January 17, 2013
Around this time every year, there are all kinds of long and short lists of what we can expect for the year ahead. Some predictions deal with serious matters, such as politics and the economy, whereas others are of a more lighthearted nature, covering subjects such as sports and entertainment.
In his recent book The Signal and The Noise: Why So Many Predictions Fail—But Some Don’t (Penguin, 2012), statistician Nate Silver writes about the importance of predictions in our daily lives (think weather forecasts, house prices, fuel costs etc.), yet notes how poor we are at actually making predictions.
While humans are born with the ability to recognize patterns—which is an essential skill for making predictions—information overload causes us to simplify the world in a way that confirms our biases rather than reflects the truth, Silver writes. Unless we actively work to understand these biases, chances are we will ignore information that might change our expectations of the future.
Entrepreneurship entails predicting the future
Entrepreneurs make more predictions than most people. In seeking to commercialize innovative ideas, they begin a journey where almost nothing is known about the road ahead, including the nature of the problem they are solving, the best solution for that problem, who their best target customer is, how much a customer would pay for the solution, to what extent a sustainable business model is available and so on.
Not knowing the truth about these types of issues constitutes a severe risk for any new venture. For instance, it is impossible to successfully execute a marketing strategy without having a clearly defined target customer, and it is equally difficult to present investors with a credible revenue forecast when the variables that make up your business model do not have a solid basis in reality. In other words, your ability to find customers and secure financing is limited when your predictions have such loose foundations.
Steve Blank, who gave us Customer Development, defines a startup as a “temporary organization designed to search for a sustainable business model.” In his mind, the role of a startup is to reduce the risks associated with launching a new venture by systematically testing the predictions and assumptions that underpin the business.
And that is what we at MaRS repeatedly tell the passionate entrepreneurs who come to us for advice. The way to find a sustainable business model is to identify which key business presumptions need to be true and to find a way to test them before betting “the entire farm” on the venture’s success. As Nate Silver explains, the challenge is that our own biases—and entrepreneurs tend to be supremely optimistic—often stand in the way of actually uncovering the truth about those presumptions.
So how can we counter our tendency to notice only information that confirms our predictions and help entrepreneurs actively suspend their biases?
Two new workbooks to help you move from business idea to business model
Our solution is to offer entrepreneurs two practical workbooks that cover the steps that a new venture must overcome when moving from a business idea to a business model.
The first workbook focuses on the first major hurdle that a startup faces: deciding on a value proposition. And we don’t just mean a nice sound bite that explains what it is that you do. We ask our entrepreneurs to create a value proposition that effectively encapsulates the key decisions of their startup, including their choice of target customer, the value generated for that customer and the product used to generate such a value. Arriving at these decisions requires the team behind a new venture to develop detailed insights by systematically collecting relevant feedback from the market.
The second workbook addresses the next challenge that entrepreneurs face: designing a sustainable business model. Our experience working with early-stage startups across Ontario has demonstrated that arriving at a sustainable business model—one where long-term revenue surpasses expenses and allows the business to grow in a profitable manner—is often an elusive step for many. This workbook integrates the frameworks developed by Steve Blank and Alexander Osterwalder with our many years of experience in helping entrepreneurs with this process.
Please download the workbooks and their accompanying templates and use them for any new venture you are working on. If you like the workbooks, feel free to share them with your colleagues and peers. If not, let us know how the workbooks can be improved. Any feedback is welcome.