Building an entrepreneurial society

Archive for the tag “Lean startup”

Business building should be open ended

In years past the business building process involved putting together a plan with milestones and deadlines.  Often the plan building process took months and was completed before any discussions with potential customers were done.  The entrepreneur stayed tightly within the bounds of the plan forging ahead even when things weren’t working.  If there was outside funding this adherence to the plan was even more strict.  The introduction of a lean approach to business building removed these problems by pushing the plan aside in favour of a learn as you go process.  But many who teach, mentor or incubate start-ups have introduced a new model that reintroduces some of these problems.

Classes on business building and incubator programs or competitions have set time frames with some end project such as a pitch or business plan.  Forced into this time box entrepreneurs are limited in their ability to explore or make course corrections as they become necessary.  Time is further compressed as the teams approach the end date and move from building their business to practising their pitch.  The team will also avoid any changes in direction prior to working on their pitch since the changes may hamper their ability to get the pitch ready.  So we can see that the process itself actually takes away from the likelihood of success for the business.

Business building has to be open ended letting the problem/solution testing and customer discovery process find its course.  The team will usually need to conduct many discussions with potential users before they adequately define the need, the solution that solves the need and the initial user base.  The time it takes to get through these processes can’t be reasonably predicted.  Trying to force closure before the process is completed increases the risk of failure.

The incubators and entrepreneur classes get most of the attention but the truth is most successful companies do not come from these programs.  Very few school projects become sustainable businesses after graduation and incubators tend to work with a very small proportion of start-ups.  There is no evidence to indicate that start-ups coming from incubators have any greater chance of success than they would have on their own.  While we look for short cuts and magic formulas sometimes it is old fashioned hard work that still makes the difference.

What is a business model?

In my last post I discussed the need for business model innovation to enable entrepreneurs to find solutions to the problems and opportunities we face.  In this post I will expand on that by proposing some structure around the term business model.  Having this structure is important if business model innovation is going to be a major driver of an entrepreneurial society.

We have all had discussions with colleagues and clients around an idea or concept where we all believed we had a common understanding.  Later when we tried to execute what we had discussed we found that we didn’t have common ground at all.  That is the danger with certain terms we use in business such as business models or innovation.  We each have our own interpretation of the terms and often believe that everyone in our discussions has the same one.  It will be difficult to have a conversation with a potential investor, customer or supplier if we don’t all have a shared interpretation of what a business model is.

Saul Kaplan, the founder of the Business Model Innovation Factory defines a business model as  a “story about how organizations create, capture, and deliver value.”  This is a good one line definition but doesn’t provide enough structure to build a business on.  Fortunately a structure has emerged from work done by Alexander Osterwalder that is outlined in his book Business Model Generation.

In Business Model Generation a business model is comprised of a set of interrelated building blocks:

  • Customer segments
  • Value propositions
  • Channels
  • Customer relationships
  • Revenue streams
  • Key resources
  • Key activities
  • Key partnerships, and
  • Cost structure.

A worksheet has also been designed that summarizes all of these elements on a page to facilitate the development and evolution of business model generation.  There are also good resources on this framework at www.BusinessModelGeneration.com.  These tools are used in conjunction with the lean approach to business startups.

Using the canvas a founding team can quickly develop a version of a business model in order to get the startup process moving.  It is understood that the first draft of the business model is based on the founding team’s assumptions about the various elements.  Each of these assumptions will need to be tested resulting in successive iterations on the business model design.  Ultimately the team will end up with a final business model that has been vetted by customers and may look quite different from the initial concept.

The structure proposed in this post is not the only way to look at business models but it is becoming widely adopted and it is the one we will use when discussing business model innovation.  We will expand on the list of business model elements in future posts as we explore business model innovation.


Business planning — from analysis paralysis to active learning process

We are used to seeing business plans that are many pages thick and have taken the startup team many weeks to build.  That would probably be a good way to go if we knew exactly who the customer was, what they wanted and how we were going to build it.  We would also know what our organization structure would look like and exactly how much money we need.  Unfortunately in a startup we don’t really know any of these things with any certainty.  A major problem with this planning approach, aside from over analysis, is that we tend not to want to change it once we have put it on paper.  We are destined to ride this one right off the cliff if that is where it takes us.

We need a different way to plan our business that acknowledges what we know and don’t know and gives us direction but with the flexibility to adapt as we learn.  This post will layout a new approach to planning that builds in active learning.

We have started by looking at jobs to be done and the people who do them.  Our plan will have a model of who the person is, how they do the job now and how we believe they can improve on it.  This is the beginning of the planning process.  We will constantly add to this model as we learn more.  We may also add new user profiles as we find other potential users over time.  We should have a belief that there will eventually be enough users to build a sustainable business around.

We have also assessed whether there is any other provider of these services to determine if it is a disruptive innovation.  If it is not then we need to look at different jobs to be done, different target users or abandon the venture.  We need to be constantly aware of competitor responses and new introductions and adjust parts of the plan accordingly.

Out study of the potential  users will also give us some insight into where they might purchase the product, where they might use it, what assistance or training they may require.  This part of the plan helps us plan for the distribution channel and part of the organization structure (i.e. do we need people to train).  This part will also evolve as we learn more.

Now we are ready to create a model of the business that will pull together all of the pieces we have assembled so far.  We want to build a model in Excel that demonstrates what success will look like.  How much revenue we need, what our margins will be, what our costs structure has to be, etc.  It is essential that the whole team be involved in building this model since the degree of learning that falls out is significant.  I am always interested in how much the team does not know about how the business works or needs to work until we put the model together.  There are many instances where it is necessary to go back to the product, customer or channel and rethink it based on what the model is demonstrating.

The model is a representation of the business strategy and is the bridge that links our customer/product/channel/organization planning to the execution.  We will use the assumptions in the model to develop the product in a way that let us test them out and evolve the product.

Once the model is constructed the team then has to separate facts from assumptions and then rank the assumptions based on how critical to the success they are.  Having identified the key assumptions we will test them using a structured experimentation process.  As in a scientific process the experiment will have a purpose (i.e. we want to test the assumption that users will download the product from our website), a hypothesis (a prediction taken from the model on the user acceptance rates) and a procedure which is what we will include in our launch product.  We create features, A, B and C to determine if the users will find them useful and download them from our site.

In Lean Startup, Eric Ries identifies two types of hypotheses, a value hypothesis test whether the product or service actually delivers value that the customer is willing to pay for, and a growth hypothesis tests how new customers will discover the product.  We will need to make sure we are moving in both directions by making the product more valuable and growing the user base.

We will also decide on how we will measure the results and include that in our experiment description.  The plan will have a series of these experiments along with the results.  The results may support or refute our hypothesis.  If they support it we will then move on to subsequent assumptions creating experiments for each of them as we go.  In each instance we will build only enough into the product to test the specific assumption we want to learn about.  We will also be updating the earlier segments of the plan such as product and customer for what we have learned.  The model should remain fairly stable at this point unless some of our learning significantly changes one or more of our assumptions.

If the results fall short of what we expected or demonstrate an unexpected turn they should be followed up with users to understand why.  This is a deeper learning tool that will help us to get the product back onto a user acceptance path.  What we learn from these investigations will inform the earlier parts of the plan.

The company could reach a point where there is no significant traction from the product as it is being delivered.  The company then has to revisit whether there needs to be a shift in the strategy by making changes to the major assumptions and redrafting the model or whether they should abandon the project.  The results from the testing and discussions with potential users will provide direction for these decisions.  We will discuss these types of decisions in future posts.

We can see by looking at this approach that the planning phase was not some big investment of time up front but was built as the company progressed through strategy and execution.  Also, by incorporating learning early it was possible for the company to identify missteps and correct them before they has exhausted their resources.  If the business ended up not proceeding then this process will let the company fail early before they spend excessive time and resources trying to prop up something that isn’t working.

A reason why people use the old way of planning is that some investors expect to see things in that format.  Using the learning approach will often mean fewer resources are needed up front and investors will have better insight into how the product is progressing before any revenue or profits start to accrue.  If you find yourself being pushed into the old planning model by investors then it may suggest you have the wrong investors.  Having the wrong investors for your business is something you want to avoid at all costs but that is a topic for another day.

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