Value Lab: an 'antidote' to Lean startup and the business model canvas?

In August of 2020 I had the pleasure of joining the 5th Annual Lean Startups and Innovation Strategy workshop, hosted by Harvard Business School. During the workshop I was introduced to several eye-opening limitations of Lean startup and the business model canvas. Curiosity sparked, I wanted to learn more. I contacted Professor Teppo Felin and he very kindly (on a weekend may I add) sent over several fascinating papers that he has co-authored on this topic, including the paper: ’‘Lean startup and the business model: Experimentation revisited’ by Professor Felin, Alfonso Gambardella, Scott Stern and Todd Zenger. My last article explored (some of) the key ideas of that paper. I will provide a link to this paper in the?comments as I strongly suggest you read it in full as I condensed things for a quick read.

In the paper, Felin et al highlighted that:

“[Lean’s] heavy emphasis on readily observable feedback and immediately validated learning undersells the entrepreneurial scientist's central task of composing a novel theory and hypotheses, prompting instead a search for value and validation only where it is easy to observe it. Thus… lean inadvertently…promotes incremental experiments that, more often than not, only generate incremental value. Furthermore, the favoured hypothesis-generating tool of lean startup—the business model canvas—lacks specificity in helping startups craft unique, targeted hypotheses and critical experiments for testing their theories.”

In summary, Felin et al argue that whilst there are many virtues to the Lean startup approach, the approach has some challenges and unintended consequences. The two key challenges are:

1.??????Lean wasn’t designed for radical innovation

2.??????Lean encourages entrepreneurs to orient towards ideas and products that can quickly and transparently be tested with customers

My last article mainly focused on exploring limitation 1 – whether Lean is likely to inhibit radical innovation. In this article, I explore limitation 2 in greater detail and then introduce a a potential 'antidote' to Lean and the BMC.

Due to the emphasis on experimentation and the scientific validation of hypotheses through customer interaction, many (Felin et al included) have raised concern that Lean startup is the metaphorical equivalent of a prompt to look for your keys under the streetlight. The fundamental problem is that Lean encourages?entrepreneurs to use experiments to prove or disprove certain hypotheses to determine how to create value. However, Lean fails to provide any direction with regard to what hypotheses the entrepreneur should be testing in the first place and what data they should be gathering in order to prove or disprove a particular hypothesis. Given this, Lean may encourage entrepreneurs to look for value where it is easiest to find – under the metaphorical ‘streetlight’.???

According to Felin et al, the most valuable entrepreneurial ideas are those that are unlikely to allow easy and affordable experiments. Rather, they require:

“…some kind of contrarian belief, vision about and commitment toward a counterfactual world that may not easily be recognizable by other market actors.. the most valuable entrepreneurial ideas demand carefully formulating the underlying problem the startup is seeking to solve, developing a theory of how to solve it, and only then crafting what may often be a costly set of experiments to test and explore the underlying theory. Thus, impactful startup activity often requires a significant commitment toward a specific course of action, rather than a set of low-cost experiments and pivots.”

If a startup is looking to disrupt an industry or produce ground-breaking, radical innovations, Lean may not be sufficiently guiding. How then, should startups approach strategy? Felin, Gambardella and Zenger propose that startups must begin by creating their own theory of value. Felin and Zenger explain in ‘What Sets Breakthrough Strategies Apart‘ that the role of a theory is to shape sight and perception. Theories enable you to see things that were previously hidden:

“Whether you can observe a thing or not depends on the theory which you use.” - Albert Einstein

Like theories in science, a novel theory of value can lead to hypotheses and experiments that help startups to identify and exploit opportunities invisible to others. A novel theory of value can therefore help guide entrepreneurs - telling them where and what to look for in the first place. Using the streetlight metaphor, Felin et al argue that having a theory of value - which commits the startup to a particular course of action - is the equivalent of using a flashlight. It shines a light on potential sources of value.

Sounds promising.. but does it work? Well, in a study of c. 1,000 start-ups, those who were taught to compose a theory of value before setting out performed significantly better. There is strong evidence to suggest that this approach is fruitful. How then, can a startup create their own theory? Professor Felin and his colleagues - professor Gambardella and professor Zenger have proposed a solution – Value Lab. Value Lab is an alternative framework to the business model canvas and can be used by startups to create their own theory of value. I will provide a link to this resource in the comments so you can explore the authors explanation of this tool in full.

As a brief overview, value lab identifies three critical components to a novel theory of value:?

1. The first focuses on the entrepreneurs beliefs about the future?- focusing on the founders unique or contrarian beliefs.?
2. The second frames a specific problem (and its various sub-problems) that, if addressed will realize their contrarian beliefs.?
3. The third focuses on articulating a concise statement of the theory – this involves identifying a set of actions to test.

Felin et al have very kindly provided three different iterations of the Value Lab framework to give you a better idea of how the framework might be completed. Figure 1 below is a blank copy:

Figure 2 includes comments about each of the columns and boxes, offering guidance on how to fill them:

Figure 3 is an informal example of a filled-out framework, applying the Value Lab model to Airbnb:

Felin et al state that:

“Your theory may reveal useful experiments that test key assumptions and validate or disprove the theory. The theory may also reveal critical resources which you need to secure. These may include underpriced resources or assets which will allow you to make productive investments essential to realizing your hypothesized value. Finally, the theory may allow you to identify specific problems for which to find solutions.”

Most startups would benefit from adopting a scientific, evidence-based approach. However, as Felin et al have shown, Lean startup and the business model canvas may not be sufficiently guiding, nor conducive to radical innovation. Given this, entrepreneurs may want to consider creating their own novel theory of value creation. Value lab can be used as a tool to ‘shine a light’ on potential sources of value and illuminate the various experiments that need to be tested in order to prove or disprove the theory.

Note: this article is an extremely condensed overview of Value Lab. I have summarised some of the key ideas for a quick read and strongly urge you to explore the original materials and resources for their full value. Many thanks to Professor Teppo Felin for providing me with the insightful papers on this topic. They have greatly advanced my understanding of Lean and the limitations of the BMC. Full credit to Professor Felin and his colleagues for the ideas explored in this article. Links to papers and original resource in the comments.?