Why do new ventures fail? There are three areas of risk when we launch something new:
- Technical (or product) risk: can we build it?
- Market(or customer) risk: does anyone want it?
- Cash (or business model) risk: if people want it and we build it, can we make enough money from it?
When most people try to launch something, they often focus too much on technical risk. This tendency is amplified when the projects are based on scientific research. This is a mistake – market risk is by far the biggest.
Here is what the Lean Startup team says:
If you’re wondering which kind of risk you face, let me help you out: It’s customer risk. Nearly always, it’s the biggest question, because you simply don’t know the value, if any, your new product has for potential customers. When I say, “Nearly always,” I mean: this is so often the case, you should assume it’s true every time.
The tricky part is that commonly, product risk looks more urgent. After all, if you’ve hit on an exciting new idea that you’re pursuing, you’re doing so because you believe other people will be interested in it, too. And if you assume the demand will exist, you’ll be tempted to make sure you can build the product before you offer it to people.
The normal process in research-based organisations like universities, or the CSIRO, who I’ve been working with recently is to do the research first, which reduces technical risk. Then give the new technology to a business development team to bring it to market, which requires reducing market and cash risk. But if the biggest risk is market (customer) risk, is this smart?
One of the key reasons for using a Lean Startup approach like Lean LaunchPad is that it helps you address all three types of risk simultaneously. Doing customer development interviews help you build a validated business model, which reduces market and cash risk.
Steve Blank developed a tool that he calls the Investment Readiness Level (IRL). It is designed to track your progress in building a validate business model, and it looks like this:
It’s a great tool. Here are the advantages to using the IRL:
- The Investment Readiness Level provides a “how are we doing” set of metrics
- It also creates a common language and metrics that investors, corporate innovation groups and entrepreneurs can share
- It’s flexible enough to be modified for industry-specific business models
- It’s part of a much larger suite of tools for those who manage corporate innovation, accelerators and incubators
When we started using the IRL in our CSIRO Lean LaunchPad programs, I noticed a problem – the teams often overestimated how far they had progressed. To help with this, I made a modified version of the IRL with criteria to assess for each level:
Click on the picture to see a bigger version of it.
I also included information on how many customer development interviews you need to be confident in your assessment.
We used this in our most recent programs, and here are some observations:
- It’s great for planning your learning. This gives you a pretty clear idea about what things need to be validated before you move to the next level.
- While the levels are important, ultimately you need to check off all the boxes. All of the things included here help you build and validate your business model.
- Teams tend to progress linearly over Levels 1-5, and then they start doing bits from several levels at once. The critical step in all of this is getting to Product/Market fit at Level 5, and the process for getting there is relatively straightforward. Once you do this, the sequence of actions is less important.
- It’s possible to end up back at Level 0. Level 0 is “We have an idea.” We’ve had a handful of teams do 90+ customer development interviews which led to the conclusion that there currently isn’t a good use for the technology they’re working on. This isn’t a fun outcome, but it’s an important one – it allows them to move on other research.
Lean LaunchPad flips research commercialisation on its head. One thing that we’ve learned in doing this is that good customer development actually changes the science back in the lab. This is critically important since research projects can run for five years or more – it’s important to be working on ideas that will have impact.
Science-based research will always have higher levels of technical risk than other ventures. However, market risk is still incredibly dangerous. It’s important to use tools like Lean LaunchPad and the IRL to reduce all of the risks we face when we’re trying to change the world.
Note: Over the past year, I’ve been running (with help, of course!) a bunch of Lean LaunchPad programs with the Commonwealth Science and Industrial Research Organisation (CSIRO) aimed at increasing the impact of all the great research that they’re doing. This is part of a series reflecting on what we’ve learned through the course of six programs involving 40 research projects and more than 250 people. The other posts are:
- Part one: The How and Why of Customer Development
- Part two: Is Our Business Model Ready to Launch?
- Part three: How Big is Your Market and Where Will You Start?
- Part four: What Assumptions Underlie Your Business Model?
- Part five: A Minimum Viable Product is an Object for Learning
- Part six: Move Sooner and Faster Than You Think You Can
- Part seven: How to Find Your First Customers
- Part eight: How to Make Good Lean Startup Hypotheses
Hi Tim,
Two great posts. Exactly what we need in this time of innovation hype to reduce the amount of innovation “waste”, as Eric Ries would put it. What I see these models doing more than anything is managing risk. In fact, by focusing on a Lean technique you are looking at reducing risk as early as possible by finding out what doesn’t work. What I love about what you’ve posted in the last two blogs is you’ve provided practical tools that you’ve tested yourself and not just hype and buzz. We need more of this.
In addition, this is a topic I am extremely interested in and have just finished writing a book on the types of tools available to reduce the innovation risk inherent in undertaking new ventures, which tie extremely nicely into the Lean Startup and Launchpad methodologies. I’d love to send you a copy after the final editing phases right now and get your opinion.
Best regards,
Evan Shellshear
Thanks for the feedback Evan – it’s great to know when stuff here is useful. I agree with you that lean startup is primarily about risk reduction. It’s funny how that point doesn’t always click with people…
Good luck with the book – I’d be interested to see it.
Tim.
Having lived and worked in several countries and read a lot of the research on innovation, I find these ‘risks’ missing one big element….poor management skills.
This is common sense in other countries and yet we rarely talk about improving the skills of today’s generation of managers and ‘entrepreneurs’. In particularly, in comparison to NZ and Singapore which have formal programs to improve the skills of today’s business people, I find the lack of focus in AU very troubling.
I am not the first to say this in Australia either. Management skills unpin all of these processes.
Thanks Ed – management competence is definitely an assumption I’ve made, which, as you point out, isn’t always correct.
I think your elaboration of the IRL in the table is great. It makes Steve Blank’s tool that much more accessible for innovators alike. However I was wondering, as you had mentioned in another post, how would you work in the assessment of the TRL simultaneously while guided by the IRL here?
Thanks Yazid. As I’ve said in a couple of other posts, the key thing is to be working on both the TRL and the IRL simultaneously, so that you can use the things you learn in one of them to help the development of the other. The TRL is most useful when you are doing genuinely novel technical work, where the level of technical risk is higher than it is when you are building a web-based product or an app, for example.