How I Document my Business Model Hypotheses
ashmaurya.com | Aug 11th 2010The validated learning loop is the fundamental feedback loop that drives a lean startup:
Even though, this diagram shows “CODE” as the artifact of BUILD, I subscribe to a much looser interpretation of BUILD that applies to anything you create for the purpose of learning from customers. So, a problem presentation, landing page, and even components of your business model are all examples of BUILD artifacts.
The most significant goal of a startup is finding a scalable and repeatable business model and the process for doing so follows the same validated learning loop. You start by documenting a set of business model hypotheses, then systematically validate those assumptions against reality and make course-corrections, or pivots, along the way.
It is really important that you write these hypotheses down. As Brant Cooper and Patrick Vlaskovits point out in their book: “The Entrepreneur’s Guide to Customer Development”, storing them just in your mind is a “subconscious rationalization” trap.
I’ve experimented with a number of different ways now for documenting my hypotheses and this is how I go about doing it:
Start with worksheets
Steve Blank’s book was my first introduction to customer development and I followed the worksheets at the end of his book as my starting point.
4 Steps to Epiphany Customer Development Worksheets:
1. Product Hypothesis
2. Customer Hypothesis
3. Channel/Pricing Hypothesis
4. Demand Creation Hypothesis
5. Market Type Hypothesis
6. Competition Hypothesis
The worksheets go into very specific detail on each hypothesis – some may or may not apply to your type of business since they were written for a specific type of business – enterprise software. Steve’s intent was not to create a universal set of questions but to get you started in thinking about the types of questions you need answered for your business.
Brant/Patrick simplify these hypotheses to an even smaller set, where they have you first thinking in terms of the customer-problem-solution, and then they layer in the business model details.
1. Customer-Problem-Solution Hypothesis
2. Business Model Hypotheses
– Business Assumptions
– MVP Assumptions
– Funnel Assumptions
I tend to outline my own initial hypotheses along 3 big questions: WHAT, WHO, HOW:
All these worksheets more or less tackle the same set of questions with slight variations in approach. However, you choose to answer these questions, the point of this exercise is to free form your answers. Then it’s time to get it down tighter.
Create a Business Model versus Business Plan
You could take your hypotheses and blow them up into a 30-50 page business plan or go the other way and shrink them down to a 1 page business model. As convincing as your hypotheses might sound to you, it’s important to recognize that they are still largely untested guesses that will almost certainly change.
Writing a business plan, at this stage (or ever?), is a form of waste – You can capture the same level of information in a 1 page business mode and have it be more portable and accessible. But more importantly, it’s a lot harder to distill the essence of your business down to a single page which is great practice for articulating your hypotheses – whether you’re pitching a customer or investor, you only get a tiny slice of time to make your case.
Business Plan: A document investors make you write that they don’t read.
Business Model: A single diagram that describes your business.
- Steve Blank
The Business Model Canvas
I particularly like Alex Osterwalder’s 1 page canvas approach to business model generation. It visually captures the essential components of a business model and looks something like this:
I do find some of Osterwalder’s blocks a bit too general for a lean startup and specifically my type of business – web apps. For instance, before product/market fit, I need to see more emphasis on Problem/Solution than key partners or a customer relationship model.
Rob Fitzpatrick created a great adaption of Osterwalder’s canvas that better captures the “4 Steps of Epiphany” type of hypotheses. You can create these hypotheses online at http://thestartuptoolkit.com. Rob’s goal is to version each update so you get an automatic way for tracking the evolution of your model/pivots.
However, after using the Rob’s Startup Canvas, I found it unfortunate that he left out a few critical blocks like the cost/revenue pieces which make up the foundation of the business model.
So I decided to iterate on this one more level and created a version that looks like this:
There’s a clear delineation down the middle, on PRODUCT versus MARKET and here’s a brief description of each block and the order in which I like to think/validate them:
1. Problem: A brief description of the top 3 problems you’re addressing
2. Customer Segments: Who are the customers/users of this system? Can they be further segmented? For example, amateur photographers vs. pro photographers. If I have multiple target customers in mind, for example, graphic designers vs. lawyers, I will create a separate canvas for each. More than likely a lot of the other pieces like problem, solution, channels, etc. will be different too.
3. Unique Value Proposition: What is the product’s tagline or primary reason you are different and worth buying?
4. Solution: What is the minimum feature set (MVP) that demonstrates the UVP up above?
5. Key Activity: Describe the key action users take that maps to revenue or retention? For example, if you are a blogging platform, posting a blog entry would be a key activity.
6. Channels: List the FREE and PAID channels you can use to reach your customer.
7. Cost Structure: List out all your fixed and variable costs.
8. Revenue Streams: Identify your revenue model – subscription, ads, freemium, etc. and outline your back-of-the-envelope assumptions for life time value, gross margin, break-even point, etc.
9, Unfair Advantage: I left this for last because it’s usually the hardest one to fill correctly. Jason Cohen, a smart bear, did a great 2 part series on competitive advantages. Most founders list things as competitive advantages that really aren’t. Anything that is worth copying will be copied. So what is a competitive advantage:
Unfair Advantage: Something that cannot be copied or bought.
- Jason Cohen, A smart bear
You may initially have to leave this box blank but the reason it’s here it to have you really think about how you can both make yourself different and make your difference matter.
So, is being “Lean” a competitive advantage? What do you think?
I agree that lean can be copied but as with any process or methodology, there are varying degrees of execution/refinement as well as outright resistance from incumbents. How come Toyota dominated with Lean Thinking for so long when it was out there for others to copy?
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Original Page: http://www.ashmaurya.com/2010/08/businessmodelcanvas/
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