How to De-risk Your Business Ideas

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De-risking business is part of every entrepreneur and leader's obligation.

Yet, responding to?VUCA?(volatile, uncertain, complex, ambiguous) environments (like the one we find ourselves in today) takes foresight, courage, resilience, and vulnerability.

It requires a leader (and their teams) to?step away from safety and security into new frontiers and ways of operating.

Recently, we unpacked?how to thrive in turbulent times?by focusing on building capability across three areas:

• Anticipating change
• Designing change
• Implementing change

This week, discover the four pillars of testing business ideas that will?help you de-risk while creating new futures.?

Let's go!

Why Test Business Ideas?

The simple truth is found in market failure.

"Most new products will fail in the market, even if competently executed"?- Alberto Savoia.

Alberto has studied the failures of hundreds of companies and believes failure comes from three main reasons:

1. Failure in launch.?"We built the right product. We built it right. But we launched it wrong."
2. Failure in operations.?"We built the right product. We launched it right. But we built it wrong."
3. Failure in premise.?"We built the wrong product to start with."

Alarmingly, it is building the wrong thing, to begin with. That is by far the most significant reason.

Building the wrong thing comes from two main places:

• Lack of a scientific approach to systematically reduce risk while simultaneously testing the idea.
• Human factors lead us to believe our ideas or go down the wrong path, such as ego, confirmation bias, and several other?biases.

The?four pillars provide a proven system for testing your ideas.?

Pillar 1 - Testing Business Ideas - Design

The design pillar comprises team design, team behaviour and team environment.

Team design?is best thought of as constructing a diverse team with cross-functional skills and backgrounds providing different perspectives.

Diverse teams help to cultivate more unique ideas.

Team behaviour?is about how a team acts. Six behaviours indicate team success:

• Data-informed.?They use insights to shape the way forward.
• Experimental.?Teams look to learn from conducting experiments.
• People-centric.?They focus on staying connected to the customer's needs, experiences and core reason for the idea.
• Urgency.?Teams move at pace, building momentum towards their goals.
• Iterative approach.?They focus on 'the doing' and iterating their way to success.
• Challenge assumptions.?Teams don't hold their beliefs too close and consistently seek to challenge assumptions.

The team environment?speaks to creating a stimulating and creative space to operate from.?

Also, providing the necessary resources, autonomy and direction that a 'startup' needs.

Pillar 2 - Testing Business Ideas - Testing Process

The testing process covers defining a hypothesis, assumptions mapping, framing experiments, evidence and insights.

Defining a hypothesis.

A test needs a hypothesis to measure the outcome. For example, try the XYZ formula – X% of Y people will Z.

For example, We believe 30% of office workers aged 30-40 will purchase cold coffee (to reheat themselves) for half the price of hot coffee.

Assumptions Mapping.

Assumption mapping is a two-by-two matrix to identify the most critical assumptions that need to be tested.?

These are the ones that are the biggest risks (top right-hand corner) to desirability, feasibility or viability and are prioritised in terms of the level of importance and evidence.

Framing experiments.

As per defining a hypothesis, framing experiments clarifies what will be done and the measurement and success criteria.

Try this framework:?

1. 30% of office workers aged 30-40 will purchase cold coffee (to reheat themselves) for half the price of hot coffee.

2. To verify that we will interview and offer 30 office workers cold coffee to purchase.

3. And measure how many office workers purchase cold coffee.

4. We are right if 9 or more purchase cold coffee.

Evidence and insights.

Once you've experimented, then synthesise the learnings.

Study the evidence and derive the insights to validate or invalidate the hypothesis.?

The learnings that you get will help you decide whether to test again (always run multiple experiments), pivot to a new market or idea, or kill the idea.

I suggest the following framework:

• We believed that [ ].?
• We observed that [ ].?
• From what we learned [ ].?
• Therefore, we will [ ].

This process, while straightforward, helps to provide a documented system to defuse reactive, emotional thinking and allow objective review to make your decisions.

Pillar 3 - Testing Business Ideas - Running Experiments

Experiments can be categorised as 'discovery experiments' or 'validation experiments'.?

Discovery experiments provide weak evidence but point you in the direction in the form of insights.

Validation experiments provide strong evidence and validate insights.

And they cover the phases of desirability (do they want it?), feasibility (can we build it?), viability (should we do this?).

There are three things to consider when selecting an experiment:

1. What phase are you testing? I.e. desirability (d), feasibility (f) or viability (v) because some are better at testing particular phases.
2. How much certainty do you already have? If you have little evidence for the particular assumption, always start with a fast and inexpensive experiment that might point you in the right direction.
3. What time or money constraints do you have? For example, if you lack time or money, you should select inexpensive experiments to test multiple assumptions.

The general idea is to:

• Start inexpensive and fast in the beginning.
• As you gather more evidence, increase the investment in experiments to provide stronger evidence and run multiple experiments to test the same hypothesis.
• Try to select experiments that will provide strong evidence under your existing constraints.
• Delay building anything (actual product) until you have run multiple tests and have strong evidence.

I have started building an experiment library with some core experiments for you to select.

The library is a?notion template?you can duplicate and use.

Pillar 4 - Testing Business Ideas - Useful Mindsets

Mindsets often need to be more recognised in their importance for innovation.

And?their importance is even more amplified when innovating within an existing business, often with well-ingrained cultures and habits.

The mindsets are categorised as?enabling actions, leadership and culture tips.

Enabling Actions:

• Look for evidence that proves AND disproves your hypothesis.
• Provide sufficient time, or the experiment will be compromised.
• Observe actions, not just what people say.
• Run experiment sequences to build up the evidence.
• Remember, this is about learning and progress, so adapt.
• Never outsource or use other people's data. You need your own new data.

Leadership and culture:

• Develop an inclusive culture using empowering words such as "we, us, or our".
• Build capability in your team by removing hierarchy and encouraging participation, such as asking, "How might we test this...?" or "What else could we do...?"
• Hold your beliefs and opinions loosely to allow space for new ideas. Focus on evidence.
• Help the team develop processes, design suitable metrics and provide the necessary resources.
• Be vulnerable yet confident in your team's ability to navigate uncertainty.
• Don't expect a 'silver bullet' and help transform your team's ability with coaching.
• You might also find these articles about?change?and?leadership styles?helpful.

If you enjoyed this edition, forward it to a friend.

This article was inspired from Christian Walsh and Alberto Savoia's, David J. Bland and Alex Osterwalder's work.

See you next issue ??

Vaughan

P.S. Do you run experiments to test your ideas? If so, what have you done? I'd love to know.

Articles you might have missed:

?? How to Thrive in Turbulent Times

?? Creative Leadership During Uncertainty

NOTE

This article was originally published as a two-part series in March 2023 as a Future-state Thinking newsletter. If you're not on the Future-state Thinking mailing list, you can catch up on the most up-to-date publications and subscribe by?clicking here.

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