Thursday, December 20, 2012

The New Entrepreneurial Methodology

A new entrepreneurial methodology is emerging under name of lean startup (with customer discovery).  The spread of the methodology coincides with a worldwide spike of interest in and practice of entrepreneurship.

The methodology can be summarized as follows:
  1. Define a business model (the plan)
  2. From day one, develop personal relationships with customers.
  3. Run a customer-centered experiment to test your plan.
  4. Based upon what you learned in the experiment, revise your plan and your product and design and run more experiments, repeating the process until you find a plan that works.
Or to summarize it even more concisely, in six words:
  1. Business model
  2. Customer relationships
  3. Experiments
  4. Rapid cycle time
The uncertainty premise.   This methodology rests on one critical assumption:  that starting up a company to create something new or even something new to you is a highly uncertain venture.  Many startups today in the web and mobile space are doing just that.  On the other hand, if you've managed a beauty parlor for years and you want to start your own beauty parlor, there's less risk.

Ironically, entrepreneurs seem genetically programmed to underestimate their risks and to act as if they didn't exist.  This is bad for entrepreneurs but good for society which thrives on many people trying and failing to create new things.

Back to the methodology...

1.  Business model.  A business model is, while having a fancy name, a simple thing.  Its a simple representation of your plan that answers the questions:  
  • What am I offering (value proposition)?  
  • What are the customer groups that will buy my offer (segments)?  
  • Will customers actually buy what I'm offering (problem-solution fit)?  
  • Will enough customers buy from me (market size, product-market fit)?  
  • How will I get, keep, and grow customers (customer relationship)?  
  • How will I make money and will it cover my costs (revenue streams and cost structure)?  
  • What resources do I need to make it all happen (key resources)?  
  • What are my most risky assumptions (key assumptions)?  
A business model can be summarized in one or two pages.  It's simpler than a business plan, more useful and represents a complete picture of the business along with its key risks.

A business model is also a set of guesses.  The method helps you turn guesses into facts.

Lastly, a business model is a logical expression articulation of an entrepreneur's vision which is the creative powerhouse and engine behind the creation of new things in the world.

2.  Early and personal customer relationships.  Its important to develop personal relationships with customers early on even if your starting a business that doesn't require much ongoing customer contact.  Customers provide an early warning system for flaws in your business model.  They give you deep insight, often unintentionally, and that insight  leads to changes in your model, small and large.

3.  Rapid cycle time.  You won't succeed with your first business model.  Perhaps not with your second, third, or tenth.  This is a foundational fact.  

Let's engage in a thought experiment.  Imagine you could look into the future and know that your tenth plan is the one that will work.  You can't jump to ten because you're going through a learning process where one plan leads to the next.  At your current rate of learning, you will run out of time and money before you get to ten.  So the solution is to speed up the learning process.  The more quickly you can loop through a plan-test-revise cycle, the better your odds of success.  This is also called iteration.

4.  Experiments.  Experiments are what you do during an iteration.  The English word experiment derives from the Latin exper which means to try.  Startups use conversations, networking, presentations, and prototypes to try out their product and their business model on potential customers.  There is a lot of accumulated wisdom on different types of experiments and how to run them efficiently.  Experiments create learning experiences for entrepreneurs which lead to better plans.  To experiment is to engage in trial-and-error, or perhaps, more accurately, trial-and-learn.

One of the words repeated in this post is learning.  Entrepreneurship is a process of learning about customers and markets and using that learning to build a profitable business.  The startup methodology outlined here is about how to orchestrate the learning process.

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