What's Your Riskiest Assumption?

Wednesday, Dec 16 (2020) | 3 min read

Your true job as an entrepreneur is to de-risk your business model over time.

At the early stages of an idea, you have to de-risk your idea to convince your
- Co-founders to quit their stable jobs and join your cause,
- Customers to take a chance on your product versus the existing alternatives, and
- Investors/stakeholders to give you money to grow your business.

It logically follows that you should prioritize tackling what’s riskiest, not what’s easiest, in your business model.

That’s precisely why “Prioritizing your riskiest assumption” is the second step in the Continuous Innovation framework.

But while a simple enough concept to grasp, it’s ironically quite hard to put into practice — and where lots of entrepreneurs go astray:

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Incorrect prioritization of risk is one of the top killers of startups.

Why is that? Because when you mis-diagnose your riskiest assumption, you end up wasting needless time, money, and effort focusing on the wrong actions.

This depletes your already limited runway to finding product/market fit.

So what are some ways for prioritizing your riskiest assumptions?

Approach 1
You could use your intuition to identify your riskiest assumption. But your intuition is subject to your biases.

Approach 2
So a better approach would be to involve your entire founding team (if you have one) and vote on what’s riskiest. There’s even a tool for this:

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But voting on what’s riskiest is still subject to our respective specialization biases. What’s riskiest to a technically-oriented founder will inevitably be quite different from what’s riskiest to a sales-oriented founder.

Approach 3
So an even better approach would be to involve seasoned advisors and domain experts on determining what’s riskiest.

But even here, it’s more common to end up with conflicting assessments on what’s riskiest. I see this happen all the time at some of the best accelerators in the world.

We call it the advisor whiplash problem.

And it does more harm than good.

Imagine consulting with 10 doctors about a headache and getting 10 different prescriptions.

Uncertainty + Conflicting Advice = CHOAS

So while each of these approaches are well intended, none of them are foolproof.

The underlying reason for this is that all of them require guessing — either you guess, or your team guesses, or you have someone with more experience than you guess.

But it’s still guessing.

The only way to tell if the guess is right or not is through testing which costs you time — the scarcest resource in a startup.

So is there a better way?

The answer is yes... And it requires using a systems-based approach.

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Enter the Customer Factory

If you read the Customer Factory manifesto, principle #10 was about applying the Theory of Constraints (developed by Eliyahu Goldratt) to your business model.
If you haven’t read the Customer Factory manifesto, now would be a good time to do so… then come back here.
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The basic premise of the Theory of Constraints (TOCis that a system is made up of a series of interconnected processes with a single constraint.

On a factory floor, think of this as the slowest machine. There is always one.

The overall throughput of the system will be limited by the capacity of the slowest machine -- which is the bottleneck or constraint.

So it follows that the first step towards optimization should be identifying the slowest machine.

The bottleneck or constraint isn’t the same thing as your riskiest assumption because the bottleneck only tells you where you are slowest, not why.

But that’s still a critical first focusing step.

The next step after that is determining why it’s slow and how to make it faster.

On the factory floor, this could be because the machine needs servicing, upgrading, better operators, etc.

It’s in the why and how that you uncover your riskiest assumption(s).

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The Theory of Constraints applied to your business model
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Your business model is no different.

It too is a system made up of a series of interconnected steps — specifically the 5 macro steps outlined in the Customer Factory.

The job of optimizing your customer factory similarly starts with first finding the limiting constraint among these 5 steps which I’ll leave to with you as an overnight exercise.

Given the picture below, where is the constraint in the customer factory?

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If you’d like to share your answer, you can do so in the comments section below.

In any case, I’ll have the answer for you in tomorrow’s email.

Cheers.

Ash