Entrepreneurs and managers can consciously design experiments to surface flaws in their business plan and spur revision. An entrepreneurial experiment, as I use the term, is a test designed to reduce uncertainty critical to success before committing additional resources. Common examples include customer research, prototypes, regional service, and beta customers. Based on the results of these experiments, entrepreneurs may decide to cut their losses, revise their working hypothesis and run another experiment, or harvest the value they have created. Below are some examples.
- Identify the deal killers. Every plan includes countless assumptions. Rather than worrying about all of them, an entrepreneur should identify potential deal killers, variables that could prove fatal. Deal killers vary: In commercial real estate development, title disputes or environmental liabilities could scotch a deal, while a software start-up faces a deal-killer if a deep-pocketed rival has a valid claim on the underlying intellectual property. Deal killers are often discernible early on, and managers and entrepreneurs should try to surface these critical source of uncertainty early. New deal killers may appear as the venture proceeds, while others prove tractable.
- Know what you are betting on. In turbulent markets, multiple variables influence the an opportunity’s
Entrepreneurs can pursue an opportunity much as scientists pursue knowledge–by following a disciplined process of identifying an anomaly in the market, formulating a plan to fill the gap, testing their plan in the real world, and revising their assumptions in light of new information. Menlo Park based ONSET Ventures, a venture capital firm focused on fledgling start-ups, has codified a set of practices that increase the odds that entrepreneurs formulate, test, and revise their working hypothesis in a disciplined fashion.
Since its founding in 1984, ONSET has backed over 100 early stage start-ups, 80% of which have gone on to receive subsequent rounds of financing, a much higher success rate than the average for investments in raw start-ups. When they co-founded ONSET in 1984, Terry Opdendyk and David Kelley (who also founded IDEO) conducted a systematic study of 300 seed stage ventures, with an eye to understanding the factors that influenced their ultimate success or failure. They found that a few factors accounted for most of the variation between successful and failed start-ups, and codified these findings into a set of principles for incubating new ventures.
- Simplify the working hypothesis. When selecting potential investments, ONSET partners use a set of
My last post described Karl Popper’s cycle that explains how scientists spot anomalies in existing theory, formulate a working hypothesis, submit it to rigorous testing, then revisit their hypothesis in light of new information. Entrepreneurs, it turns out, can exploit opportunities much like scientists pursue knowledge, by spotting a gap in the market, formulating a business plan to fill that gap, and then running experiments in the market, and revise their plan in light of new information.
- Notice a gap in the market. In the first step, the entrepreneur or manager notices an anomaly in the market that may point to a potential opportunity. Typical anomalies include a product that shouldn’t sell but do or customers using a product in an unexpected way. Consider Noodles & Company, a chain of