How Do We Restart Post Lockdown?

Much of the world has started to emerge from COVID-19 lockdowns and businesses are trying to restart. One recent article put it this way: “every organization is now a startup.” Perhaps we should refer to our once stable organizations as ReStartups — having to again go through the painful (but critical) process of finding a value creating role for all stakeholders.

How do you do that? It’s a scary thought for most leaders. For many, it’s been years or decades since they or their organization have been in that place. The normal rhythms and practices of the organization aren’t designed for starting from scratch and denying all existing assumptions.

Established organizations may not have those rhythms and practices, but startups do. The good news is that ReStartups aren’t really starting from scratch. They have much to build from. But, there is still much to learn from entrepreneurs about how to turn an envisioned opportunity into a reality.

I’d like to introduce you to four practices that startups use in pursuing lasting businesses that create sustaining value, even amidst great uncertainty:

• Build-Measure-Learn
• Design Thinking
• Business Model Design
• Bottoms-up Financial Modeling

The first lesson that ReStartups need to learn, however, is the importance of hypothesis.

We think we deeply understand our business.

We have immense amounts of data. Our customer research tells us what our customers value and what they want. Our operational data tells us how well our internal processes are functioning. Our competitive data tells us what our rivals are doing and how well those tactics are working.

As one of my bosses once put it, we also have “good guts”. Based on our experience running this business and competing in this industry, we have a strong sense for what works and what doesn’t. We have a “spidey sense” that tells us when something is wrong. Sure, we look at the data, but we often make decisions based on “gut instinct.”

The problem right now is that both our data and our instincts are almost worthless.

Our customers may be scared, hurt, and changed by the lockdown. Even if we asked them, their responses couldn’t be trusted to tell us how they will act in the near future. Our internal operations have also been changed by social distancing rules, work from home options, and the extended shuttering of key facilities. We don’t really know how well any of it will perform in the coming weeks and months. And we can only guess at what competitors will do, some of whom are probably wounded and feeling cornered by financial pressures.

None of us have been in this situation before. We have low confidence that we know how well any idea will work. Our internal alarms are probably going off 24x7, and have been for a couple of months while so many aspects of our business have shut down. Sometimes we struggle to figure out which fire to try to put out first and we don’t feel we have the luxury of sitting back and contemplating what should come next.

Although for different reasons, I’ve just described the reality of a startup. There’s no way to predict what customers will value, how well internal operations will work, and how competitors will respond. Everything is so new that entrepreneurs have little directly relevant experience to draw upon to make “gut decisions.” And yet every year some startups survive and emerge as new leaders in their industries. How do they do it?

Perhaps the biggest tool in the entrepreneur’s toolbox is that of the hypothesis. Entrepreneurs know that all of their beliefs about the business are hypotheses and none of them are yet proven truths.

Right now, in your ReStartup business, you may be hoping that everything will return to normal. That, my friend, is a hypothesis. It’s probably the biggest and most important hypothesis impacting your future. If you assume it’s true and confidently move forward based on that assumption, you may be making a “do or die” decision. Are you prepared for that, or do you want to pause for a moment and learn a lesson or two from the startup community?

Build-Measure-Learn

There are three steps to moving from hypotheses to truths:

1. Develop a set of well defined hypotheses.
2. Prioritize them so that you evaluate the most important ones first.
3. Run experiments to turn hypotheses into verified truths.

Earlier I used as an example the hypothesis that “everything will return to normal.” This isn’t a very good hypotheses for a couple of reasons, most importantly it is just too big.

“Everything” implies all aspects of the business: customer desires, operational effectiveness, financial performance, etc. That’s too big of a hypothesis to test at one go, so it’s helpful to break it down into a series of hypotheses that we can test individually. For example, we might have a set of hypotheses around customer behavior, another set around our internal operations, and another set around business economics.

In their book Testing Business Ideas, David Bland and Alex Osterwalder identify the characteristics of a good hypothesis. A good hypothesis is testable (it can be validated based on evidence), precise (you can define what success looks like), and discrete (it describes a single testable aspect of the business).

For example, “we believe customers still want our food” isn’t a very good hypothesis, while “we believe that at least 50% of our loyal customers plan to eat in our restaurant this summer” is testable, precise, and discrete.

We then need to prioritize all of these assumptions. Sometimes there are one or two “leap of faith” hypotheses that are so critical that, if they are wrong, then the whole business fails. For example “we believe that we will be able to source enough meat to keep up with customer demand” might be such a “do-or-die” hypothesis for a steak restaurant. These huge assumptions are the ones you need to test first. After these “leap of faith” hypotheses, move down the prioritized list to less critical, but still important ones. At some point in the process, you’ll get to hypotheses that are interesting but aren’t impactful enough to justify the time and expense to verify.

So how do we move from hypothesis to proven truth anyway?

In The Lean Startup, Eric Ries introduced the Build-Measure-Learn loop. In this approach, you build an experiment, you run the experiment and measure results, and then you evaluate the results to see what you’ve learned. Based on what you’ve learned, you modify your hypothesis and refine the experiment, then you run it again. And again. Until the experiment validates the current hypothesis.

Ries makes two important points about the Build-Measure-Learn loop. The first is that you need to approach it in reverse order. You identify what you want to learn, then you determine what you could possibly measure to answer the critical questions, and then finally you design the right experiment. The second point is that at the end of each loop, you need to ask whether you still have confidence in the general hypothesis and you just need to refine it, or is it time to “pivot” to a different hypothesis altogether.

All of that is fine and good, but how do you design and run an experiment in the first place?

Bland and Osterwalder break hypotheses into three broad categories:

• Feasibility: Can we do this? Can we make it and deliver it?
• Desirability: Do customers want this? Will they buy it?
• Viability: Should we do this? Can we make money?

They then provide 44 different experiments. For each experiment they ballpark the financial and time investment required, the speed of results, the strength of evidence produced, and the broad categories of hypotheses that the experiment is well suited to address.

A few examples from their book might help give a sense for what experiments look like.

Some experiments are similar to traditional forms of corporate learning. For example, customer surveys can be helpful, especially if they are designed to truly test hypotheses and not just confirm the current beliefs.

Other experiments may be new to ReStartups. For example the “Buy a Feature” exercise modifies the traditional focus group meeting to have customers allocate imaginary money amongst potential improvements to your product or service. Another example is the “Wizard of Oz” where you temporarily have people “behind the curtain” manually performing tasks that in the future will be automated in order to test and understand the value of that service before investing in the automation.

Selecting and running experiments takes diligence, but the hardest aspect of adopting the Build-Measure-Learn approach into a ReStartup is the change in attitude required. Quickly learning that our current model isn’t going to work anymore is a huge win, even though it feels like a major setback. By uncovering the issue early in the ReStart, we hopefully have time to pivot to a different approach. (Of course, that new approach then needs to be tested and validated.)

Proverbs 1:5 teaches us that “A wise man will hear and increase learning, and a man of understanding will attain wise counsel.”

Demonstrate wisdom by being teachable and adapting to this still unknown new reality.

Design Thinking

Some hypotheses are obvious and critical to confirm, but beyond these do-or-die assumptions, where should you look next for the hypotheses to drive your business strategy?

Design Thinking has been central to many of the revolutionary changes brought about by the Lean startup and Agile software development methodologies that have fundamentally redefined how businesses and products are launched.

Tim Brown, the CEO of IDEO, says, “Design thinking is a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.”1 In other words, similar to what Bland and Osterwalder said, design thinking operates at the intersection of what is desirable from a human perspective, what is technically feasible, and what is economically viable.

Design thinking typically moves through three main phases (sometimes multiple times): Inspiration, Ideation, and Implementation. In the Inspiration phase, you learn more about the people you serve by talking to them, observing them, and empathizing with their hopes and desires. During the Ideation phase, you brainstorm many potential ideas and test those ideas to narrow down to the best ideas. This is often described as “divergent thinking” where many perspectives create a multitude of ideas and then “convergent thinking” where the best ideas rise to the top. Finally, in the Implementation phase, the best ideas are tested, iterated, and refined towards reality.

In Design a Better Business, authors Patrick van der Pijl, Justin Lokitz, and Lisa Kay Solomon identify the 7 essential skills of a designer:

• It all starts with the customer.
• Think and work visually.
• Don’t fly solo. You are not smarter than everyone else.
• Tell stories and share the experience.
• Keep it simple.
• Set up small experiments and learn.
• Embrace uncertainty. It’s candy for the brain.

Jesus reminded us in Matthew 22:39 to “love your neighbor as yourself.”

As we ReStart our businesses as ReStartups, we need to deeply understand our customers. Startups specifically use a process called Customer Discovery.

In The Startup Owner’s Manual Steve Blank and Bob Dorf outline the four questions to be answered in the Customer Discovery process:

• Have we identified a problem a customer wants to see solved?
• Does our product solve this customer problem or need?
• If so, do we have a viable and profitable business model?
• Have we learned enough to go out and sell?

They explain how to begin answering those questions: “Facts exist only outside the building, where customers live, so the most important aspect of customer discovery is getting out of the building, in front of customers. And not for a few days or a week, but repeatedly, over weeks if not months. This critical task can’t be assigned to junior staffers and must be driven by founders. Only after founders have performed this step will they know whether they have a valid vision or just a hallucination.”

In fact “get out of the building” is a common refrain among entrepreneurs. You really don’t learn much about customers sitting in a conference room in your headquarters, even if you’re listening to consultants provide a readout on the latest customer research, or you’re watching a video from a focus group. You want to deeply understand your customers. You need to see where they live and feel their pain. You will learn so much by hearing from them what they’ve tried to use to solve their problems; what worked and what didn’t.

Until you understand your customer and their “value chain” in choosing, buying, using, and discarding the products and services in your category, you won’t fully recognize the customer-centric hypotheses you’ve built into your business that need to be critically tested. In today’s post-lockdown world, you especially need to understand how that entire customer value chain has changed.

Using Jesus’ terminology, how well do you know your neighbors? Are you loving them as well as you love yourself? Can you make their life even better?

Business Model Design

Startups spend a lot of time focused on getting their business model right. Alexander Osterwalder defines a business model as “a representation of how an organization makes (or intends to make) money.” Startups need to spend a lot of time on their business model because they need to find a way to make money so that they can have a sustainable business.

But this is another case where established businesses, who now find themselves in the ReStartup mode, can learn a thing or two from entrepreneurs.

Established businesses don’t spend nearly as much time on business model design as startups because, long ago, they found a business model that worked and since then they’ve simply refined the model and executed well against it. Sadly, as a ReStartup, that may no longer be true.

In his book Business Model Generation, Osterwalder introduced the Business Model Canvas, a simple one-page, nine-box model for summarizing any business model.

The canvas can roughly be broken into three parts:

The front-end, customer-facing section:

• Customer Segments: Who do you serve? What are their needs and desires? How big is the market? How do they make decisions?
• Value Proposition: How (and how well) does your offer meet customers’ needs? In what ways does your offer create value for customers? Can you measure that value?
• Channels: How do customers hear about your offer? Where do they buy your offer?
• Customer Relationships: What is your ongoing relationship with your customers? How does that translate into customer loyalty, recurring revenue, and future purchases?

The back-end, operational section:

• Key Activities: What do you need to do to deliver the value proposition to target customers?
• Key Resources: What do you need to have to deliver the value proposition to target customers?
• Key Partners: What outsiders are essential to your ability to deliver the value proposition to target customers?

The financial outcomes section:

• Revenues: How does the delivery of your value proposition translate into revenues for your business? What’s the breakdown between products, segments, and channels? What is the trajectory for each?
• Expenses: What investments (long term capital and short term expenses) are required to achieve those revenues?

In this post-lockdown world, the former truths for your business in many of these nine boxes may have become shaky hypotheses. I would especially encourage you to ask these questions. For each, consider both near-term and long-term impacts:

• How have customer needs, desires, and expectations changed?
• Have customers changed their channel preferences?
• How have key activities been challenged or changed?
• How have key resources been impacted?
• Has your supply chain been affected?
• Have key partners changed their business model or practices?
• Have expenses increased significantly in any material areas of the business?
• Have customers’ ability or willingness to pay changed?

I intentionally framed those eight questions from a “victim’s” perspective, where those changes may have hurt your business, and that’s an important perspective to explore, but I would now encourage you to go through the exact same set of questions from an “innovator’s” perspective:

• What new customer needs, desires, and expectations can we serve?
• How can we leverage changing customer channel preferences to efficiently grow our business?
• How can we do things better?
• How can we be more efficient in our use of facilities and materials?
• How can we improve our supply chain?
• Are there new partners we should engage with to improve our business?
• Can any of these changes enable us to reduce expenses?
• Can we deliver more value to customers and capture much of that value?

Take this ReStart opportunity to examine your business model to find ways to make it even better and stronger. Uncover promising hypotheses worthy of testing and proving.

Bottom's-Up Financial Modeling

So far we’ve focused on identifying and testing hypotheses in the business. That’s an important exercise as we seek to ReStart our businesses after the COVID-19 lockdowns. We need to understand how the world around us has changed and how our business should change in response.

But, the humbling reality is that, for many of us, we don’t know whether our businesses can even survive this ReStart. That’s the reality that entrepreneurs wrestle with constantly. Part of their everyday vocabulary includes phrases to specifically deal with this challenge and uncertainty.

Entrepreneurs and their investors regularly talk about the startup’s “burn rate” — how much cash they are consuming each week or each month. They then talk about how much “runway” the business has — how many weeks or months the company can survive before all their cash gets consumed at that burn rate. They try to make the right decisions to increase cash, reduce the burn, and therefore extend the runway, all while still maximizing their growth opportunities.

There’s an essential tool that most startups use that I strongly recommend for ReStartups — a bottoms-up, assumption-driven financial model.

In our established businesses, we are used to working with precise financial reporting tools. These tools accurately report our historical performance, and from that history we can generate forecasts for expected future performance. The more stable our business is, the better our traditional tools work for forecasting the future.

For startups with little financial history, such reporting and forecasting tools aren’t much help. Sure, the books need to be kept accurately, but to manage the business, a different kind of tool is necessary.

So, entrepreneurs custom build financial models that reflect how money flows through the business and tie those money flows to assumptions about what will happen in the future. How does money spent on advertising translate into sales? How does a sale translate into revenue and gross profit? And how do sales translate into expenses within the business?

In some ways, established businesses should be much better than startups at doing this modeling. With years of experience and data, the linkages should be more apparent and reliable. However, the uncertainties that we face coming out of lockdown challenge those assumed correlations.

A bottoms-up, assumption-driven financial model simplifies the business down to a manageable level of complexity and identifies a small number of key drivers and levers that can be used to evaluate critical strategic decisions that your ReStartup will need to make. What are the uncertainties that are most likely to impact revenues and expenses? What are the levers, the key decisions that you might make (e.g. marketing spend, headcount, compensation) to survive this crisis?

To get a sense for how such a model might be built, a video tutorial is provided here.

In the Bible, the apostle James tells us: “My brethren, count it all joy when you fall into various trials, knowing that the testing of your faith produces patience. But let patience have its perfect work, that you may be perfect and complete, lacking nothing.”

Let God guide you in learning through these trials. Leverage the gifts He has given you — experience, knowledge, understanding, wisdom, and maybe even lessons from entrepreneurs.

View this ReStart period as a big experiment to build a stronger and more resilient business!

I can’t leave this topic without acknowledging that there is good news. In our businesses, everything may be a hypothesis, but in the world, there are some truths that we can trust. “Jesus Christ is the same yesterday, today, and forever.” (Hebrews 13:8) Our “spidey sense” may be unreliable, but those who trust God have a still small voice that does speak truth. The Bible may not give us operational statistics and processes, but it can strengthen us, and can guide our steps.