How to diagnose your riskiest assumptions

risk

Most startups fail because they run out of either time or money.  You can significantly increase your chances of success if you save your time and money until you are sure that you are pursuing a solid business model.  And the best way to make sure your business model is solid is to pick out at least 5 of your riskiest assumptions and objectively test them as if you were investing in your own venture.

So how do you find the riskiest assumptions in your business model?

First, you need to create your assumptions.  Whether you are using a lean canvass or a business plan, you need to lay out your vital assumptions about the business.  Here’s a brief list of questions you need to be able to answer about your business model.  Let me know if you think I should add anything.

  • Customers – Who are your customers? What do they do for a living? Where can you find groups of them? How many of them are there?
  • Problem – Have you identified a migraine level of pain for your target customers?  Are they currently doing something to try and solve it?
  • Solution – Will your solution solve your customers’ problem?  Are they willing to pay your designated price for your solution?
  • MVP – What is the Minimum Viable Product for which your customers will pay?
  • Competition – Who else is providing this solution? What is your competitive advantage?  What about your solution makes it difficult for your customers to leave?
  • Sales channels – How will you sell your product/service? Online? Inside sales? Outside sales? Distribution?
  • Supply – How will you produce your product or deliver your service?  What sort of infrastructure or inventory do you need in order to handle 1000 customers? 10,000 customers?
  • Human Capital – Do you or someone on your team have industry expertise in this market? Do you or someone on your team have the necessary leadership skills to lead this company in terms of product development, sales, marketing, financials, etc.?
  • Financials – How many customers do you need until you achieve target profitability? Is that a realistic number with your available resources? What are your key drivers of revenue?
  • Legal Issues – Do you have the necessary intellectual property rights to operate your business? Have you and your team come to an agreement on equity and responsibility distribution?

Next, list each of your assumptions as a line item.  Then, go through each one and write down two numbers.  The first number is on a scale of 1-5, rating the possibility that your assumption might be wrong.  This is like an inverse confidence rating.  So the less sure you are about it, the higher the number.  The second number is on a scale of 1-10, rating how detrimental an incorrect guess on this assumption would be to your business model.

Go down the list of each assumption and write down the two numbers.  When you are done, go back through one more time and multiply the two numbers to get your overall risk assessment.

Here’s a sample layout I created for a company that offers discount fuel cards for truck drivers.

Assumption Possibility of wrong assumption (1-5) Level of Impact if you are wrong (1-10) Total Risk Level
My target customer is the owner operator of a tractor trailer truck rather than the owner of a small or medium fleet 3 9 27
Their problem is that they need to buy as much gas for their truck as large fleets, but they don’t get the fuel discounts that group purchasing affords 2 7 14
There are no good options for fuel discount cards that allow owner operators to save 10 cents per gallon or more 5 5 25
Owner operators of trucks get information on new products from trade periodicals and online message boards 5 3 15
The average discount fuel card that owner operators use saves them 5 cents or less 4 3 12
Less than 50% of owner operators use any discount fuel card 4 8 32
We can sell discount fuel cards to owner operators through an inside sales force over the phone 4 8 32
We can sell discount fuel cards to owner operators through an online presence 4 4 16
We can partner with an existing fuel card underwriter to create our card and discount program 5 10 50
We have the necessary team to understand the trucking industry and deploy this product 3 4 12
We have the necessary team to supervise an inside sales operation 3 4 12
We understand what is required on the backend to process applications, approvals, and customer service 5 5 25
We need 500 customers to achieve our minimum revenue goal 1 3 3
Each inside sales representative will sign up 20 new accounts per month 4 5 20
Our team is on the same page about equity distribution, roles, and responsibilities 4 5 20
There are no regulatory hurdles for us to offer this product to truck drivers 5 8 40

Once you go through each of your assumptions to the categories outlined above, you can prioritize them based on the total risk level number.  Now you know which assumptions to test and validate.

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Categories: Startup, Validation | 2 Comments

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2 thoughts on “How to diagnose your riskiest assumptions

  1. Pingback: SKMurphy, Inc. » Lean Startup Conference 2012 Roundup

  2. I had no idea you were so Lean savvy! Great stuff!

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