hello this is dr. Adam Jay Bach in these short video presentations we're going to talk through the topic of the Lean Startup there are three basic elements of the Lean Startup that we're going to discuss the assumptions and hypotheses associated with the business concept the process of experimentation to confirm or reject those assumptions and hypotheses and then we're going to talk a little bit about the MVP the Minimum Viable Product concept that's at the core of the lean startup and briefly note the distinction with the MV BP that's described in disciplined entrepreneurship we're pretty much closing out our entire process we've made it through the full journey of disciplined entrepreneurship and are closing out our final topics it's very important to understand that many entrepreneurs and startups begin the process with assumptions that are quite simply wrong any time you're going to do something novel there's a good chance that the your opinion or your ideas or even the data you have isn't relevant or are simply incorrect even industry experts can miss nuances or differences in what in what reality really is and you have to test hypotheses by running experiments especially when innovation is truly new to customers I just want to point this out from personal experience with one of the companies that I founded neruda's corporation Meridius was arguably an extremely capable company with very bright people running it I feel like I'm a reasonably bright person and I this was my second start up in the biotechnology industry I was working with a nationally recognized scientist from Northwestern and a CEO who had previously run a multi hundred million dollar biotechnology company and yet and we hired good scientists and good people and did lots of great research and and talked to people in the market and yet we still managed to get it wrong three different times we founded the company in 2004 we initially went after coded stents we then when that was unsuccessful we attempted to develop a bone glue then when that that was the situation with the technology actually was not capable of the application that we needed we went after a new application of a catheter coding that also was unsuccessful because of challenges with the specific market and then finally we found the application and neurosurgery that resulted in the successful sale of the business in 2011 could any of these mistakes have been prevented it's a great question we could you know do a post-mortem on this indefinitely and try to figure that out but ultimately each one of these we've discovered through the process of direct experimentation or market experimentation of prototyping that they didn't work and presumably there might have been ways to get through this a lot faster rather than for to have this take seven years to get to an actual product that appeared to be viable the challenge of course is that hypothesis testing is difficult it's especially difficult in biotechnology of course but it's generally difficult entrepreneurs have limited time and resources if we completed the innovation marketplace in this class you may remember that particular challenge where you only had so much time to talk to people I only had so much time to come up with ideas and you only had so much so many resources available to you prioritization is critical figuring out where to expend your effort and which experiments to run to test hypotheses is really really important you need to design good experiments that turns out to be usually the single biggest challenge is designing experiments that get you the data that you need the bottom line is that it's very expensive to build a fully developed final product and then turn how it turn out that that was the wrong product to develop and this is why we want to encourage rapid experimentation so let's do a quick activity in canvas you should be able to go into canvas I recommend doing this right now rather than waiting till the end of the presentations obviously it's up to you we chatted previously about the idea of a faux noodle restaurant and so what I'd like you to do now is to answer a couple questions about that specific restaurant I'd like you to identify two hypotheses that you might have about the restaurant the restaurant idea and then selecting one of those hypotheses think about the data that could be collected in order to try to confirm whether that hypotheses hypothesis is correct or incorrect and then finally what could you do to actually collect that data so there's a little more information presented in the canvas activity please take a look this is a great time to do this so that you're learning as you go along the concept of experimentation is designed to de-risk your business in other words your goal is to identify the ways that you can reduce the risk that you get things wrong some risks can't be reduced or eliminated because there are so many things about business that are going to be out of your control such as the broader economic situation the available immediate availability of suppliers and so on but there are many things that are under your control for example have you designed a product that actually matches customer needs and one of the ways to test that of course is to create experiments that allow you to confirm quickly whether or not you're putting together something that will work your goal here is to minimize the effort of your experiment that while maximizing the learning that you get from it you're really trying to ensure that what you're measuring is relevant and can generate action or change if after all you're asking questions and the answers to those questions won't affect what you do then you're probably not asking the right question a really good point for identifying the experiments is the business model canvas or the lean canvas you may remember when we when you created those a key aspect of those canvas activities is to identify the the hypotheses and assumptions associated with why the business model might or might not work so let's talk about that a little bit because this is a really good starting point if you're ever gonna run your own business for thinking about the data you want to collect to determine whether the business is likely to work so you may remember the e parking model that we've talked about the link here is right here in case you'd like to go back and take another look at that but there are a whole variety of hypotheses associated with whether this a parking model would actually work one hypothesis is that property owners will actually rent spaces out it could turn out that we could try to identify property owners willing to rent driveway or garage spaces and none of them will another hypothesis is that we'll be able to get the necessary insurance coverage to make this work after all who's responsible if a visitor to campus parks a car in a private driveway and then something happens to the car a vandal breaks a window or there's an accident at the house of some kind or somebody hits the car who's responsible for that we don't know whether insurers will actually cover that sort of thing on behalf of our business will customer segments actually use and pay for the service you may remember from the parking model there are multiple customer segments students faculty staff visitors some of them might be willing to pay for the service and some of them might not can we get this platform to run automatically and how much of the platform can run automatically after all the platform can't obtain the driveway spaces we're gonna have to go out and get those are directly ourselves will there be a low complaint rate will we meet users expectations things like a person who parks in someone's driveway and then doesn't collect their car on time that could block the owner from getting their car back into the driveway or the garage and then they might choose never to use the service again will the transaction fee that we tentatively identified actually cover the costs and generate a profit there's lots of hypotheses associated with whether this business model could actually work entrepreneurs make many critical assumptions about the nature of the business what is the cost of the product and specifically the cost of customer acquisition what are the likely marketing costs conversion ratios for identifying potential customers and turning them into actual paying customers the overall sales costs and our ability to close sales once we've moved down the sales funnel who will the main competitors be which target customer segments are most important what price will customers actually pay and what is the lifetime value of the customer all of these are critical assumptions about any given business and their assumptions that you generally can test in one way shape or form and great entrepreneurs test and validate as many of these as possible many first-time entrepreneurs make very simple errors they focus on aspects of the business that seem easy fun and exciting and the reality is that great entrepreneurs focus on the business issues that are critical to success you have to confirm that they're actually things that can be done focus on the difficult issues figure out if you can simplify them and identify the issues that lead towards competitive advantage many first entrepreneurs realize how difficult some of these things are and then they don't address those they focus instead on the easy and unimportant things let me give you an example of a slightly different problem but I was approached by a series of students who wanted to create an app an online platform which they called uber for in-home care giving the idea was that the population in the United States is aging and families would like to find in home part-time caregivers to help with elderly who may be infirm and so the idea was to create an online or mobile platform which would match caregiving needs with available part-time caregivers so you know it's just like uber the idea is a family realizes they need someone who can maybe do a little cleaning or maybe do a grocery run or even just takes a go for a walk with someone to make sure that they're getting outside and exercise but also safe and so they could people could post the kinds of services that they would provide and then families would go online and identify a potential caregiver at the price they're looking for and it would be awesome and so the team said that their first goal the very first thing they wanted to do was to build the platform and while I understand the sort of excitement of in a platform and building an app is cool and you know it's fairly straightforward the reality is that that doesn't give you any information about whether this business will actually work after all there's all sorts of likely challenges associated with this if you're a family looking to find someone who's going to take care of an elderly person how will you know that the person who you're identifying on the platform is qualified and safe that they perhaps don't have a criminal record and so on and so the key hypothesis here is that will families actually use this and you don't build the platform to test that you need to go and actually talk to families and find out what their criteria are going to be Daniel chefs key who also teaches on this course has created what he calls a hierarchy of tests we're going up the hierarchy this pyramid gives you a better and better indication of whether the business is viable starting with your assumptions and dreams maybe talking to industry experts these are relatively low cost low effort activities but they're also only so likely to be indicative of actual results an online survey can be powerful but usually not as good as in-person interviews and then ultimately you would like to do an MVP review with your customer but the final hierarchy the final test and the hierarchy is do people actually pay for it so as an adjunct to that is the hierarchy of customer interest if you're at the point where you have an MVP or you at least have something you can show to customers your goal then is to get in front of customers and try to move them up this hierarchy from having a conversation with you to potentially agreeing to some kind of pilot test and perhaps trying something out and then ultimately actually making one kind of payment or another so hopefully this gives you some sense of the starting process for thinking about assumptions and experiments in the next couple of presentations we're going to continue this conversation to focus on experiments and ultimately talk about the Minimum Viable Product