Defining Your Business Hypothesis
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“No business plan survives first contact with customers.”
- Steve Blank, Silicon Valley entrepreneur
The lean startup movement, pioneered by Eric Reis, is an approach for dealing with the inherent uncertainty in entrepreneurship. It is particularly well-suited to early-stage startups when:
- There is little or no historical data
- Customers and markets are uncertain
- Competitor behavior is not obvious
- The business model is based on a large number of generally unverified assumptions
The starting point of the lean startup approach is the creation of a Minimum Viable Product or MVP. The MVP allows you to go to market and test the response of the market to your product and/or service. The MVP could be a physical product, software, or service.
How to Define Your Business Hypotheses
The form of the hypothesis is as follows:
I believe [target market] will [do this action/use this solution] for [this reason]
Hypotheses are usually based on assumptions. You need to isolate the most important assumptions for your product and/or service and test them first.
Based on the work of Tom Eisenmann of Harvard Business School, assumptions fall into four key categories. Each category could give rise to several hypotheses as follows:
- Customer Value:
- I believe the target market will use this solution for this need
- I believe this segment will find the offer attractive
- I believe we can maintain our competitive advantage for this reason
- I believe the market will pay this price
- I believe this partnership will work with us to succeed
- I believe our competitors will be slow to react
- Technology and Operations:
- I believe our costs will be lower than our revenues
- I believe we can assemble the right team to bring this to life
- I believe we can develop and maintain the underlying technologies
- I believe our solution is sustainable in the long term
- Sales and Marketing
- I believe these sales channels will get us to the market
- I believe we will get new customers at this rate
- I believe our costs of customer acquisition will be lower than our customer lifetime value
- Finance and Profit
- I believe our financial projections are accurate
- I believe we can build the product before we run out of money
- I believe we can raise money from this source for this reason
As a team, consider each assumption and rate them:
- 1-5 based on the level of expected importance
- 1-5 based on the confidence level (5 is least confident)
Select the assumptions with the highest scores as your key assumptions and hypotheses.
Once you have identified your most important assumptions and hypotheses, you need to conduct preliminary experiments. We will discuss this in the next article.