Allbirds, How To Take A Leap Of Faith To Success

This is a piece authored by our Kellogg colleague Paul Earle for Forbes.  Allbirds was started in Carter’s New Venture Discovery class at Kellogg.  Both Carter and I thought the idea was a little nutty when Tim Brown first pitched it in class (He wanted to solve the problem of smelly athletic shoes).  Just goes to show you that with passion, drive and solid execution, wild ideas can turn into amazing businesses!  Enjoy!

Tim Brown had a crazy idea.

The former professional soccer star was troubled by what he felt was a lack of sustainable practices in footwear materials and manufacturing, not to mention the over-the-top nature of the branding landscape itself. And he wanted to change all that.

But footwear is a notoriously difficult space. And his product concept—a hybrid runner made almost entirely out of wool—was so novel that it lacked any useful frame of reference. So when Brown pitched the idea as an exchange student in the New Venture Discovery class at Northwestern University’s Kellogg School of Management, clinical professor and venture capitalist Carter Cast had… well… a few concerns.

Ultimately, as recounted to me by Brown and Cast themselves recently, Cast believed in Brown as a principled business leader, and encouraged him to follow his passion. Which Brown did, forgoing other opportunities (such as competing on the Olympic soccer team for his native New Zealand).

This embryonic idea became Allbirds, which struck a nerve in popular culture almost instantly after its launch in 2014, and today is one of the hottest lifestyle brands in the United States. It was named by Time as the “world’s most comfortable shoe.” But were it not for a leap of faith, Allbirds might not have even survived as an academic project.

Faith. It is belief without proof, and irrational by definition. And even in this age of “big data” increasingly telling us what to do, faith is required for progress.

Faith is provocative as a business principle because the term is so closely associated with a different domain: religion.

Theologian John Buchanan, summoning Kirkegaard and others, argues that all your reason, all your logic, can only take you so far. At some point, to achieve anything meaningful, you have to walk through a door without knowing what is on the other side. This is the origin of the concept known as the “leap of faith.”

If you’re wearing Allbirds as you read this, it is thanks to the fact that a very small group of people actually took that leap, initially.

Faith in any context must have at least some grounding, of course. In the case of Brown and co-founder Joey Zwillinger, their faith in their idea emanated from a belief that if they made “better things, in a better way,” success would follow (note that this has nothing to do with shoes themselves; it is a higher-order ideal).  Like most great new consumer brands today, as I’ve chronicled in this space and elsewhere, Allbirds is intensely purpose-driven.

I visited Brown and the Allbirds team at their headquarters in San Francisco last month. Here are other observations about what is making them so successful.

  • Radical consumer focus. The company operates a retail store on the ground level of its main office, and all employees, from Brown and Zwillinger to junior staffers, regularly cycle through there as clerks and salespeople. Brown said that this direct daily immersion helps them deeply understand their fans, and allows them constantly experiment with new ideas. What might be some ways established companies can follow suit?
  • Team first. The human energy at Allbirds is palpable, and it’s driven by a true egalitarian sense of mission and team. It starts at the top; Brown—a former leader in a team sport—gets it. Everyone, for example, takes turns as the receptionist in the lobby. When I arrived, randomly on the desk was Allbirds’ VP/Marketing Julie Channing, one of their top executives. (She seemed a bit distracted by something big going on in her “other” job at the company, but she nevertheless carried out her receptionist duties admirably.)

[Note: The night before publishing this, I serendipitously had dinner with a Kiwi who told me that in New Zealand, the custom of “mateship” is particularly strong. It is “friendship” times ten, and apt here.]

  • Less is more. In nearly every vertical, simple has never been more compelling and relevant than it is today. In Allbirds’ case, they do simple well (which is difficult to do, as Steve Jobs famously said). The product design is minimalist, all the way to the logo appearing as a discrete small tag on the back of the shoe, not the side. Simple also applies to the sourcing guidelines for their materials, and nearly every other element of the Allbirds brand and operations.
  • Have some fun. I’ve always believed that the brands (and teams behind them) that are having fun will perform the best: it is attractive. There is a twinkle in the eye throughout the entirety of the Allbirds experience, from the animated sheep embedded in the confirmation email following an order, to the name itself (a reference to the fact that Brown’s New Zealand homeland is inhabited by an abundance of birds; “all” may be a bit over-the-top, but you get the idea).

As I connected with Cast and Brown, I uncovered a startling postscript to their Kellogg experience together. Cast eventually became sufficiently enthusiastic about the Allbirds opportunity that he personally invested in it. His investment thesis: “I believed in Tim Brown.”

Wait a minute, I pressed. What was initially an idea that elicited a healthy dose of skepticism ended up with you reaching for your checkbook? Cast’s second response was the same as his first: “I believed in Tim Brown.” He took The Leap, capital T and L intended. And so did Brown.

(Oh, and for the class: Brown got an “A.”)

Can You Scale It?

Our eighth theme in New Venture Discovery is: “What Works in the Lab Must Also Work at Scale.” On that note, we thought it would be useful to share some considerations to keep in mind when scaling your start-up. The information below was pulled together for a growth company CEO who asked to meet to discuss the challenges he was facing in scaling his (extremely) high growth company. In the meeting, we referred loosely to this “punch list” of topics/questions, focusing on the ones most relevant to his business. While the content is full of opinions and isn’t exhaustive, it may be worth examining as your businesses gains traction…

The Market

Is your market big enough to accommodate your mid-range (~3-5 year) growth plans? Is the addressable market big enough (VCs often state they’re looking for +$1 billion markets) and can you make the case for how you might garner at least 10% of it?

Do you have a good understanding of the key market risks that might impede your ability to scale? Often there are one or two lethal blind spots for a venture. (For more on this, see our Fast Failure Is a Success blog entry, paragraphs three and four). Try hard to determine what yours are and how to mitigate them.


Do you know where you want to take your company?

Is the vision aspirational, memorable and believable? Is the mission, the hill to take, clearly defined? Does your team know where you want to go and do they believe in it? If we walked around your office and randomly sampled employees, would they consistently play back the vision and mission?

Your Value Proposition

Is your positional advantage clear, real, distinct and compelling to your target market?

Are your company’s resources (people and money) focused on reinforcing and expanding that value proposition? If you listed all the activities your team was working on, what percent of the activities directly further your value proposition? For the activities that do not, is there a compelling reason you’re working on them?

The Growth Phase of Your Company

Are you in the “start-up” phase? What resources are needed to get the flywheel really spinning and prove your business case?

Are you in the “early growth” phase? How much can you afford to invest in order to gain presence, generate trial and establish positional advantage?

Are you in the “scale phase”? Have you developed clear and agreed-upon growth strategies that will allow you grab more market share and to realize quantified efficiencies (scale economies)?

Your Organizational Capabilities & Gaps

Do you know where you are most vulnerable from a people standpoint? Where are your biggest talent gaps? Where are your current organizational “governors”—the key choke points, where work is most impeded due to lack of talent?

In hiring, beware of the very real danger of “settling.” Unfortunately, A’s hire A’s more slowly than B’s hire C’s. It just takes longer to find those gems. So you must resist the urge, especially when you’re in that scale-up stage and need people fast, of hiring warm bodies…

Be ready to open up your checkbook when you find a really talented prospective employee who maps well to one of your key competitive points of differentiation. Don’t be penny wise and pound foolish…

Do you have the right reward structure to recruit and retain top talent? (And it’s not just about the money—it’s also about providing them the autonomy to create and acknowledging a job well done.)

How Fast Should You Go?

Can you truly realize a first mover advantage by investing capital in rapid growth (e.g. the network effect realized by businesses like Apple with their closed music system, Open Table’s platform, eBay’s buyer/seller community, etc.)? Or does a more balanced and deliberate growth rate make more sense?

Have you really identified your growth barriers? Are they around consumer/customer awareness and adoption? Improving customer repeat rates? Gaining access to a key channel of business? Operational through-put issues? Or perhaps human or financial capital needs?

What You Measure

Do you have the right business intelligence tools in place to track measure progress? Areas such as:

  • Your Dashboard / KPIs / Metrics that Matter
  • Do you know your unit economics? Can you effectively measure variable contribution margin?
  • Do you know your customer acquisition cost and your customer’s lifetime value?
  • Do you have the right operational performance metrics in place (especially on service delivery–Net Promoter Score, etc.)
  • Do you have a good understanding of your conversion funnel (and where it leaks)?

Marketing & Selling Strategy

Are you creating powerful selling tools/materials to aid your sales force in their selling efforts? Is the marketing department helping the sales team at the top of the funnel, supplying them with quality lead generation opportunities? Is your sales force incented properly (not just on closing accounts, but on the quality & profitability of their accounts)?

By the way, in our experience, probably the most powerful marketing department is the “customer support department”. We’ve found that it pays to invest in this team, from the quality of your hires to providing them with software tools, effective training, development and performance incentives. See it as a selling/revenue center vs. a cost center.

Keeping the Innovation Wheel Spinning

Have you created an environment conducive to exploring new ideas and taking risks? Is innovation truly valued? Do you have avenues for good employee ideas to receive consideration? How are you creating a “growth mindset” attitude (see Dweck’s Mindset book) in your organization?

It’s awfully hard to work on the future while addressing all the issues you face in the present. This is especially true during the “hot” scale phase. To ensure you don’t ignore the future, you might want to structure your technology development teams around:

  1. Product “antes” (current bugs, core functionality, etc.),
  2. Product “drivers” (important new features and functionality, etc.)
  3. “Testing” (i.e. future differentiators). Be careful—it’s easy to be so focused on executing the core business that test development resources get cut and/or redeployed. The “urgent” often steals resources from the important/not urgent…

Alignment with Investors

Are you aligned with your investors/board on where you need to make investments? Have you brought them along on your key business priorities and where you will be placing your spending bets? Do they understand and agree with your KPI’s / success metrics? Are you diligent about communicating your burn rate?

The answer to all of these questions needs to be “yes”.

A Final Biggie:

The scaling phase is a lot of fun, but it’s also a very stressful time. Be real with yourself on your own vulnerabilities (e.g. do you know your blind spots and allergic reactions?) and how you’re showing up at work. Make sure you have a personal board of directors/mentors you can turn to when you’re under stress and need help.

Finding a Good Problem

By now most people will appreciate that we begin the New Venture Discovery process at Kellogg by focusing on “problems” instead of “solutions”. There are a number of reasons why we take this approach. At the end of the day it boils down to this: there are often a number of different ways to solve any particular problem. Being married to one approach/solution too early will stifle an entrepreneur’s objectivity (and creativity) when it comes to the process of customer discovery and the development of a compelling new offer.

You’ve heard the old adage, “If the only tool you have is a hammer, everything looks like a nail”? Well, if the solution you have in mind an ios app, every potential customer looks like someone who has been waiting with bated breath for a product just like yours to show up in the App Store.

So what makes a good problem?

We’ve taken a shot at trying to frame some criteria that can be helpful when thinking about what makes a good problem on which to build a business. (There are numerous points of view on this – and below we have listed a few articles and blog posts below that are worth checking out).

A good problem is…

1. Sizable

A “sizable” problem is one that it affects a large enough market to build a business around and offers you degrees of freedom (viable options/different paths) in scaling it.

So what constitutes a large enough market? Well – that depends on the business you’re in, what type of entrepreneur you want to be and how you plan to grow.

Small, local businesses for example may be content to grow organically serving only the communities that they are in (think main street/retail). High Growth startups that seek venture funding, by contrast, typically need to be pursuing ≥$1B opportunities. This might come from selling a $2 product to 500M customers, or selling a $1M product to 1000 customers.

For the purposes of New Venture Discovery we are interested in focusing high-growth businesses. We are looking for ideas that can be scaled quickly.

Note: you may believe that the existing addressable market doesn’t appear to be sufficiently large, but that your idea has the potential to expand the pie, by creating a new usage occasion (e.g. couch-surfing with the iPad), increasing purchase frequency (e.g. the ease of Uber), appealing to a new user segment (e.g. the affordable luxury of Lexus in 1990 ) the opening up or expansion into a new channel of business (e.g., MOOCs) etc. While this is a great way to be thinking about your idea, you’ll have to work hard to make your case to an audience of potential investors. It’s a lot more challenging to make the case that you’re expanding the pie, which is being truly disruptive (and wonderful) than to take market share away from an existing set of competitors.

2. Accessible

“Accessible”, in this context, has a couple of meanings:

Meaning 1 = Can you reach (and actually get in front of) the customers/users you intend to serve? In our opinion, this is one of the BIGGEST SNAGS for start-ups. We’ve seen more ideas go into the scrap heap because of their inability to gain access to the target market, whether it’s due to high user acquisition costs, reticence of users to change existing behavior, or structural entry barriers (e.g. slotting fees in supermarkets), etc. So don’t underestimate the challenge in this key area.

Meaning 2 = Does regulation or other market/non-market forces block a path to entry into this market (this does not include competition – we don’t want you to be afraid of that – at least not at this stage).

Your market must be accessible to you in order for you to properly learn about your customers and commercialize a solution.

3. Un/Under Addressed

So as obvious as it seems, you should focus on opportunities where customer/user needs are being unaddressed, or at the very least under-addressed. These might be functional needs (like wanting something faster, better, cheaper etc. than they are getting it now) or higher-order needs (like feeling less lonely, more confident, more interesting etc.).

We are constantly surprised by how many “better mousetrap” business ideas we see where the entrepreneur has no idea of whether or not users feel like their needs are being adequately addressed by existing offers or not. Of course the entrepreneur feels strongly that an unmet need exists…but does anyone else…especially anyone that will be paying for the product??

The customer discovery process is designed to dive in to this question in detail, but before we get to that level or research there are some quick sniff tests that an entrepreneur can perform to get a sense for whether or not there is a true “there there”.

4. Monetizable

Will someone pay you to solve the problem?

If ‘yes’: you have a business! If ‘no’: you have a charity.

(Along these lines, be careful when you advocate a “freemium” model. We’ve often seen that freemiums stay free—customers don’t easily segue to your paying model…)

5. Conceptual

If the problem that you are trying to solve with a startup is that “kids needs mintier-tasting toothpaste” there is a finite number of approaches to solving it.

The best startup problems are ones that allow the entrepreneur to explore the conceptual macro challenges related to the problem. In other words: problems for which there are number of different potential solutions.

A more conceptual version of the toothpaste problem might be: “how to get kids to bruth their teeth longer or more frequently” or “kids need a toothpaste that makes it more exciting to brush their teeth.” Now we can explore innovations not just with flavors, but also with packaging, experiences, and more. Could be that the end result is not toothpaste at all.

The more conceptual the problem, the more shots-on-goal we get with possible solutions.

6. Hard

Most of the easy problems in the world have already been solved.

If you find yourself saying, “I can’t believe that nobody as thought of this!” chances are that someone has. It could be that the reason you are not aware of this is that it has been tried…and failed for one reason or another.

We don’t mean to sound cynical, but most good, high-growth businesses are built around solving hard problems (technically, commercially, operationally etc.). It’s where true, defensible and lasting value is created. PLEASE resist the temptation to go after a problem you think will be easy to solve. Chances are it is indeed easy….and therefore it has been (or is being) tried. 

7. Personal

The most compelling startup pitches come from entrepreneurs that are passionate about the problem they are solving. In fact the best entrepreneurs are more than “passionate”- they are “obsessed”.

This type of passion/obsession is almost impossible to manufacture. It is usually rooted in a personal connection to the problem, the customer being served or the solution being created.

Too much passion for a particular solution can also be a very dangerous trap for a founder (for many of the reasons touched on above), however passion for a problem or customer segment can be the fire-in-the-belly that fuels an entrepreneur though the inevitable challenges that go hand-in-hand with starting a high-growth business. Those that have this type of connection are unusually able to demonstrate deeper empathy for the customer, which often results in a more compelling and human-centered solution, as well as being more open to exploring multiple ways of solving a particular challenge.

Try to find a problem that you are personally passionate about solving. There is just no substitute for authentic passion.

Other articles and blogs worth checking out on this topic:

Paul Graham: “How to Get Startup Ideas”

Kauffman Foundation: “The Itch”

Forbes: “Tricky 2014 Problems Startups Could Solve”

Mohan Sawhney: “Is Your Startup Solving a Worthwhile Problem?”

The Venturing Mind

Startup Thinking is Not Just for Startups.

We have now been teaching the completely retooled New Venture Discovery class (KIEI 462) at Kellogg for a 2 full years. Between us we have we have taught the course 16 times to over 600 students and have learned a lot about which aspects of the course/curriculum work well, which don’t, and which elements we might change to improve things going forward.

As we reflect, one theme has become clear to us: the process of New Venture Discovery (translating an unmet needs into new offers and business models) is as applicable/useful to non-entrepreneurs as it is to those aspiring to launch new companies. We see evidence of this in a few notable areas:

  1. The makeup of the students that take the class – about 2/3 of which are not sure that they want to be committed entrepreneurs, but find the process of New Venture Discovery interesting and useful
  2. The feedback that past students share from their experiences after graduating. We’re told that they are using these tools and methods and some companies, like Adobe, have their own lean start-up/launch-pad tool suite.
  3. The reaction we’re getting from alumni and other executives when we share the principles of New Venture Discovery with them. We hear quite a bit of: “This is a great approach for any company trying to bring something new to market or innovate on its business model – my company gets bogged down in ‘planning’, and it takes forever to get to the ‘doing’!”

The fact of the matter is that the majority of people we teach, present to and speak with are not, and will never be founders of companies. That being said – many of them are finding it useful to learn how to think like a scrappy, customer-oriented entrepreneur. This pattern has led the two of us to begin to use the term “Venture Mindedness”. It means adopting a discovery-oriented mindset when designing new business models – regardless of whether you are a startup founder, corporate executive, physician, marketer…whatever!

There are three areas of the discovery approach that serve as the foundation of the venturing mind:

The importance of spending time in the field, having first-hand conversations with users/customers

Most businesses fail because they never achieve product-market fit. Most businesses never achieve product market fit because they never fully understand their customers’ needs. Most businesses never understand their customers’ needs because they don’t spend enough time with them – in the proper context (especially when they’re experiencing the product/service)– and asking the right questions.

This is as true for established companies (of all flavors) as it is for startups.

The power of embodying questions with prototypes

“Leave prototyping to the engineers.” At least that is the common belief of most executives and managers. This has, in large part, been born out of the ingrained understanding that ‘prototyping’ is as way of presenting an early version a final product and NOT as a way of asking questions of users.

Our point of view is that a prototype is a “question embodied” – and that we can prototype almost anything (a product concept, services, experiences, business models…you name it).

Again – this way of thinking is as useful and appropriate for large companies attempting to create new business value as it is for founders looking to disrupt an industry. Just because you are big doesn’t meant that you need to spend like it.

Sometimes the cheapest, lowest-fidelity sketch can answer the million dollar question. Why spend more time and money than you need to just to arrive at the same conclusion?

Embrace experimentation, failure and the process of iteration

Those with venturing minds believe that early in new offer’s life action and experimentation are far more useful than planning and forecasting.

The path of achieving product-market fit is never a linear one. Its elliptical, and the more cycles of the ideate-experiment-evaluate-refine cycle you get through the better off the business will be. The key here is to learn as much as you can, as quickly and as cheaply as you can.

With more testing, you encounter failure. Then, with that failure comes new insights, which allow you to create a better idea/plan, leading to more progress… and on it goes…

Because this is the inevitable reality in the actual way a new venture is created (lots of ideas tested that don’t pan out), it’s important to: A) test A LOT; B) test rapidly; C) have an optimistic and resilient attitude, viewing a test that fails not as a “failure” but as a customer or marketplace insight.

New Venture Discovery as much a mindset as it is methodology.

You don’t have to be building a startup to engage your Venturing Mind. This discovery-focused lens is just plain useful for bringing new ideas to market – regardless of if it is a product, service, business model, marketing campaign or a new company.

Fast Failure is a Success

This phrase sounds like it came right out of a positive psychology seminar, doesn’t it? It’s nestled right alongside “Love your frailties as much as your strengths…” Oh well—it’s a fairly common phrase and is well-intended. While it might be more palatable to some if it’s re-phrased “Learn fast”, tying the concepts of success and failure together is worth commenting on.

The phrase “Fast Failure is a Success” consists of two parts: 1) moving fast–running mission critical experiments early in the life of your venture so you kill bad ideas quickly and don’t burn a lot of precious time and money; 2) equating failure with success–learning how to re-frame the notion of “failure” makes sense, simply because setbacks and failures come along with the territory of being an entrepreneur. If you can’t digest and rationalize failure as part of the learning process (and part of the hero’s journey inherent in entrepreneurship), you will get so depressed you’ll stay under the covers in the morning.

Regarding the first point (moving fast), in the early stage of your venture, how can you determine the critical experiments to run? There are not only a whole bunch of unknowns, there are even quite a few “unknown unknowns” (or “unk-unks”), where you don’t know what you don’t know. What’s a person to do? Well, the worst thing you can do is to engage in a free form jazz improvisation exploration, or embark on a fishing expedition, where you conduct consumer/customer research without a well-articulated set of hypotheses to prove or disprove. Instead, start by trying to pinpoint your most critical hypotheses or assumptions. These should be based on your binding constraints. As you may recall from your high school math classes, a constraint is a condition of an optimization problem that the solution must satisfy. Drawing from your decision sciences class, in linear programming, a binding constraint is a critical factor on which the solution is dependent. If you change it, the optimal solution will change. (A non-binding constraint doesn’t affect the optimal solution and can be changed without changing it.) So, as your write down your key assumptions or hypotheses, you need to do your best to determine what your binding constraints are. In our experience, they usually are centered around three areas: a) category dynamics (where your venture concept fits within the existing market structure and its value chain); b) category and concept economics (particularly where your concept’s unit economic model may be vulnerable) and c) consumer/customer behavior (is there a real problem and does your proposed solution truly solve it). For example, in category dynamics a binding constraint may be your ability to gain access to key suppliers or re-sellers. In concept economics, a binding constraint may be your end-to-end product delivery costs in B2C eCommerce. In consumer behavior, a binding constraint may be customer readiness to embrace a DIY medical healthcare records system or the true likelihood that consumers will take the extra step in food preparation that is necessary to enjoy your product.

So, based on your binding constraints, what key hypotheses are critical to prove or disprove to know if your venture concept has potential? Once you have identified them, do your “smoke-testing” – conduct interviews and develop early provocations/prototypes that your potential users can react to. Concept boards, positioning statements, sketches, storyboards, crude prototypes, etc.

Regarding the second point (equating failure with success) the research is clear: entrepreneurs generally fail multiple times before they launch a successful venture. So you’d be well served to learn to re-frame the concept of failure so you don’t get too discouraged when things get rough. The best way to do this, in our opinion, is to view your failures as experiments that provide an opportunity to learn, which is exactly what they are. As Thomas Edison said, “”I have not failed. I’ve justfound a thousand ways that won’t work.” You too are in the lab, experimenting. Each experiment that doesn’t work teaches you something vitally important. The trick is to make sure you draw learnings from each experiment and apply them, so you continue to get smarter. As American political theorist Benjamin Barber said, “I don’t divide the world into the weak and the strong, or the success and the failures. I divide the world into the learners and the non-learners.”

I’ll wrap it up with two sort of existential thoughts on “failure.” First, real failure isn’t failure in the activity itself. Real failure lies in not doing the things you should do because you don’t have the guts. Real failure is the failure to act. Second, remember that ultimately these everyday so-called “failures” make us more real, more genuine. They teach us to let go of false self-images and superficial ego-directed goals and desires. They give us grit and resilience, deepen our humility and broaden our compassion.

Want to Add To Your Startup’s Value? Start by Subtracting Risk

Here is the golden rule of startups:  Value goes up, as risk of failure goes down.  As a result, one of the primary goals of founding teams should be removing risk from a new venture.

There are lots of flavors of risk when it comes to startups – and they vary from industry to industry.  Some sectors (such as healthcare and financial services) are fraught with regulatory risk.  Others must deal with risks around intellectual property, taxes and duties, environmental issues and more.  There are a few risk varieties however, that are nearly universal for startups in any industry.

Adoption Risk

Simply stated – this is the risk that customers won’t buy your finished product; and we can’t think of a business in which failure in this category is not a complete company-killer.

More often than not, encountering this problem is related to a lack of properly understanding customer needs, the competitive landscape and market dynamics.  Creating a beautiful product or service that nobody wants to buy is not a “business”, thus it is the job of early-stage companies to quickly get out and prove to themselves and investors that there is indeed a market of willing customers ready to buy (literally) their value proposition.

We can make great strides in removing adoption risk from our business by (wait for it…) talking to our potential customers! The earlier we do this in the business-building process the better.  As mentioned in earlier posts there are some key assumptions we all make about our customers when we start a new company and its incumbent upon founders to get out and test these assumptionswith real customers – as soon as possible.

Removing adoption risk by getting out in front of customers and experts and talking through their pain, and learning about the competition and market dynamics is one of the fastest and cheapest activities we can do to remove risk from our startup – all the more reason to do it first!

Product Risk

This is pretty much the opposite reciprocal of adoption risk.  What good is a hungry market full of early-adopters if you can’t deliver them a decent and desirable product to use. The key questions here are things like: “Can it be made?”(i.e. is it feasible), and at minimum, “Does it adequately kill the customer’s pain or create a worthy gain (i.e. is it desirable)”.

These are the types of risk that can be mitigated significantly by the use of prototyping.

Testing desirability is Job 1 in this category.  Like adoption risk – it tends to be fast and inexpensive to arrive at high-level answers to questions about adoption.  You might not get all of the information you need with a low-fidelity prototype, but you will certainly get a long way in understanding if a customer will buy the finished product – even if they need to squint their eyes a bit to imagine what the final version might look/behave like in the wild.  The key here is to develop a prototype with just enough detail to gain clarity of whatever question you need answered – and no more.  (More will be written about this topic in future blog posts)

Feasibility is a different story and often a bit harder to test.   The basic idea is that in order to be feasible, a product can’t be based on magic at its core. Cold fusion is great – and no doubt there is a market for it – but is it possible to actually deliver its value in a product?

Feasibility can be validated by speaking with subject matter and technical experts early on in the development of your business.  At worst, an early conversation about technical feasibility might let you know what constraints you should keep in mind as you go out in the world to test desirability of a possible offer.

On the flip side, whale staplers are totally a totally feasible product to deliver on, but are they desirable to a large enough segment to create a high-growth business?

This question brings is to…

Business Viability Risk

In a nutshell, a business’ viability is a measure of whether or not the venture can make money.  As we all recognize these days, “viability” is no longer a synonym for profitability or revenue. In some cases all it takes for a business to be viable is attracting a critical mass users to its platform (see Instragram) or achieving proof-of-concept for its technology so that it can be acquired by a strategic buyer (as is the case with many of medical technology companies).

Today, there are many business are “built to sell” and not “built to grow”.  We will not argue in favor of one model over another, but regardless of the model and metric one uses to assess viability, it is very likely that that some of the core assumptions underlying the business model can be tested early and cheaply!

If you are starting a business that is built to sell, get out and learn about the metrics and proof points that drive desirability in your chosen sector.  Is it the number of eyeballs on your website or app, your revenue, number of repeat users, profit, achieving technical milestones, a certain regulatory approval? Learning which of these create compelling value for your ultimate customer is something that is possible to learn as early as the other elements of desirability mentioned above.

If you are starting a company that is built to grow, evaluating the strength of your business model should quickly follow your tests of desirability and feasibility (often its hard to evaluate “viability” until you know exactly what you are building and for whom). Viability should exist at the “unit level” as well as at scale.

Tools you can you to test viability range from conversations with experts to the good-old excel model.  The latter is a great tool with which to run  “if, then” scenarios.  Don’t simply use your pro forma and cash flow statement to highlight what the future for your successful company might look like, use them test different scenarios and sensitivities related to your business model.  Think about it like a financial simulator.  The more honest you are about your inputs in these simulations the more valuable your outputs will be in helping you asses viability risk.

Execution Risk

Finally we come to execution risk. It is exactly what it sounds like – can you and your team actually deliver?  This one is the most difficult to “test”, and is more something that needs to be demonstrated through action.

One way to mitigate execution risk is to have people on your team that are experienced operators with a track record of accomplishment and “getting stuff done”.  Ideally they will have done this in the context of another growth business, but a demonstrated track record at a larger organization within the domain is a close-second. Having an experienced team will instill confidence in outsider go along way in alleviating many of the typical concerns that investors will have about a startup’s ability to realize its business model.

Though tricky to test, it is possible (and recommended) to speak to potential investors about the gaps they may see in your management team and what execution-proof-points they would require before making an investment.  This will at least give you some guidance on the gaps that may exist, and investors may even provide recommendations and connections to people that can help you fill them.  Worst-case scenario – its good to be aware of the market’s concerns, and have thoughts prepared to address them when they come-up during sales and investment presentations.

So as you can tell – there is a common theme forming on this blog.  Get out and test ideas in the wild!  The value of your business and your limited time depend on it!

The Starting Point : The Science of New Venture Creation 


(Photo: State Library of Victoria)

The way that we think about new venture creation in our class at the Kellogg School of Management is a lot like basic science.

In chemistry for instance, researchers begin with a series of hypotheses (educated guesses) about what they believe to be scientific truths (Chemical A will react with Chemical B in the following way and will result in the best drug for male pattern baldness ever!).  Our scientist then designs and runs a series of experiments to discover if his/her hypotheses are in fact…well…”fact”.  Based on the outcome of the experiment, the researcher will either proceed down the originally-planned development path to hair-growth-glory, or create revised hypotheses informed by the learnings from the last round of experiments. This cycle then repeats itself until either the researcher discovers a desirable, evidence-based answer (maybe the one they are looking for, but sometimes not*), or decides to throw in the towel and try again down the road.

Our belief is that effective new venture discovery (the fuzzy front–end of creating a new business) is very much the same process as scientific discovery.

Startups often begin as a bunch of hypotheses about what an entrepreneur believes to be a “commercial truth”. – a hypothesis about a certain customer problem, an idea for a solution, a belief about how money will be made, how users will be reached etc.  The issue is that few first-time entrepreneurs recognize that the things they believe to be truths are nothing more than guesses or assumptions, often laden with biases from a founder’s own personal experiences, but not necessarily indicative of the market at large.  As a result – much like in science, the best way to validate the core hypotheses behind a new venture is to systematically design and execute a series of experiments to help learn the real commercial truths around a venture.  And just like in the case of our chemist, depending on the outcome of our experiments, the entrepreneur will either revise the venture’s underlying hypothesis to reflect what has been learned as a result of the testing (and repeat the cycle again…and again) or, with singed eyebrow, decide that the safest place might be away from the Bunsen burner.

What’s that you say?  “What types of experiments can an entrepreneur run to discover commercial truths early on in the process of creating a new venture?”  Glad you asked!  Future posts on BNT will cover this topic in detail – so stay tuned!

– David + Carter

 * This is a key point – particularly in venturing.  Often, it’s unexpected discoveries in building a new business model that generate the most valuable insights for a startup.  Examples include lots of billion-dollar companies we know today: Groupon, Google, Facebook – even blockbuster drugs like Propecia (coming full circle on the pattern baldness reference) began their life as ventures focused on different problems then what they evolved into.  It was the process of experimentation, iteration, and discovery that let these companies to their eventual “Eureka!” moments where problem, solution, and business model all gelled together.

For more on this topic check out the blogs of some of these luminaries of Customer Development and Lean Startup.