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. And each resolution should spur the entrepreneur to continue, change direction (in other words, “pivot”), or, in the worst case, abandon the enterprise.
3 Comments On: How to Test Your Assumptions
In my almost 20 years of building models to value novel medical technologies I have found that even the fanciest math cannot overcome faulty assumptions. Jon, thank you for laying out such a simple outline of what can be a very complex process. Excellent article.
I agree with Michael – that faulty assumptions and the natural bias created from work experience tends to create filtered views. I would also add- that in today’s market- a healthy paranoia towards competitive alternatives is really important. Hertz and Avis were so focused on fleet management assumptions that they failed to see Uber.
Greetings, Mr. Jon!
Very interesting and useful method described to test new business assumptions.
At first I also found it strange to recommend testing first the least probable assumptions, then I understood!
I would like to refer to your article in our blog como se preparar para concurso blog about study techniques.
Thank you so much,
Gerson