What Assumptions Underlie Your Business?

Hypothesis Testing for Lean Startups - Part Four in the Lean Startup Series

Hypothesis testing

Every social activity that we undertake is subject to underlying assumptions.

Think about music – here is a great section from the book Art Worlds by Howard Becker:

Consider what changing from the conventional Western chromatic musical scale of twelve tones to one including forty-two tones between the octaves entails. Such a change characterized the compositions of Harry Partch. Western musical instruments cannot produce these microtones easily, and some cannot produce them at all, so conventional instruments must be reconstructed or new instruments must be invented and built. Since the instruments are new, no one knows how to play them, and players must train themselves. Conventional Western notation is inadequate to score forty-two-tone music, so a new notation must be devised, and players must learn to read it. (Comparable resources can be taken for granted by anyone who writes for the conventional twelve chromatic tones.) Consequently, while music scored for twelve tones can be performed adequately after relatively few hours of rehearsal, forty-two-tone music requires much more work, time, effort and resources. Partch’s music was often performed in the following way: a university would invite him to spend a year. In the fall, he could recruit a group of interested students, who would build the instruments (which he had already invented) under his direction. In the winter, they would learn to play the instruments and read the notation he had devised. In the spring, they would rehearse several works and finally would give a performance. Seven or eight months of work finally would result in two hours of music, hours which could have been filled with more conventional music after eight or ten hours of rehearsal by trained symphonic musicians playing the standard repertoire. The difference in the resources required measures the strength of the constraint imposed by the conventional system.

The difference in the resources required also measures the amount of assumptions in the conventional system. Here’s another example: money has no inherent value. How long would it take to navigate daily life if we had to negotiate trading terms for every single thing that we needed? It would require all kinds of extra resources.We have many other sets of conventions like this that allow us to interact – things like time, every single language, standards of dress, and so on.

Conventions like this save us tons of time and hassle every single day. My brother Gabriel is a fantastic violinist, arranger, composer and generally excellent music guy. Here is his response to the Becker quote:

I was very lucky a year ago to be part of an “audience” of four squeezed in to the (big!) room at Montclair State where Harry Partch’s own instruments are housed, on the occasion of the final dress rehearsal of several of his landmark works before their reprise at Lincoln Center later in the week…pretty freakin’ amazing music!!

IF (and it’s a huge ‘if’) one really has something so different and valuable to create musically than the millions before, then MAYBE eschewing centuries if not millenia of tradition for the sake of incredible INefficiency and frustrations and utter lack of infrastructure may be worth it… Maybe, yes, for example, in the very very rare case of Harry Partch…

Becker is making the point that constraints enable creativity, as you can also see in that statement from Gabriel.

This is very circuitous route to a very important point: every time we build a business model, there are a TON of assumptions that lie underneath it, and some are more obvious than others.

Here is what it means for lean startups: every assumption is an innovation opportunity.

You start with your first proposed business model, which consists of a bunch of guesses.

Business model guesses

The next step is to convert these guesses into testable hypotheses – this is why the National Science Foundation in the US has called the Lean LaunchPad approach “the scientific method for startups.”

There are plenty of tools for doing this – we’ve used Strategyzer. Here is what one of their hypothesis testing cards looks like:

Hypothesis testing

The structure for a business hypothesis and test is:

  • We believe that…
  • To validate this belief, we will…
  • And we will measure…
  • We were right if…

Once you’ve done this, then you have to go do customer development interviews, and record your results. Was the hypothesis right? If so, great! Move on to test the next one. If not, you need to build another hypothesis to test.

At its simplest level (simple, but not easy), business hypothesis testing lets you test out the hypotheses that must be true for your business model to work.

At a deeper level, you can be like Harry Partch and think about the fundamental assumptions that underlie the area you’re working in.

I talked about money – there are all kinds of assumptions with it, like:

  • The value of money is guaranteed by government fiat. Challenging that assumption led to Bitcoin.
  • Money requires currency. Challenging that assumption led to mobile money platforms in Africa like Sente, where money is stored in phone accounts.
  • People keep money in banks. African mobile money platforms also challenge this assumption, where a huge percentage of the population has skipped banks entirely.

Assumptions aren’t automatically bad. For day-to-day things like language and money, assumptions save us a great deal of time and effort.  Nevertheless, when we are doing new things, it is useful to articulate the assumptions that underlie the work. Challenging these assumptions can lead to potential innovation opportunities. At the least, clarifying assumptions gives us the hypotheses that we must test to improve our chances of success.

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:

Another note: if you’re interested in Harry Partch, here’s a good documentary about him and his music.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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