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5 Lean Startup Essentials to Reduce Risk and Uncertainty

Alexander Osterwalder

When you start exploring new ideas, you are usually in a space of maximum uncertainty. You don’t know if your ideas will work. In this post we outline five Lean Startup essentials to help you optimize time, energy, and budget to systematically reduce the risk and uncertainty of new ventures. 

1) Uncertainty is at its maximum at the beginning of a venture. Don’t waste time on a business plan.

Acknowledge that uncertainty is at its maximum at the beginning of a venture. This sounds obvious. Yet, entrepreneurs and intrapreneurs don’t always behave as if they understood the implications of high uncertainty. You shouldn’t spend time on refining and perfecting your ideas when uncertainty is high and thus the risk of getting it completely wrong is very high. When uncertainty is high you should keep your ideas rough and shape them just enough to be able to test the underlying assumptions.

That’s where the Business Model Canvas and Value Proposition Canvas come in handy. These two tools help you flesh out your idea just enough to start testing it. You shouldn’t spend more than a few hours on your initial Canvas(es) because you’re certain to get it wrong anyways. Don’t refine your Canvases at this stage. Remember, uncertainty is at its maximum early on, which means things will change as you learn more. The biggest time waster at this stage would be to refine your ideas into a business plan (read How a Great Business Plan Will Maximize Your Risk of Failure).

This first phase of any venture consists of the search for the right business model and value proposition(s). It’s followed by the execution phase in which you scale your model, once you sufficiently reduced uncertainty and have enough evidence that your idea might work (read Search = Design, Test, Learn, and Iterate). 

2) Start testing the riskiest assumptions: What’s the most important thing that needs to be true for your idea to work. 

You make a lot of assumptions (aka hypotheses) about how and why your idea is going to work when you start a new venture. Your most important task as an entrepreneur and intrapreneur is to make these assumptions explicit and then test them. By doing this you reduce uncertainty and the risk of failure.

Assumptions are essentially all the things that need to be true for your idea to work. It’s very easy to list these them once you shaped your initial idea with the Business Model and Value Proposition Canvas. When you have your list of assumptions, you need to identify the most important thing that needs to be true for your idea to work. That’s the assumption/hypothesis you will test first.

For example, you probably want to test the need for a new type of energy drink with potential customers before you start testing the interest of potential channel partners. Firstly, because there is no market and no need for distribution if customers are not interested. Secondly, because you could use the evidence of customer interest to get channel partners onboard. 

The riskiest assumption will be different from one venture to another. In many cases it will be a customer assumption (e.g around your customers’ jobs, pains, and gains), but it could also be an assumption related to production costs (e.g. can I produce an item at a specific cost?). 

Keep in mind that you might have to throw away all other assumptions if your most important assumptions turn out to be wrong. If you were wrong you’ll have to go back to the drawing board (e.g. your initial Canvases) and rethink your idea. This is another reason why you shouldn’t refine your ideas early on. 

3) Start with cheap and fast experiments when uncertainty is high. Invest more with decreasing uncertainty. 

You need to start with fast and cheap experiments when uncertainty is at its highest and you’re most likely to get it wrong. Starting with expensive and time-consuming experiments can become very costly if your initial assumptions turn out to be wrong. For example, a pilot study in a test market is a very expensive undertaking. It should be proceeded be numerous small experiments that reduce uncertainty enough to justify a pilot study. 

Make many small and quick bets (i.e. experiments) when uncertainty is high. Increase the stakes as you learn more about what works and what doesn’t. Large companies in particular still think innovation is about making large and risky bets. However, it’s quite the contrary. The bolder the innovation, the smaller the initial bets should be. You’ll learn from those quick and cheap experiments and persistently reduce the uncertainty and risk of failure. At one point you’ll have a sufficient evidence that your idea will work and you can move to serious execution and scaling.

4) Optimize your experiments (aka MVPs) for learning. Don’t build a smaller version of what you intend to build.

Entrepreneurs and intrapreneurs often start the journey of their new venture by building prototypes. They build smaller and cheaper versions of what they intend to implement later on. After all, the Lean Startup process consists of the three steps, Build, Measure, Learn. But “Build” shouldn’t be taken too literally. At the early stages of a venture it’s often faster and cheaper to explore alternative ways of testing your ideas. 

First, you should talk to a large number of customers and learn about their jobs, pains, and gains, before presenting them any type of product or service idea. Explore and understand potential customers before exploring solutions. Once you think you’re starting to understand them, it still might be cheaper to conduct other experiments than actually building something. 

Strategyzer recently worked with several project teams from a renowned consumer goods brand that was exploring a new product technology platform. Before investing in (expensive) technology prototypes, they did some cheap experiments to learn and reduce uncertainty. To evaluate customer interest, they built landing pages on the web and measured click-through rates . Then they showed potential customers 10 cards - each one containing a specific customer jobs-to-be-done - and asked them to prioritize them. That and other experiments gave them some informed input for their first technology prototypes. 

There are countless ways to test your assumptions before literally building something (read Don’t Believe Your Customers!). We’ll explain more on these techniques on this blog in the coming weeks and months. Just sign up to stay posted ;-)

5) Building your business only starts after you found the right value proposition(s) AND business model.

Focusing solely on figuring out your value proposition is not enough and might still lead to failure. It’s true that no business can survive without a value proposition that customers want. But it’s also true that no business can survive on a business model that produces less revenue than costs. For example, you will fail even with the hottest product and service if it costs you more to acquire customers than you will earn from them. 

In the case of established companies, it’s even more complicated since they need to carry the legacy costs of a business model from another time. Kodak went bankrupt despite helping invent the digital camera, a product that customers loved. Unfortunately, they didn’t invest enough in the search for the right business model for the digital age. 

Unfortunately, we see too many companies focusing mainly on the search for products and sometimes value propositions that customers want. Yet, success depends just as much on the right business model (read Why Some Business Models Are Better Than Others). Even startups that first focused on scaling products first (e.g. Twitter, Facebook, WhatsApp, Instagram) ultimately had to find a sound business model or a company that would acquire them. 

Are you doing all it takes to reduce risk and uncertainty?

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