The SearchLite has now completed over 80 Market Discovery Challenges over the past 3 years. Our startup and new venture clients have included a wide variety of organizations, entrepreneurs and topics. What they all have in common is a need to assess the commercial viability of a new technology or solution. Furthermore, they need to assess it quickly before they run out of time and resources. The objective is to quickly identify if there is a need to iterate deeper or execute a bigger pivot regarding either the target customer segment or the solution. Of course there is always the possibility that there is no product-market fit and that “the baby is ugly”. With respect to their technology or solution, our clients hire The SearchLite to find out:
- Who cares?
- Why do they care?
- How much do they care?
Market Risk – The elephant in the room
Studies have all shown that market risk is by far the biggest risk facing any new venture, whether it is being driven by an entrepreneurial startup team or from within an existing company. Market risk is believed to be the cause of over 80% of new startup failures. Technical risk, team risk and financial risk make up the remaining smaller share of risk.
To address market risk, The SearchLite’s Market Discovery Process integrates popular tools from key thought leaders in the lean startup movement. These tools include the Customer Development Process from Steve Blank as well as Business Model Generation and Value Proposition Design from Alex Osterwalder. Both are good tools individually and are even better at addressing market risk when used together.
The Business Model/Value Proposition Canvas identifies the nine most important building blocks of any new business venture. The Customer Development Process provides the methodology by which to create and validate key hypothesis across the nine building blocks. In essence, the two tools provide a framework for applying the scientific method to validating key hypothesis, just as any researcher would do on their bench to prove out their new science. The Oxford Dictionaries define the scientific method as “a method or procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses”
Addressing Fear, Uncertainty and Doubt (FUD)
One of the most common issues we have seen over three years when working with inventors, especially university researchers, is they are not able to make the mental connection and apply the same scientific approach to market risk as they would do to address technical or scientific risk, even when confronted with the evidence that market risk is the bigger risk to address. A common challenge is that they have not developed their key “product-market fit” hypothesis. At best, they often only have a handful of questions in mind. Because the researcher has not been able to properly frame hypothesis in the form of decisions, there is a general cloud of what I would call “FUD” or “fear, uncertainty and doubt” hanging over the researcher/inventor and their commercialization coaches (e.g., tech transfer mentors). It is important to recognize and acknowledge the FUD, but then quickly adopt a strategy to address it.
One of The SearchLite’s early challenges on most projects is to help our startup client re-frame their ad-hoc questions in the form of structured decisions, each with the appropriate criteria and alternatives. We find that this approach is less intimidating and more effective than forcing the client to create narrow hypothesis. It is often too difficult to express narrow hypothesis at the beginning of Customer Discovery if the science is early stage and/or has broad market application.
Taking a lesson from Systems Thinking
A basic tenant of systems thinking is to identify and understand the relationship between multiple decisions as well as the alternatives and criteria associated with each decision. Failure modes in business, or even life in general, are thought to all fall within one of three buckets. Startups and new ventures are not immune to these failure modes and, in fact, are likely more susceptible to them.
Decisions poorly made
Decisions poorly implemented
The Biggest Decision – Product-Market Fit
Steve Blank’s Customer Development Process provides a good example of systems thinking. The SearchLite often finds that startups and new ventures often believe that they are one to two stages ahead of where they really are with respect to the Customer Development Process.
- They have begun building their company with creating customers.
- They have begun customer creation without validating who their customer is.
- They have begun validating their customer without discovering alternative customer segments to consider.
Getting these decisions properly framed and sequenced is a critical success factor to addressing market risk. The struggle of knowing where you are in the Customer Development Process as a startup or new venture comes from not understanding how to (1) identify and frame the decisions; (2) identify the associated alternatives and criteria to properly make each decision and (3) properly sequence the decisions to address. Thus, relative to systems thinking, many startups are often making all three errors simultaneously. No wonder that there 80% of startup and new venture failures result from addressing market risk … “it is not easy”!
How to know when to move forward?
In the case of the Customer Development Process, startups may not understand the thresholds by which they pass from one stage to the next. Thus, they mistakenly believe that they are further along that they really are.
- Problem-Solution Fit – You move from Customer Discovery to Customer Validation when you have evidence that customers care about certain jobs, pains, & gains AND you have designed a value proposition that addresses those jobs, pains, & gains.
- Product-Market Fit – You move from Customer Validation to Customer Creation when have evidence that your products and services, pain relievers, and gain creators are actually creating customer value and getting traction in the market.
- Business Model Fit – You move from Customer Creation to Company Building when have evidence that your value proposition can be embedded in a profitable and scalable business model.
Startup Example – Med Device Solution
Now we will use a startup example to demonstrate the integration of the Customer Development Process, Business Model/Value Proposition Canvas within a Systems Thinking Framework.
Decision Framework (Business Model Canvas):
- Product-Market Fit – For whom are we creating value? Who are our most important customers? What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products & services are we offering to each Customer Segment?
- Channels – Through which Channels do our Customer Segments, want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines?
- Customer Relationships – What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How costly are they? How are they integrated with the rest of our business model?
- Revenue Streams – For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues?
- Key Activities – What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?
- Key Resources – What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?
- Key Partnerships – Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform?
- Cost Structure – What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive?
Decision #1 – “Product-Market Fit” – Customer segment alternatives
- Large private practices
- Medical device manufacturers
- EHR software vendors
- Large regional healthcare systems
- Small private practices
Considered, but rejected:
- VA health system
- Small regional health systems
Decision #1 – “Product-Market Fit” – Decision criteria
- Clinical workflow integration
- Insurance reimbursement
- HIPPA compliance
- Legal liability
- Patient data usage
- Automated notifications
- Intellectual property protection
We have now demonstrated an approach using existing “off the shelf” tools that, when applied properly, will help prevent the most common failure modes when addressing market risk for startups and new ventures. The SearchLite uses systems engineering software to capture the proper decisions, their alternatives and criteria. Capturing generalized patterns from past projects allows The SearchLite to identify value proposition and business model starting points quickly, thereby accelerating our Market Discovery Challenges for each new client.
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FOOTNOTE: Osterwalder, Alexander; Pigneur, Yves; Bernarda, Gregory; Smith, Alan (2015-01-23). Value Proposition Design: How to Create Products and Services Customers Want (Strategyzer) (Kindle Location 756). Wiley. Kindle Edition.