Okay! So it’s a bit of a dramatic title. But I want to get your attention because my topic today may sound boring but is really, really important to get to grips with if you want to build a successful business.
Creating a startup is all about working in uncertainty. There are no guarantees and there are lots of things we don’t know. But the deadly things that can kill our business are
the things we don’t know that we don’t know.
They are called … wait for it …
(There, I told you it sounds boring.)
But stay with me, because if you understand this, it could make the difference between a business that works for you and one that fails.
Making assumptions can mean big trouble
An assumption is a statement that is assumed to be true and from which conclusions can be drawn.
Samuel Butler, a British poet, said “A little knowledge is a dangerous thing, but a little want of knowledge is also a dangerous thing.”
My interpretation of this is that firstly, assuming I know about something is dangerous and also, not knowing something is dangerous.
The danger in a startup comes when we don’t recognise that we are making assumptions. If we draw conclusions and act on ‘knowledge’ which is actually an assumption, we could be headed for trouble.
Big Blue: a perfect example
Let’s take the president of IBM, Thomas J Watson’s famous quote as an example: “I think there is a world market for maybe five computers.” Now there is some argument as to whether he really said this. ‘Assuming’ he did, can you see how the conclusions IBM would draw from this assumption would influence their business? If you had a new product that had only 5 customers, what would you do?
- Make it really really expensive (to cover my costs)
- Find 5 really big companies with lots of money to buy it
- Try and make lots of money from servicing
- Lease it to customers rather than sell it (to help their cashflow)
If on the other hand, we assumed that we had a product that had a market of 1 billion (the amount of computers in the world), what conclusions would we make?
- Price it so we had small margins – so we could sell a lot quickly in order to capture market share
- Concentrate on making production rapid so we can meet demand
- Segment the market and create different versions for different market segments
- Outsource manufacturing where possible; production components, assembly
- Hire distributors and/or retailers to get it out there for us
Can you see that these look like two different businesses? All from one assumption about the market being changed. I know which business I would rather be in!
Now there is two ways most people will go with this:
1. If you are a perfectionist, your tendency will be to get bogged down by having to know everything up front, which is not possible. So you need to give yourself permission to go forward without knowing everything.
2. If you are super optimistic, you will be likely to not worry too much about the details and charge full steam ahead. You need to recognise that there are some details that are important to get right for your business to be successful.
So, how do you handle assumptions in your start up?
- You have to make assumptions. Obviously in life and business, we need to make assumptions. We assume the computer will work when we turn it on. We assume that we will be able to walk when we get out of bed. If we spent time validating all these assumptions before taking any action, we would all end up in the looney bin, not to mention not getting any work done! In a startup, we don’t know everything and can’t find everything out before we start. So we need to make assumptions in order to take action.
- Work out which assumptions are critical. Not all assumptions are important. Some are non-critical and you will adjust and change them if they are not working as you go along. But some assumptions will have a big impact on whether your business will succeed. They will be different for every business but will be based around your key success factors (see post here); like who your target market is, what the demand is for your product, how much people will pay etc. So recognise what the assumptions are that you have made.
- Validate the critical assumptions. Be aware and catch yourself when you are making assumptions about critical aspects of your business. Ask yourself, is this statement based on facts or feelings? What evidence do I have for this? Writing things down in an opportunity evaluation or short business plan helps with this. If something is critical to your business’ success, you want to make damn sure your assumption is right. So go and do some research – and keep doing it until you are confident you were right or you have changed your assumption (and your business model). It is important to approach this with an open mind. You don’t want to prove yourself right, you want to find out the truth – before you waste a lot of time and money. It’s about getting the foundations right.
Why am I so anal about this?
Some time ago, when I was a naive want-to-be business owner, my husband and I bought a business. We made a critical assumption: that people could grow mushrooms of a commercial quality at home. It sounds silly now and of course anyone who knows anything about mushroom farming knows that they are grown in a highly controlled environment that people don’t have a hope of replicating at home. We did check this with an expert, but not the right one. Needless to say, we came to grief when we bought the business and lost a lot of time and money. But it did set me on the path to learn all I can about evaluating opportunities and starting successful businesses – so I guess it wasn’t all bad. However, I would like to think that you could avoid my mistake.
So what assumptions have you made about critical aspects of your business? What evidence have you got to back them up? And how can you get the information you need?
Image used under Creative Commons license courtesy of FurryScaly, Flickr.com