How to identify your riskiest assumption
Richard Branson, the billionaire adventurer, has a complicated relationship with risk. On the one hand, he loves trying outdoorsy stunts and attempts to break world records.
For example, he managed to cross the Atlantic, Pacific, and then circumnavigated the globe in a balloon. He even succeeds at doing so, despite the occasional crash:
On the other hand, he’s brilliant at managing his risk professionally, when starting new ventures. For example, thirty five years ago, he was stuck for hours on Peurto Rico. He wanted to fly to the British Virgin Isles to join his girlfriend, and came up with the following scheme:
Branson walked to the back of the plane and asked for a chalkboard and a writing implement. He figured out how much it would cost to charter a plane to BVI — and how much it would cost each passenger if the expense were pooled. And then he went for it, walking up and down the aisles of the grounded airplane selling tickets. On the chalkboard he wrote, “$39 one way to BVI.”
In one move, he confirmed that there was demand for an alternative. So he charted it. That got his appetite wet. Piggy-backing on his record store chain, Branson went on to sell plane tickets. He entered into a conditional lease of a plane from Boeing, where he insisted on having a one year break clause, to be able to return the plane if necessary. He aimed to fly it between the UK and the Falkland Iles. So Virgin Atlantic was born.
In short, he made a couple of moves which significantly limited his downside while giving him the possibility of evaluating whether it was worth soldiering on.
With new products, your primary goal is to manage your risks
Denying the existence of risks only makes you more susceptible to them. Particularly when you are faced with a high risk of failure. Like 50-90%, depending on the study you look at. No joke.
It’s really important to note that this is not about being pessimistic. Or questioning your vision. This is about figuring out your vision’s fastest possible path from your head and into reality.
The “magic pixie dust” resides in prioritizing what you test. By testing your riskiest assumptions first, you reduce the chance you go belly up. Regardless of where you are in your new product’s journey, you will always face unexplored or unmitigated risks.
Yet, identifying this riskiest assumption is hard. The key factor to consider when managing your resources (including your time) is risk. All of that requires you to have a solid grasp on what your biggest risk actually is at that moment. Which isn’t always easy, particularly if you are doing something new.
What makes this particularly hard: it’s likely there are some “unknown unknowns”. So even if you do deliberately try to identify problem areas, you’re likely to miss something.
Essentially, the idea is that you want to generate a large number of ideas about what’s risky. And then prioritize to identify what is riskiest (and were you need to start).
Ways to get inputs on what’s riskiest:
This is hard to describe. Sometimes you just have a gut feel. Pay attention to it. And run with it. Essentially, you’re looking for what feels like it could have really big & bad implications. And it is likely to be a problem.
Personally, I feel this with tension in my gut. So it’s just a question of tuning into that sufficiently, especially before making bigger decisions. And that’s often good enough. But it has taken some effort to be aware of this. Moreover, in a larger company, you may still need to convince others and create alignment, and “I feel it in my gut” is not a strong enough argument. Even if it’s true.
2. Who is the customer and does the customer actually have problem you think?
This is a great insight I got from Lean Startup Machine specifically. Running around London like a headless chicken with some friends, trying to interview young parents. (admittedly before I was one myself). We had a product idea which we though would be attractive for this group. We made some guesses about their biggest challenges. And then we hit the streets and looked for anyone pushing a buggy/pram.
This was the net result:
After a few failed hypotheses, we had to acknowledge that we actually had no idea what parents of kids 0-2 years old struggled with. And while there were some patterns in what we were hearing, it was clear that it was still too wide of a market to have clear patterns. The tool on the wall helped us systematize testing:
- who is the customer?
- what is their biggest problem or challenge?
- would the solution be an appropriate solution to that problem?
In the end, we had to acknowledge that we the pie chart we were drawing had too many possible answers.
So we weren’t going small enough to have a clear pie chart, with a significant share of answers being the same:
In other words, we needed a consistent easily identifiable & reachable group of people who share a particular challenge. That is a good market segment on which you can build a business.
This is almost always true. And often overlooked up front. Without it, you’ll have a hard time building something that will be relevant for enough people to make a dent. At least in a B2C business, where you need a lot of sales to get started.
In a B2B business, that breadth is less important, as much as depth. You need to be certain that whatever you do build and launch fully addresses the customer’s problem. And has positive and measureable side effects around:
- increasing revenues
- reducing costs
- lowering risks
- improving their customers’ experience.
At a high level, most businesses will only pay for those outcomes. But each industry and business is a bit different, so you will need to dig into the details of how to achieve it. But the starting point is really deeply understanding the problem from your prospects’ eyes.
In short, ask people having similar success in different areas or industries doing things similar to what you want to achieve. This was an insight from Getting to Plan B by Komisar and Mullins.
For example, let’s say you discover a really powerful yeast which helps give red wine a unique and attractive flavor. Then you buy wine in bulk, add your magic dust, and then try to resell it to large supermarket chains.
Coming up with the yeast was the hard part. To figure out how to sell the supermarkets, you can probably speak to any salespeople who also sell to supermarkets in your country. It doesn’t have to be other wine merchants or wholesalers. You will learn a lot from a few conversations with people like that, enough to get your head around how this sales cycle works. So even though you don’t have in depth experience doing it yet, you’ll have a clear picture of how to proceed. In this case, you are using an analog to discover any hidden assumptions that could derail the use of direct sales as a distribution channel.
This is a good technique to turn “unknown unknowns” to “known unknowns”. Possibly even “known knowns”. Even though it’s less likely to have a company killer impact, it is still possible that you are making assumptions about that initial sales process which could derail you.
4. Antilogs (or Picnic in the Graveyard)
Some industries, especially software and internet, have a lot of public information about startups that have tried something. And failed. There are lots of writeups by previous founders of why they think their startup failed, such as:
If you are thinking of building something similar, you are just at the beginning. Those founders had been through years of trying to get a similar idea off the ground. So it’s quite likely you will learn something from them, if you can read about their failed attempts. Or even better, call them up and speak with them directly.
The idea here is to formulate a good reason why you think you will be successful this time around. It might be a different feature or market. It might be market timing. It might be any number of reasons. Because if you can’t articulate it, it questions whether it’s an idea worth pursuing. Not to mention, it will be hard to convince investors, too.
5. Risk Scorecard
This is kind of the left-brained alternative to #1 above. Basically, you can create a spreadsheet scorecard, where you:
- list all of the risks
- assign each a weighting from 1 to 5 for both likelihood and impact
- multiply the weights together
- reverse sort by the highest number going down
The outcome is that you have 1 specific risk you need to address and start focusing your experimentation on.
Here is a more detailed writeup of how to do this. Or here.
Imagine your business failed 4 years into the future. You meet with your cofounders over beers or tea. As your tears flow, and drip on your Business Model Canvas (BMC), you discuss what you wish you would have known up front.
Which is the likeliest to have caused the failure?
- Write down all possible additional reasons you come up with onto post-its.
- After a general session, you can also think through any assumptions in each box of the BMC which might be relevant for this particular business.
- Prioritize them using dot-voting
- Create an initial risk backlog based on this discussion, sorting from the most dots down to the least
The best source for this is Dave Gray’s excellent Gamestorming book, if you need any more detail. But that should get you started.
7. My “ace in the sleeve” questions
Based on my own mis-adventures in startup land discussed in Launch Tomorrow, I have a few following additional questions which I use to “stress test” any idea:
- Am I going after the right customer–for me or my company? Is it a strategic fit?
- Can I reach my customer cost-effectively?
- Is this customer type willing to do anything about the problem? Because if they aren’t, they aren’t likely to spend any money.
So for example, it’s a good idea to build a business around a group of people you can easily relate to and who you like. I tried building a business in the weight loss industry despite not having a medical background or being a middle-aged woman. So while I did have a signature success story in this context, my marketing would always be less effective than if either of those requirements were fulfilled. And I wasn’t keen on going back to school to become a doctor first.
All of these do matter in certain contexts. And they’re probably good “spot check” questions anyway, before you proceed with a specific idea.
8. Talk to industry experts
Once I get outside of the internet and software worlds, there is a lot I don’t know. Lately, I’ve been working with AgriTech and MedTech startups, for example. And while I know the concepts behind innovation, I honestly don’t know have that much experience in how they apply to those sectors.
For example, agriculture has a “crossing the chasm” like curve. However, it’s heavily skewed to the right. So basically, there are many more people in the late majority or even the laggards. In other words it takes a lot longer for a technology to diffuse. But when it does, it’s everywhere.
Anything related to medicine has to go through regulatory approval. In this case, you can’t just pooh pooh the regulators like various marketplace startups did (Uber, AirBnB). People’s lives and health are potentially at stake. In practice, for founder this means it takes a decade before you can go to market. Which means two things:
- you need a lot more money up front
- you have less attempts at building a business during a founder’s lifetime
In short, these industry specific details significantly change how you’d look to innovate in these areas. And I learned both of these points from experts with decades of expertise in the industries (thanks Huw and Anthony).
From a risk management perspective, expert’s ideas are simply ideas that require testing. You don’t want to ask experts for their opinions and treat it as gospel either. As that would mean you replicate their biases. Gather your own data and proof. But at least you know what to pay attention to.
9. Red team, Blue team
Finally, to stress test your business model, you can use this approach that the British military came up with. This is a strategic exercise, to try to identify any holes or oversights in a plan. The red team tries to penetrate a well designed defense plan.
- Essentially nominate a few well-meaning friends.
- As them to “red team” your current business model.
- Looking together at the current BMC together with your “blue team” consisting of the co-founders or delivery team, ask the “red team” to identify any major assumptions you might have missed. Holes that need to be covered. Things which could easily go wrong and derail your product launch.
There was a good example of this in the HBO serial Newsroom. The news team was working on a high stakes story. Certain people were intentionally kept in the dark about the big scoop. When the team producing the story was ready to go live, they assembled the people who had been intentionally left out to form a Red Team. The Red Team’s job was to poke holes in the story, as the paper was risking its reputation by going live with this story. People kept in the dark are more objective. They aren’t invested in the story, so they see it from a different perspective.
What you are after
Basically the goal is to uncover as many assumptions as possible. And to prioritize them. So you have 1 specific assumption to start testing. This focuses your experimentation on company killers and existential risk, the most meaningful place to start managing risk. This is, in fact, what successful founders like Branson excel at–like when he put up a cardboard sign and started confirming there was enough of a market to create a challenger airline.
If you can take smart risks while being better at managing them, then you are much more likely to do better over the long run. Any particular risk might still go sour. But this ability to manage risk will ultimately define your career as a startup founder and business builder.