How to Test and Pivot in a Startup - The Value Hypothesis and Growth Hypothesis

I just finished reading the book, 'The Lean Startup' by Eric Ries - and more people should! I want to share some of my learnings, which I could relate to, based on my personal experience of working with and talking to startup founders.

Eric, in his book, defines a startup as:

“A human institution designed to create new products and services under conditions of extreme uncertainty.”

To be able to successfully navigate through the uncertain conditions, it is critical for a startup to rely on empirical testing rather than theoretical surveys, market research, or pure logic. This is where the lean startup framework of Build-Measure-Learn feedback loop kicks-in (but we'll get to this a bit later).

?"42% of startups fail because they offer products or services that the market doesn’t need."

A startup begins with an idea or a vision. Just as scientific experimentation is informed by theory, startup experimentation is guided by the startup’s vision. The goal of every startup experiment is to discover how to build a sustainable business around that vision. Now if you think about it, the startup idea or vision is based on certain inherent assumptions, about the product/service being offered, the problem the startup is solving, the market, the target audience etc. Eric calls the riskiest elements of a startup’s plan, the parts on which everything depends, 'leap-of-faith' assumptions. The two most important assumptions are the value hypothesis and the growth hypothesis. So what are these?

1) The Value Hypothesis:

The value a product provides is the only reason why someone uses it. A value hypothesis tests if a product or service is valuable to customers once they are using it. One of the primary reasons why companies fail is they create products/features/services that users don’t want. You need to empirically test the value hypothesis - does the customer have the problem you’re trying to solve? Does the product actually deliver value to the customer?

2) The Growth Hypothesis

A growth hypothesis is an assumption on how users find your product. If you already know the way your company is going to grow, test it. Don’t assume it works. Create a test, measure it, and prove it works. If it does work, keep the growth strategy active and come up with another way to grow even faster. Growth hypothesis is the assumption on how new users will find and start using your product, and how will the company grow once people start using the product.

Once clear on these leap-of-faith assumptions, the first step is to enter the 'Build' phase as quickly as possible with a minimum viable product (MVP). The MVP is that version of the product that enables a full turn of the Build-Measure-Learn loop with a minimum amount of effort and the least amount of development time. The goal of the MVP is to begin the process of learning, and to test these fundamental business hypotheses. Since MVP is an overused term, I wouldn't talk more about it here. I do however want to share an example of how the founder of a large technology company built and used the MVP to test its value hypothesis.

The Story of Dropbox

In 2008, Drew Houston, the founder of Dropbox, had this idea of a cloud storage service that works seamlessly across devices. The idea of having all your digital data stored in one place and available everywhere was innovative at that time. Now he could have invested thousands of dollars to build a whole hardware infrastructure, developed apps and so on, but if the idea would have failed, Drew would have lost priceless time, and a lot of effort and money. So what did he do? He didn’t make any product at all. Instead, he pretended they had it ready by creating an explainer video! They wanted to check if their file-syncing idea is anywhere close to being interesting to people. So, he released a short video (watch it below) that demonstrated synchronization with Dropbox. It wasn’t a simple demo; it was full of jokes to appeal to early adopters (2:49 lol). Drew says this “drove hundreds of thousands of people to the website. Our beta waiting list went from 5,000 people to 75,000 people literally overnight. It totally blew us away.” The video gave Dropbox the valuable feedback that enabled them to validate their core assumptions.

In conclusion, instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop. Through this process of steering, we can learn when and if it’s time to make a sharp turn called a pivot or whether we should persevere along our current path. The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop. Hypothesis should be changing until a company proves them. When a company proves one hypothesis, they should come up with a new hypothesis and validate it too. The more value a product has the more users want to use it. The more proven growth strategies a product has the faster it grows.