Aprobability of failure exists in any new business venture and the risk increases in proportion to the degree of innovation of the business model. So, it is directly related to the degree of uncertainty inherent in the key assumptions/assumptions of the business model.
In the previous article we noted that the last two decades have seen the emergence of methodological tools to better manage risk in business and reduce the waste of business resources. One of these tools is the "Lean Startup"methodology. The Lean Startup manual was published in 2011 by Eric Ries, but the philosophy on which it is based was already in development in the early 2000s by Steve Blank.
Blank, an entrepreneur, university professor, investor and influential author in the international business innovation community, took the time to understand and explain what it is that makes some companies trying to innovate, more successful than others. In 2004, he wrote the book "The Four Steps to the Epiphany", in which he explains that a startup, is not just a miniature version of an established business. On the contrary, Blank says there is a crucial difference between the two.
A start-up is designed to discover an innovative business model that it will then execute in order to grow on a large scale at high speed. In contrast, an established business bases its growth on the execution of an already known business model, whose characteristics are well understood.
The distinction between the discovery stage and the execution stage of a business model is fundamental. On this basis, Steve Blank gave his own definition of a startup: "temporary organization designed to search for a repeatable and scalable business model".
Let us examine him carefully:
1. "organization": When Blank talks about "organization" he refers to the organized group of people who contribute to the search for an innovative business model. Whether this group has already established a business with legal and tax status, or not. The existence of a tax number is neither a necessary nor a sufficient condition. And indirectly, by talking about organisation, the definition underlines that innovative business is not an individual sport but a team sport.
2. "temporary": the organization is temporary because it is certain that the team that constitutes the starter group will soon have changed. One possibility is that the search will be fruitless and the team will disband. The other possibility is that the search will lead to promising results and the team will evolve, adding or removing roles and people, in order to continue the search for a suitable model in greater depth, or to start implementing it.
3. "designed to search": the search for a business model requires a different organization than the one used to execute a project. A startup performs best when it operates as an organized research team, rather than an established business with functional separation into sales, production, etc. In research, failure is a natural part of the process. Some assumptions will not be confirmed by the data we collect and our current version of the model will need to be revised. The same is true in startups. The primary is a culture of continuous learning and discovery.
4. "repeatable and scalable business model": what drives a startup to innovate, despite the increased risk compared to a business on a conventional trajectory, is the reward of finding an operating model that is more efficient than replicating known models. As long as it remains small it means that it has not yet fulfilled its objective. It means that it is still in the discovery stage.
The distinction between the model discovery stage and the model execution stage is crucial for another reason. It completely changes the approach that a team starting to work on an innovative idea, has to take.
Those who work in the startup field, often encounter startup founders who believe, or have been advised, that the first step is to develop a "businessplan". That is, to start by writing a multi-page document about what is going to happen in the future, with five-year projections. Once the document is ready, they will be ready to look for funding. And if they find it, they will be ready to start.
The Lean Startup methodology says that the above approach is fundamentally unsuitable for innovative businesses at the startup stage. No one disputes the necessity of operating under a detailed business plan in an organization that executes a known and fully understood business model. But it is the wrong approach for a temporary organisation still trying to find its model. At this stage, a business plan would be nothing more than guess work, assumptions and unsustainable financial projections.
Boxer Mike Tyson once said "everyone has a plan, until the first punch hits them in the face". The punch comes in the startup, when it gets in real contact with the customer. The punch is that point in time, when we realize that a key assumption/assumption of our business idea, is ultimately not valid.
Reality vs. Cases, 1-0.
There is no question of if this will happen, only when. Let's take it for granted that when we test a new business idea, it is humanly impossible to have correctly predicted all the parameters and fall into all the assumptions. Therefore, the sooner a key assumption is disproved the better, because the research enterprise we are running will not have wasted time and money unnecessarily. The slower the refutation comes, the greater the waste. And unfortunately, too often in startups, the risk management is not right and the refutation of a critical assumption comes too late. So late, that time and money are running out.
For these reasons, the Lean Startup methodology highlights three principles. First, instead of describing detailed designs based on unsupportable assumptions, we should carefully designed run experiments to confirm our most critical assumptions, as soon as possible. Second, instead of relying on intuition and subjective judgment, we should be in constant interaction with clients togather objective data. Third, instead of spending time and money designing a product 100% and investing in its development, invest incrementally, committing time and money alongside incremental confirmation of the business model.
TheLean Startup philosophy brings the scientific method to business. It helps us move from uncertainty to knowledge through running experiments and gradually disproving our hypotheses. As the uncertainty is reduced, the clearer the picture becomes of how much we really need the product we want to bring to the world, how feasible it is to do so, and how viable a business would be, if we executed the business model. This allows us to decide whether further investment of money in pursuing an endeavor is justified.