I was at the least executing, but I never went beyond that stage since I didn’t know how to design or make a website. My efforts stalled. I think this is the single most common reason why ideas remain as ideas and never get executed. A lot of people think the next step after you have an idea is building a website/product, but most of us don’t know how to do it.
So here is your next step. Drop all the tools and hammers, laptops and website for dummies books. You don’t need them at this point. You don’t need to build a product right away. What you need is a structured approach to know if you need to build the product in the first place. That structured approach is lean startup methodology.
What the hell is lean startup methodology?
At the core, lean startup methodology is all about validating each guess that you have about your startup and learning as you invalidate some of these guesses to change your assumptions and keep moving on.
Steve Blank, Eric Reis, Ash Maurya and all proponents of lean startup say that your startup is nothing more than a collection of guesses.
- You have a guess about a problem that your customers are facing (problems)
- You have a guess about the solution that will solve that problem (solutions)
- You have a guess about who your customer is (customer segments)
- You have a guess about where you are going to find this customer (channels)
- You have a guess about what value your product will provide (unique value proposition)
- You have a guess about how you will make money (revenue)
- You have a guess about how much it will cost you to make the product and get customers (cost)
- & 9. You haven’t even started thinking about who to partner with (partners) and how you are going to prevent competition from trashing you (unfair advantage).
That’s right, there are too many guesses! You can see here that I have mapped out 9 areas that should work together to make your startup successful. These are all guesses and you need to work systematically to validate each guess. These 9 areas collectively is called business model canvas and you have to go through the process of validating/invalidating each guess or in scientific terms, hypothesis using data driven approach.
Quick Tip: Forget about writing a business plan, instead focus on validating assumptions in your business model
Here is an example of business model canvas of Facebook based on Alex Osterwalder canvas (Author of Business Model Generation). Every one of us should relate to this Facebook example.
As you can see, the business model is composed of 9 parts as mentioned before. Certain things are different here, solution is defined as key activities, and unfair advantage is defined as relationships. While the above business model canvas works well, I prefer Ash Maurya’s (author of Running Lean) version of business model that lists problems and solutions directly.
(Click to enlarge)
OK! I get this. Where do I start?
Step 1: Fill in problem, solution and customer segments
Write your top 3 problems, top 3 features that will solve this problem and customers you are targeting on this business model.
Step 2: Fill in remaining parts on the business model
Try to fill in other areas as much as you can, but don’t spend too much time. You will probably over-think this, but trust me, fill this out as quickly as you can.
Step 3: Validate your riskiest assumptions
Then focus on validating your riskiest assumptions. Start with problem statement, solution and customers. I feel these are the riskiest areas for most businesses, but they can be different for other businesses. While identifying your customer that you can talk to, make sure you really understand what your customer looks like. Is it a disgruntled mom with a baby stroller in one-hand and grocery bags in another, shopping at 3 PM at Wal-Mart when she would rather be doing Yoga? Yes, it should be that specific! This is called building customer persona in lean startup methodology. Learn here about how “Food on the Table” followed their initial customers to grocery store to understand them. I talk about my experience with Lean Startup Weekend in this post on how we went from being an online scheduler for kids’ activities to a car-sharing app for busy parents in just 2 days by validating/invalidating our problem and solution hypotheses.
Step 4: Iterate until you validate your riskiest assumptions
When you invalidate any of your guesses (i.e. your guess was wrong), you learn from what you hear, and then change your guess to this new finding. You haven’t validated this guess yet, so you should set out to validate this new guess now. This is called a pivot in lean startup methodology. For example, for an online shopping startup your guess might be that your target customer is young female between 20-30 who have disposable cash, and no time to buy clothes. After you got out of the building and talked to your target customer, you found that this is not your target customer, but almost everyone talked about how their moms will love it. Now your target customer has shifted to 40-55 year old female and you will have to validate all your hypotheses with this new customer segment. This is an example of customer pivot. I will write a separate post on what questions you can ask your target customer based on my experience with Jobbertunity.
Step 5: Build your first MVP
Once you get through validating your problem statement, solution overview and target customer, you can think about building a small prototype. Again, this prototype need not be programmed, you can use excel, Powerpoint, Photoshop, sketches etc. to show your user what the solution looks like. The idea is to get something in front of users to get their initial reaction and iterate on it. Big companies like Zappos and Groupon used low-fi MVP in their early days to validate their assumptions (see details below). I talk about how I used excel as a MVP and got 3 paying customers with this MVP in this post.
- Took photographs at a local shoe shop and put the pictures online
- Got emails from customers confirming orders (huge validation!)
- Bought the shoes at the shop & shipped them physically
- Launched a WordPress blog for a pizzeria coupon
- Validated the idea through redeeming 20 pizza coupons
Step 6: Validate other assumptions on the business model
Finally, after going through these three areas – problem, solution and customer, which in itself will most probably change your business idea, you will have to start working on other areas. Again make sure to identify the riskiest assumptions and work on those first. For example, a startup, Outbox, that was set out to digitize physical mail went out of business because they underestimated partnering with USPS, which was the riskiest assumption in their business model. They validated the problem, got a lot of people to sign up and provided them the solution, but their riskiest assumption failed and they shut down after raising $5 million. The details are here. So make sure you identify the riskiest assumptions first.
This might feel like a lot of work, but believe me, if you take one step at a time and focus on 2-3 hypotheses that are your riskiest assumptions at a time, then you will see the progress.
One final thing – you need to build a business that’s profitable. So make sure you plan to make more money than it costs you to run the company. The general VC rule is that your life time value of a customer (money you will earn off one customer in his lifetime) should be more than 3 times the cost of acquiring that customer. Also you should recover your money that you spent to acquire a customer within 12 months of acquiring that customer (through the revenue you generate from that customer).
When you conduct an experiment to validate/invalidate your assumptions, have a strict discipline. Decide on what will determine if the experiment was successful or not. Don’t budge on the success criteria. It’s called minimum success criteria in lean startup methodology. I have discussed an example of minimum success criteria in my previous post. For example, if you decide, 70% of people you talk to should rate the problem as “very painful”, and if you get only 65% people, your experiment has failed. How do you come up with 70% as minimum success criteria? Well that’s something for you to figure out. You can say we will still be excited to work on this problem if at least 70% people say this is a “very painful” problem. That becomes your minimum success criteria. In practice, this will be a little difficult to determine, but you will get closer with a few initial mistakes.
Quick tip: Be careful about confirmation bias (thanks Bhal for suggesting) as you would get into the trap of looking at data to make yourself believe that you are seeing positive signs. That’s why I say above, stick to your minimum success criteria and don’t budge on it.
Books & Resources
Below are the books that I have referred to in my post. The books are arranged in order of detail that they provide. Business Model Generation gives you a 10,000 ft. level view of lean startup methodology, while Running Lean and Lean Analytics provide more of tactical advice. The resources below are online tools that you can use to build your business model canvas and measure the progress.
Hope this gives a start to everyone who hasn’t gone beyond the idea stage. Please leave a comment below if you want me to deep dive into any of the steps or if you want to brainstorm your business model with me.
Quick Tip: Some of these online resources need subscription beyond 30-day free trial. If you don’t want to pay, create a mock-up in excel or Powerpoint and you will be good to go.