How to test a business idea and when to iterate
Derived from: "Disciplined Entrepreneurship" by Donald N. Sull, published in MIT Sloan Management Review
Instead of posting my usual business book review, I want to cover what I would consider a very important 9 page article. This was covered in my entrepreneurship class for my MBA, a class where I thought I'd already know everything and mostly just took to network with a professor who had an impressive startup background while also starting to ramp up a business for after I graduate at the end of this quarter.
Thankfully, I was sorely wrong. This article alone helped organize my thought process on startups and knowing when and how to iterate and when you do or don't have a good business and it just made sense.
First, think of your startup as an experiment rather than a company when you're first getting things started. Your startup idea is a working hypothesis that is testing a lot of variables that you believe will lead to success. List out those implicit and explicit variables. This list will include everything from technology to customer demand and willingness to pay, to competitive response and ability to obtain necessary resources.
Among these variables, place special emphasis on identifying your big bets and your deal killers. There are some grand ideas that you have out there about what will make your company take off, and there are also certainly things out there that could either squash it like a bug or keep it from becoming something big. Put lots of thought into adding those to the list as well.
One thing to consider is that you and your co-founders actually have earned the right to have an opinion on the business you are getting into. If you don't have a background in the key components of the industry you are trying to get involved with, your list of variables is going to be wildly incomplete. Get a cofounder onboard that fills those gaps, and any minor peripheral gaps can be filled with advisors and mentors.
You have to be comfortable with the idea of change as well. It's shown that most successful businesses undergo one major change and multiple minor changes on their path to success, so don't think that you're exempt to this.
Now that you have your complete list of variables you essentially have a working hypothesis, and you should view your job as a manager whose job is to test these variables through a series of experiments. This experimentation stage should also be done before making any key hires.
There are two types of experiments that you should be running: partial experiments or holistic experiments.
Partial experiments are designed to prove or disprove one of your variables. These are great ways to reveal information about a single, critical source of uncertainty and put numbers to it.
A holistic experiment tests multiple variables and interactions of those variables on a small scale. This can be launching a test market or prototype sales, or things like that. It is great for unveiling unknown unknowns, which are sure to exist.
However, with holistic experiments, you have to be careful of losing sight that this is an experiment where you're trying to decipher where the true experiment is, and you have to avoid what they call experiment creep. That is essentially where you keep expanding the time boundaries or some other aspect to the experiment and are no longer objective about the experiment.
Stage your experiments step by step, and assemble your resources based around the experiments at hand. When an experiment fails or you doesn't go as well as expected, that's a great time to iterate and try a new experiment. Eventually, you will land at a business model with a product or service that has the chance to explode and do very well. At this point, once you have a clearly defined path and capability that is profitable, it is far easier to make key hires or bring on venture capital, and that sort of thing if that's the direction that you want to go.
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