There’s a lot more to startups than just customer jobs to be done, pains, and gains. In the beginning, you can view your startup as a large collection of assumptions, or untested hypotheses. It’s vital that you decide which of these assumptions are most critical to the success of your company, then systematically test them so that you know you’re on the right track.
In this unit, we use the Lean Canvas as a tool for articulating assumptions about your business model. We then discuss ways to prioritize assumptions and test the most important ones with customers.
Why testing assumptions is vital
It’s estimated that as many as 90 percent of all startups fail. As a startup founder, you need to believe that your company will be in the successful 10 percent, even though the odds aren’t in your favor. In other words, you need to believe in your abilities.
However, self-belief by itself can be dangerous. The best founders balance self-belief with an ability to think objectively about their startup. They listen to feedback from customers and act on that feedback, even if the feedback challenges the assumptions on which they based their company.
All founders have a finite amount of capital and time available. By testing your assumptions, you can progressively reduce the uncertainty in your business while minimizing the time and money that you spend on product development and growing your team. As you decrease the uncertainty, you’re able to increase your investment and gradually shift from an exploration phase to an execution phase of building your business.
Use the Lean Canvas
The Lean Canvas, developed by Ash Maurya (author of Running Lean), can help you capture your assumptions about all aspects of your business model.
The Lean Canvas is based on the well-known Business Model Canvas by Alex Osterwalder. It uses the structure of the Business Model Canvas and applies it to early-stage startups. This process helps founders spell out assumptions that relate to nine building blocks of business models.
The Lean Canvas uses some of the inputs we discussed earlier, such as customer, problem, and solution. It then adds vital business model blocks, such as revenue streams, cost structure, channels, and key metrics.
For early-stage founders, the most critical assumptions about their startup’s business model tend to relate to three areas:
- Customer segments: You believe that you know which potential customers to focus on. You identified an early-adopter persona that represents the customers to target first.
- Problem: You believe that you know what problem the target customers have, and that those customers view existing alternatives as inadequate.
- Solution: You believe that your product is a better solution than existing alternatives. You believe that customers are going to choose your product because it’s a good fit for their needs.
Task: Complete your own Lean Canvas
Download the Lean Canvas from Leanfoundry.com.
Print the Lean Canvas and place your assumptions on the relevant section by using sticky notes. Spend no more than 20 minutes. Aim to write no more than one short sentence on each sticky note, and keep to a maximum of three sticky notes per block.
It’s best to start with the blocks for problem, customer segments, solution, and unique value proposition, because you already worked on these blocks in the Value Proposition Canvas. Then move on to the other blocks.
Identify critical assumptions
After capturing assumptions that relate to your startup’s value proposition and business model, it’s time to work out which of them are the most critical to test with customers.
We can use design thinking principles to identify three categories of assumptions that you should test. You can summarize them in the following three questions about your product:
- Is it desirable?Do customers want it? Does this problem really exist and do your customers really care about it?
- Is it feasible?Can you actually build this product? Do you have the technical skills? Do you have the necessary domain knowledge and the right connections?
- Is it viable?Can you build a commercially successful business around the product? Are there enough potential customers that are willing to pay enough for the product to achieve your commercial goals? Can you acquire customers cheaply enough that the lifetime value of those customers is larger than the cost of acquiring them?
For your startup to be successful, you need a product that’s desirable and feasible and viable. We can represent this sweet spot as the intersection of three sets in a Venn diagram.
Task: Identify which assumptions to test
Review all of the assumptions that you captured by using the Value Proposition Canvas and Lean Canvas. Draw a large Venn diagram. With a stack of new sticky notes, place each of your assumptions in one of the three categories.
Feel free to add any extra assumptions that you identify as part of this process. You can even color code them to match the three categories described earlier.
You might end up with 20 or 30 assumptions. It’s not practical to test them all, so your next objective is to work out which of these assumptions you should focus on testing.
One way to do this task is to plot each assumption on an assumptions matrix. The vertical axis of the matrix shows the importance of the assumption. The horizontal axis shows how much you know about it.
In this context, an important assumption is one that’s critical to the success of the business. If it proves to be wrong, then your business is unlikely to succeed. On the other hand, whether a trivial assumption is right or wrong doesn’t matter much.
Similarly, a known assumption is one about which you have a high degree of confidence based on some facts or evidence. An unknown assumption is one about which you’re just guessing.
It stands to reason that the assumptions you should focus on in testing are the ones that are both important and unknown. By plotting all of your assumptions in this simple matrix, you can quickly arrive at a manageable number that you need to test. Ideally, you have at least one assumption in this quadrant from each category of desirable, feasible, and viable.
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