The first thing that normally comes into mind when someone has a new business idea is: “I need to prepare a business plan“.
The first time I did that, I produced a document of 70+ pages, soon realising that, despite all the time spent writing it and all the research done, it was mostly made up.
All the figures about revenue and marketing costs were just pure invention. I had asked some numbers to the member of the team with some expertise in sales, and I put them in the spreadsheet.
As Alexander Osterwalder writes, preparing a business plan to validate an early stage business idea or a new product is a dangerous double edged sword.
On one side, it provides a tool to make an idea sound convincing when you are presenting to investors or to senior managers. But on the other end, should they consider the plan reasonable and well grounded, they might actually buy it. And if they do that, they will expect you to deliver that! This may be a major headache, because most of the plan was in fact made up.
So if a full length business plan is not the right thing to do, how do you assess whether a business idea is a good one and how do you plan for it financially?
- STEP 1. Start from a lean canvas.
I personally prefer the one from Ash Maurya than Alexander’s one, because it’s more product oriented, and forces me to create a connection between the problems I want to solve, the solutions I intend to provide, and the value proposition that comes out as a result.
It really takes a few minutes to compile, and it immediately allows to clarify ideas and the assumptions around them.
Here I collected a few tips on how to compile Lean Canvas.
At this stage is also very helpful to assess the market size. A few tips here.
- STEP 2. Identify assumptions and prioritise which assumptions to test. I look at the statements on the nine sections of the canvas and I identify how much of what is written there is actually validated. Customers have a problem, and they are mostly with these characteristics: do I have some evidences or I’m just assuming? Because if I’m assuming, I will need to test it. The best thing to do is to review the lean canvas and to identify assumption in a group session. And it’s better if participants have had previous business or startup experiences. They will help not to repeat the errors they have already done.
To prioritise, I use a 2×2 matrix, with risk on the Y axis, and level of “known” of the X. I put post-its with the assumptions in the quadrants, making sure they are evenly spread. Then I repeat the exercise replacing level of “known” on the X with “easiness to test”, and I re-position the post-its from the top right quadrant. If any assumptions have dependencies, the one coming first will be the easier to test. If certain assumptions are too difficult to test, I break them down into simpler and concatenated assumptions.
- STEP 3. Start validating the riskiest assumptions. Usually these are the ones around customer segment and customer problems. The best thing to do at this stage is to start rounds of qualitative interviews, meet with customers and validate who they are, whether they have the problems part of the assumptions, and who are the competitors’ services that they are currently using to solve them. Tips on how to run effective customer interviews are here, while here there is something about one of the most difficult and time consuming tasks: recruiting customers to interview. It is crucial to identify your early adopters at this stage; find out how here.
- STEP 4. Craft a value proposition. After having validated needs, target customers and competitors, it’s time to get together with the rest of the team and co-create a solution. It’s important to do this with the rest of the team for two reasons: first, the combined power of collective intelligence and diverse expertise is higher than the sum of the people involved. Secondly, involving the rest of the team from the very early stages of the product definition will make them more engaged when it will be time to deliver. The starting point is what was originally in the Lean Canvas. But the rule is “never fall in love with your first idea!“. So based on the insights captured during the interviews, ask the team to brainstorm ideas on “how might we…” solve customers problems. A customer-centric competitive analysis (read more here) will be of help to make sure that the value proposition is differentiated enough, and that customers care about that.
- STEP 5. Test, iterate and validate the value proposition. There are many ways to validate a value proposition at the lowest possible cost, here I collected seven options. Anything being used to validate the proposition, needs to be built in a way so that it can be easily changed and iterated based on customer feedback. The key objective of this stage is to get customer commitment. If commitment does not come, it’s time to go back to step 4, and iterate. Moreover, any option to validate the value proposition should include more interviews with more customers to get their first hand feedback on how well the proposition is satisfying their needs and the minimum number of features required for launch.
- STEP 6. Test marketing channels and acquisition costs. Marketing channels and acquisition costs are among the main components, together with the cost of goods sold, of the gross margin resulting from the product. A well refined and optimised landing page with a clear call to action to an order form is one of the things to do to assess channels and acquisition costs. Luke Szymer has written an interesting book about this. Meanwhile, the tech team have now enough elements to assess the tech effort, and provide a ballpark figure to estimate fixed and variable costs.
- STEP 7. Put financials on a spreadsheet. Only at this stage there are enough elements to start working on a spreadsheet. Most of the figures are now validated. There are countless business plan templates around the web, but two key things are most important overall: how many paying customers/orders/transactions you will need to break even, and how much cash you will need to get over that point.
The duration of the seven steps above depends from many factors, mainly the time that founders can invest, their knowledge of the industry and the easiness to reach target customers. But whatever the time invested, this process will provide three main outcomes:
- the financials in the business plan are not made up anymore, but are based on validated assumptions. I would rather commit to a plan like this with investors or execs, as I would have more confidence about being able to deliver it.
- the value proposition is going to be solidly grounded on customer insights and has received validation. It has been iterated and then developed based on customers’ frustrations, not on an idea we had while taking the shower.
- the usual output of a business plan exercise is a 70 page pamphlet. Instead, while going through the 7 steps above you would have built something real, a first step of the actual product you originally wanted to launch to market.