Beware of start-up hockey stick expectations
Wednesday, January 25, 2012/
I meet with a lot of innovators from all walks of life.
The thing that strikes me the most about them is that they typically have one thing in common – they all think that their idea will be a great commercial success.
They believe their customers will love their product, pay good money to get it and their business will take off in a hockey stick trajectory.
Based on these beliefs and assumptions, the innovator sets up a company. They then develop a glossy business plan and proceed to spend a lot of their own money, as well as funds obtained from investors, in order to commercialise their innovation.
After spending a heap of start-up capital, they launch their product and eagerly await the moment when the cash will roll in.
What happens next is that a few early adopters pick up the product and start to use it.
But the early adopters are only a small percentage of the total market. Overall demand remains low and customer take-up is only a fraction of what the innovator originally assumed.
The price early adopters are willing to pay is also a lot less than originally assumed, too.
In fact, no one really wants the product and it turns out the grand market opportunity just isn’t there.
The business now has valuable information about the market and the real opportunities, but by this stage, there’s no money left to invest in reconfiguring the product into something that customers really want.
I know the picture I’ve just painted isn’t the sorry tale of every innovation idea, but it’s an all too common story I’ve heard time and again from start-up entrepreneurs.
To avoid treading the same path of many failed innovators before you, you must use a discovery based planning process to identify the right product and market fit, before betting all your funds on a single strategy.
There are three key steps to discovery based planning:
1. Identify your assumptions
The first step in a discovery planning process is to identify the “leap of faith” assumptions that you’re making. (This is a phrase coined by Eric Ries in his book The Lean Startup, recommended reading for all start-ups).
These “leap of faith” assumptions are generally about market size, market share, customer needs, pricing and how fast your business will grow.
Writing these assumptions down will help you focus and clarify your thinking about them.
If you’re struggling to identify your assumptions, reflect on your financial projections and the assumptions you needed to make in order to set those projections.