A start-up’s founders have significant resource constraints and considerable uncertainty about a lot

of aspects of their business model. We try to resolve this uncertainty bit-by-bit by gaining
information through a hypothesis-based approach. It allows us to expend the least bit of resources
in order to gain this information needed to resolve our uncertainty.

An entrepreneur translates his vision into falsifiable business model hypotheses and tests these
hypotheses using a series of Minimum Viable Products (MVPs), which are the smallest set of
activities meant to disprove a hypothesis. These MVP tests are also called fast and frugal tests.

Based on feedback, you either persevere with your business model, pivot by changing elements of
the model or perish, abandoning the new venture. He repeats this process again and again until she
has resolved uncertainty about the model and has achieved a product-market fit. Only then can he
commence scaling.

A lean start-up is one that uses this approach using the scarce resources at its disposal to bound
uncertainty and achieve a product-market fit. Some entrepreneurs are so in love with their idea that
they produce a product that no one wants and then realize it after having expended considerable
resources at its disposal. Time matters for an entrepreneur so build rapid iterations in small batches
and small cycle times.

Alternatives to Hypothesis-based-Entrepreneurship:

1. Build-It-And-They-Will-Come bypasses customer feedback and demand validation, relying on

a founder’s vision for guidance. These entrepreneurs are introverts and are scared of feed-
back due to ego-defensive avoidance pattern.
2. Waterfall Model: Vision of founder is turned into a concrete plan. These Planning->Design-
>Designing-> Alpha Testing one after the other after the former stage finishes a formal
review. Only when they commence their alpha tests do they get customer feedback.
Sometimes they might have produced big batches of product before feedback requiring re-
work.
3. Just Do It: Improvisational and iterative product with feedback from resource providers and
customers in order to modify the product. This starts out without a strong product vision
and an improvisational set of steps which might turn out to be wrong because there is
strong step-by-step interdependence.

1.Develop a vision: Ideation – Creativity comes from 1. Immersion in a problem (self in case of
consumer businesses and through domain experts in b2b businesses) 2. Obsession – with ideas they
are working on (however, we should not be obsessed with preliminary solutions) 3. Incubation-
spending years on a problem before getting at a solution (keeping it in the sub-conscious) 4.
Recombination – new ideas come from connecting unrelated concepts 5. Clarification – keep track of
refining their ideas (whiteboarding sessions) 6. Collaboration – with brilliant people.

2. Translate vision into Hypotheses: convert the vision into a set of falsifiable business model
hypotheses. A business model is a set of activities and choices that will configure activities and
deliver value while earning profits. It includes customer value proposition, go-to-market plan,
technology and operations management and cash-flow formula. Falsifiability means the hypothesis
can be rejected through a decisive experiment. These falsifiable hypotheses should be as specific
and as quantitative as possible to maximize learnings. These hypotheses need not be comprehensive
as this is a highly iterative process.
(i)Entrepreneurs are always looking at their conversion funnel. They look at how many of their
prospects actually turn into paying customers and repeat purchasers.

(ii)They combine this data with Average Lifetime Value (LTV) of variable contribution margin earned
from a customer of a given type net of the average Customer Acquisition Cost (CAC) for that type.
(iii)They also use cohort analysis to track trends in conversion funnel performance and LTV/CAC etc.
A cohort is a set of customers that have been acquired during a specific period of time often using
the same marketing method. Analysing metrics of successive similar cohorts tells us whether the
actions to improve performance are valid.

(iv) A/B testing is frequently employed to facilitate rigorous hypothesis testing. A/B tests divide a set
of similar prospects or customers into a control group (status quo product) and the treatment group
(new product / modified product). It is done to see whether the modifications in product yield
statistically significant performance improvements.

3. Specify the MVP Tests: For an entrepreneur, it is essential to minimize time and resources
involved in minimizing uncertainty of a business model . Hence, they must launch early and often by
launching MVPs which have the smallest set of steps to complete a Build-Measure-Learn cycle and
thereby test a falsifiable business hypothesis. The MVP is done in small batches and quickly so as to
correct product features when not liked by the audience. MVPs can have constrained functionality in
the sense that they will not have all the features envisioned for future users. Smoke Tests are a way
to gauge demand for a product that does not yet exist. MVPs usually have make shift operational
capabilities. Use a series of MVPs to test various hypotheses and also constrain customer sets so that
brand is not impacted in case MVP is not good and also getting lot of customers before resolving
uncertainty will alienate early adopters. We need just enough customers to test the MVP to have
statistically significant results.

False Positives and False Negatives: When entrepreneurs take in a lot of enthusiasts, it would be a
bad idea as it might result in a false positive because these entrepreneurs don’t use a representative
set of customers in their first tests. False negatives occur when the MVP is badly executed. Ex- bad
website design and resulting negative reviews from test subjects although the project is actually
good. Using a series of MVPs eliminates the chances of false negatives.

Concerns with MVPs: Idea theft – value of early constructive feedback gotten by small and frequent
MVP launches will negate the risk of theft. Reputational Risk – It is reduced by limiting the customer
stets during testing to the size required to make statistically significant analysis – that is it.

4.Prioritise Tests: The entrepreneur must specify order of tests in such a way as to eliminate
considerable risk at lowest cost. Ex- A patent search before creating a technology product and taking
it to market. Also, parallel testing can be done to reduce time as well as uncertainty.

5.Learn from MVP Tests: Entrepreneurs must learn from MVP test results but at the same time,
guard against false positives and false negatives. They must also be aware of their own biases as well
as the fact that customers’ actual preferences are different from their revealed preferences. Some
surprises could occur during testing: 1. Unexpected test results which we can use 2. Information
from external world (such as competitors, regulators) that is not derived from testing.

6.Persevere, Pivot or Perish: When the MVP tests validate our hypothesis, we stick to the model and
prepare to scale (persevere). When MVP tests tell us that the current hypothesis is not correct but
an opportunity lies elsewhere, we could pivot in terms of Customer Value Proposition (Customer set,
Feature set or both), Cash Flow formula (ex-google), Operations and technology or go-to-market
strategy. When the MVP decisively rejects the crucial business model hypothesis, we perish.

7. Scaling and Operations Optimization: Once the falsifiable business model hypotheses have been
validated, our product has gotten the product-market fit, now we must scale by aggressively
acquiring customers. That means the early adopters have liked it and it has shown profit potential.

Limits to Lean Start-up Methods:

1.Sometimes all startups maynot be able to make and learn from mistakes. Ex-space startups and
pharma (limited by society)

2. When demand uncertainty is low: such as solar technologies etc. enterperneurs must still do
hypothesis testing but in terms of engineering approaches. They also can take their time while
building the product unlike traditional tests that are short and often done.

3.When demand uncertainty is high and development cycles are long: ex- Segway development.
Here also, the entrepreneur can test out his product whenever possible but must guard against
escalations of commitment.

**

Identify the riskiest parts of your business:

1. Problem/ Solution fit: (Is there a problem for me to solve?)

Does the problem u think actually exist ? Does a big enough audience recognize the
problem? Can we solve it feasibly ?
2. Product /Market Fit: (Does the market want the product I built ?)
Have I built something people would want ? does my solution address the problem and
would customers want to pay for my solution ?
3. Business Model /Market Fit : Scaling up
Ways to acquire customers. Are my cost and revenue structures robust ?

Perfecting the Ask:

Asks can be of various types from various stakeholders: Money, Advice or Mentorship, Collaboration
on a project, endorsement of project.

1.Start with an inventory or list of first degree and second degree connections who can be of help to
you on the project. Start calling up people first starting with the most relaxed relationships then the
harder ones. When picking up the phone think of the affordable loss.

2.Link the Canvas: Pick up linked in contacts, look at profiles of people whose education or
experience is on your project’s area. Send them a linked-in request.

3.Widen the net: Give information to people to opt in to your idea by sending regular updates about
what you are doing over email or twitter

4. Change Roles: Don’t constrain anybody engaged with you on your project in their current roles.
Always ask the questions- can my customer be an investor ?

Prepare to launch the ask:

Tailor a Narrative, Do a practice run with your friend, Don’t forget to ask precisely what you want,
Don’t think it will always be a quid pro quo, Make it an affordable loss for them
Open: The dialogue which is your ask

Start Specific but be ready to pivot, start board with an opening possibility , build empathy, build
ownership in the project.

Pivot: To match constraints, interests and means

Permission to pester, ask and dance (evolving ask), co-create with your collaborator (transform your
idea based on interests of the collaborator)

Commit: Skin in the game, Contingent commitment (you promise to reach milestones and the other
also reciprocates), talk cricket after getting a commitment, Exit with iteration (get some positive
outcome out of the ask even if it fails)

Play Fair: once committed, stick to the commitment. Co-operate with the other party and if they
violate agreement, talk about it buy give the other party a chance to co-operate.

Effectuation:

1.Always look at means in hand: Who am I ? What can I do ? Whom do I know ?

2. Set Affordable loss and do not take more risk than this.

3. Be Co-operational with others – suppliers, customers etc.

4. Leverage surprises

5. To the extent that you can control the future, you don’t need to predict it.