The process of growing a startup has always struggled with risk.

Alpha said: Startups have been struggling with risk in the process of growing up. As companies become more successful and bigger, those high-risk entrepreneurial assumptions are Verification, the risk of company failure is also decreasing. So, which entrepreneurial assumptions are the most risky, and how should they be verified? Entrepreneur Erik summed up a set of thinking methods based on his own experience. Welcome everyone’s reference.

Want to build a successful startup? First verify those high-risk assumptions

In 1978, a small startup entered the new market for personal computer software, Microsoft, a company that later had a huge impact on the digital world. But at the time, it looked like a small, inconspicuous company.

A question, If you look at Microsoft in 1978, would you think it will be a great success?

The answer is likely to be uncertain, because at the time, Microsoft did not seem to be much different from hundreds of other startups doing software and operating systems. Some of the products that ended in failure seemed to be great at the beginning.

This shows that most startups start in a seemingly similar way. To be a successful company, you need to eliminate many of the most risky assumptions in the process of growth and prove many things.

In the early days of the venture, the risk of failure will be very large. Most startups will fail within three years. At this time, even if the company persists, it does not fully prove that it has the ability to survive and grow in the long run.

In the early days of your business, your team was small and there was not much financing. Relatively speaking, the cost of trial and error is very low. A temporary failure does not mean losing everything. You still have the flexibility to change your strategy and even direction to find ways to make your company live better.

In the middle and late stages of entrepreneurship, the situation is very different. If your startup has entered a growth phase, you may have overcome some difficulties, although the risk of failure is lower than the initial start-up, but it still exists.

However, the cost of trying your mistakes is greatly increased. You have already received a lot of money and are responsible for the shareholders; your growing team and the expanding business will bring a lot of recurring costs. At this time, it is very costly to change direction and strategy. Once a problem occurs, it will be difficult to remedy it.

Obviously, it’s wise to pre-evaluate and understandThe various risks that will arise in the future will begin to address and circumvent these risks early in the business. Because it has been said before, in the early stage of the venture, the impact of mistakes on the company is relatively small, the cost of failure is relatively low, and entrepreneurs have the opportunity to remedy the response.

Look at the AirBnB example.

Since their inception, their risk of failure has been greatly reduced and they have become one of the industry leaders, but at the beginning of their business, they are as likely to fail as any other startup.

Obviously, AirBnB managed to reduce the risk of failure in the early stages of entrepreneurship, so how does it work? Where do these risks come from?

Avoid failure

According to CBInsights research, the biggest reason for startup failures is that “market demand cannot be verified.” In other words, their products and services do not solve problems for users and customers, and people do not need what they create and sell.

AirBnB will also face this problem. At the beginning of its establishment, they have no customers, no income, and the business model has not been verified. They have only one entrepreneurial idea and assume it will succeed. They don’t know who their customers are and whether their models can be extended to other cities.

The AirBnB team did different attempts and experienced a variety of failures until they found a workable approach. When building a business, they spend a lot of money to understand customers, markets, pricing, and other things that are the foundation of AirBnB’s success.

And it’s crucial that they use the knowledge they’ve learned in practice to improve the original entrepreneurial ideas and gradually turn it into something that the public is willing to accept and willing to pay.

The strategy they use is to learn from customers and first verify the most important assumptions:

  • Can we find at least one person to pay and sleep on our air mattress?

  • How much are people willing to pay for this service?

  • How many people are willing to switch from a traditional hotel to live AirBnB?

  • When will the customer become a repeat customer?

  • How to findThere are enough homeowners who are willing to rent their own house?

It is more important to solve such problems than to expand the scale, establish a platform company or set up an overseas branch. Blind expansion only increases the cost of failure, but does not reduce the risk. Before scaling up, you must first eliminate those biggest risks.

For AirBnB, each of these issues is related to risky assumptions, but it is these assumptions that underpin the business vision. One of the core assumptions is: “You can compete with expensive hotels by offering private homes that can be rented.”

If this assumption is true, AirBnB will find a way to compete with the hotel and create a new and proven business model.

All untested assumptions are risky assumptions. In the earliest days, AirBnB didn’t know if people would rent an air mattress or a private room unless it tried it. If people accept this approach, the assumption is valid, and if it is not accepted, it will be invalid.

The most risky assumptions in the AirBnB column are the following:

  • By renting a private homeowner’s house, you can compete with expensive hotel rooms.

  • It is possible to make people rent private homes repeatedly, which will expand the customer base.

  • There are enough homeowners willing to rent out their own private homes so that AirBnB can provide more rooms at lower cost without having to operate in heavy asset mode.

What if you want to eliminate risk ahead of time at the early stage of the venture and determine which assumptions are not established?

Data and objective indicators should be used to begin verification at the beginning of the business. This theory sounds great, but it’s not that simple to practice: What experiment should you do? How to set it up? How to judge the result? What is the best way to verify?

The most risky hypothesis

What assumptions should entrepreneurs test first? The answer is the most risky assumption. For different startups, this answer will usually be different, but for example verification techniques, calculating market size, determining pricing strategies and sales strategies are frequently themes.

But it’s not easy to verify them, because each hypothesis is related, usually only if you verify one of them, the other will work.

For example your assumption is “our websiteIs it possible to process one million visits a day, but only if your site has 100,000 visits, it makes sense to verify this assumption. Before the number of visits reaches 100,000, the assumption you should verify is: Does our website provide? People interested in content, whether someone came to visit our website.

To find and validate risky assumptions at the earliest, you have to start from the source of the hypothetical chain.

To find the hypothesis of the highest risk, one way to think about it is to use the principle of jenga. Its original rule is to select the blocks from the building blocks that minimize the probability of collapse of the entire building block. And we are doing the opposite here, starting with the block that most likely collapses the building blocks.

In addition, in fact, for most startups, even if the business is different, the most risky assumptions are usually similar in the same stage of entrepreneurship, we can click on the map:

Startup Idea Verification Phase

  • What is the entrepreneurial goal I want to achieve?

  • For which target groups do you need to help him solve problems?

Problem/Solution Adaptation Phase

  • What solutions should be proposed for potential users to solve problems.

  • Find a solution that helps users solve problems well and appeal to users.

Product/Market Adaptation Phase

  • I have access to users who are interested in my solution.

  • Users are starting to pay for my solution (whether service or product).

  • Begin to have repeat customers.

  • Users start helping me attract new users.

Growth time

  • I can find enough paid users to support my business.

  • I have continued to grow.

  • I have improved my efficiency and can generate profits while maintaining revenue growth.

When entrepreneurs verify these most risky assumptions at each stage of their own business, they can continue to grow and become stronger even if they encounter difficulties in other areas.

This article is compiled from Medium, the original author is entrepreneur ErikvanderPluijm.