When you’re developing a strategy for a new business, testing assumptions in a logical order gives you the best chance to make course corrections early — and not waste time and money.
For a new business to succeed, many assumptions have to prove true. Testing assumptions in a logical order gives the team the best chance of making course corrections early — and not wasting time and money. In this essay, I outline a method for (1) identifying the assumptions or unknowns and (2) resolving these assumptions on the basis of three parameters: severity, probability, and cost of resolution.
Between stints in academia, I spent more than 20 years in marketing, engineering, and general management in both startups and public companies. Most pertinent to this essay, I served as vice president of engineering for Align Technology Inc. from December 2000 to July 2004. It was at Align — now a 6,800-employee company based in San Jose, California — where I learned firsthand the importance of testing assumptions. Since leaving Align, I have worked with more than 100 startup teams and developed a systematic approach for testing assumptions. Below, I’ll explain my method, illustrating how testing assumptions helped Rent the Runway Inc., a 505-employee company based in New York City, become a fast-growing success. I’ll also explain how my method might have helped Align — prosperous though it has now become — bleed less cash during its early days.
The enthusiasm surrounding the “lean startup methodology” and its many offshoots has created a mindset that entrepreneurs should just launch, failing early and often — iterating, to use startup parlance. But failure alone does not teach. If there are an infinite number of bad ideas, eliminating one gets us no closer to a good idea. Rather, the businessperson contemplating a new venture must begin by evaluating factors that have to be true for the venture to succeed. He or she also must model these factors in a way that allows for reasonable testing. For example, the assumption that people will buy a product for the asking price is a big one; it would take a full launch to completely validate this. Therefore, the entrepreneur must split big assumptions into discrete, manageable assumptions that can be tested at a level of detail allowing for efficient learning.
Identifying the assumptions is the first step. The second is determining a sequence for testing them. Each step should resolve a critical unknown.