Get Ready to Test Your Assumptions
Episode #5 of the course How to start a startup with zero budget by Dr. Donatas Jonikas
Once you have your business model outlined, you should validate it or update according to your empirical findings. Sure, you can take a chance and build a business based only on your assumptions without any hypothesis verification, but the chance of success for an innovative business is rather low.
Steve Blank and Bob Dorf in 2014 indicated that most startups lack a structured process for testing their business model hypotheses; therefore, the authors offered a solution in their book, The Startup Owner’s Manual.
Finding the problem-solution-market fit is the most popular approach. Basically, it means that you must find and confirm a problem which is worth solving (remember how we started talking about value proposition in Lesson #1). Once you have a confirmation from potential customers that this particular problem is a real headache for them, you must create an acceptable solution. Once you have a general approval from customers that the solution is suitable for them, then you ask them to pay for it. If you get paid the price acceptable for you, congratulations! You have found the problem-solution-market fit.
Value Proposition Hypotheses
Generally, there are three groups of essential hypotheses.The first one, the value proposition hypotheses group, refers to the above-mentioned approach but is extended with additional segment hypothesis. This additional hypothesis aims to find the “hottest” target segment, or so-called early evangelists, i.e. customers who are willingly promoting the product and initiating word-of-mouth advertising. Classical marketing defines that early adopters are a small portion of customers from the target segment who are generally open to innovations and constantly willing to try new products. Obviously, it would be very beneficial to know which customers belong to the early adopters and evangelist category at the same time.
So, value proposition hypotheses are:
• segment hypothesis (do we know who our early evangelists are?)
• problems, jobs, and gains hypothesis (is a problem or desired benefit strong enough?)
• problem-solution fit hypothesis (does the solution fit the customer expectations?)
• value proposition-market fit hypothesis (is the customer ready to pay a certain price?)
Business Model Hypotheses
The second group of hypotheses is called business model hypotheses and refers to checking any uncertainties arising from the Business Model Canvas or Lean Canvas. It is normal to build your initial business model on at least one or few assumptions that couldn’t be replaced with facts during the market research (i.e. you couldn’t find enough statistical or other data to prove the assumption). Now it’s time to identify such assumptions and replace them with facts by rising and checking hypotheses.
So the business model hypotheses are:
• distribution and communication channels (do we have cost-effective and impactful communication channels? will we be able to build and secure a distribution system to serve all or at least most of your target customers?)
• costs and revenue (will our revenue cover all our costs? will we fit in a pre-defined cost structure?)
• unfair competitive advantage (do we have a long-term advantage over competitors?)
• others (e.g. will we need any special resources or partnerships? do we have them secured?)
Business Growth Hypotheses
The third group of hypotheses is called business growth hypotheses. These are more important for more developed startups. Early stage startups should validate their business model first (check the value proposition and business model hypotheses) and only then look for business growth. It doesn’t make sense to try to grow your business and implement any growth-hacking techniques if your value proposition is not good enough or if your business model has serious gaps.
The business growth hypotheses are:
• business evolvement potential (how large could the new market be?)
• the probability of initiating a viral effect (what are the chances of initiating a viral effect so current customers bring new customers?)
List your assumptions in the table to track those you’ve already validated, are currently working on, and those that have yet to be checked. Use the comments section for notes about the progress of each hypothesis.
Get clear on what assumptions need to be checked. List your value proposition, business model, and business growth hypotheses. In the next lesson, I’ll show you different ways to test them.
The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses by Eric Ries
The Startup Owner’s Manual by Steve Blank and Bob Dorf
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