Why Start-ups Must Use The 2019 Economics Nobel Prize Idea

Start-ups in India need to pay attention to what the 2019 winners of the Economics Nobel Prize are saying. Especially the part on Randomised Control Tests (RCTs).

 What is the connection? The first question that every start-up must answer is about the person in the addressable marketplace, and his/her problem that you are seeking to solve with the offering(s) from your new venture.

While many of the start-ups cannot answer this question, lots of them believe that their ‘solution’ is in itself the best manifestation of the ‘problem’.

Not very surprisingly, their problem definition is usually: “They don’t have this solution, and so they are suffering higher costs, longer time, other aggravations…” For example, in the last 4 months, one has heard at least 6 start-ups describe their venture as a “Uberisation of…” We have lots of them, ‘Uberising’ workspaces, industrial purchases, and even toys for children.

Those who think have a story, believe it is ‘good and solid’ because it is based on their personal experiences. “I have worked in this industry/function, and actually seen people go through this pain”, they say. Or, they have come up with a product/service because they could not, one day, find a doctor or an auto-rickshaw, or a transporter, or an important piece of data prior to an important customer presentation. “I suffered on that day and decided that I must do something about it. After all, there must be others who are going through the same problem every day.”

Whether you are blinded by the sheer brilliance of your ‘solution’, or you are inspired by business models of Google or Uber, or you found your ‘eureka’ in a personal experience, we need to have checked the existence of the problem(s) and the veracity of your understanding from a community of possible ‘customers’ for your solution. The 2019 Economics Nobel winners are recommending RCTs as the way to do this.

In our advisories to start-ups, we ask for a few basic market inputs. One can see RCTs providing a possible structure to determine the essential data to confirm the size, contours and extent of the problem that the start-up wants to tackle.

Esther Duflo, one of the 2019 winners, puts it succinctly: “(With RCTs) We are trying to bring a lot of data to this debate. What we are saying is that our intuitions are often wrong and questioning these intuitions by confronting them with what happens in reality is a good way of starting a conversation.”

It is truly scary to count the number of new ventures that are based on mere intuition. An intuition so strong that they bristle when asked for data to back up this strong feeling.

 Today’s business world demands winning insights and wants them fast. None of us in business can wait till we get all the necessary information before moving forward to a decision or embarking on an action. RCTs do cast a vote in favour of Inductive Thinking, an essential trait in today’s volatile world. Hilda Taba, the inventor of Inductive Thinking, believed that generalisation is good because it is a higher order of thinking.

Pick a trend, a data set, a one-off event or findings from a small sample and take that leap of faith to see/represent it as a phenomenon.

 Inductive Thinking encourages abstracting common patterns across collected stories, relevant anecdotes, personal experiences and raw data, and presenting them all in a convincing manner. RCTs use a randomised controlled sample to obtain this raw data that can be used along with known patterns and unorganised details to provide a better and far more grounded base for market decisions. Till we see a Black Swan, go full ahead with the belief that all swans are white.

Conducting a massive, extensive market research could be expensive, time consuming, and beyond the reach of start-ups. Enter RCTs.

 Do a RCT. Go with what you find. Do the next RCT. Check if change in direction/approach is required. Repeat. 

Remember, it's a Nobel Prize winning idea.