Thoughts in Time

Since a startup is fundamentally the search for a profitable business model, it is important for the founders to consider a different type of testing for their business. Traditionally, a company will build a product prototype, then alpha, then beta, then V1. At each stage, there are forms of product testing that take place.

At a high level, the goals in product testing are:
1) Does the product work as spec’d (BUGS)
2) Is the user able to use the product to accomplish what it is designed to do (Usability)
3) Does the product provide the user value that can be exchanged for economic value in some way. Would they pay or would an ancillary party pay (Value)

These are important things to test for, and a product that is buggy, not usable, and doesn’t provide the value a user expects, or create value that is could be monetized is destined to FAIL. I learned this the hard way with Pikum as the product was deficient on all three levels.

While product testing and iteration is important, another sort of testing is even more important and should be done at the earliest stage of development. Problem and opportunity testing.

Every startup starts with a premise about the need for their product as envisioned. This can be framed as pain, or as opportunity. For instance, Higher One’s initial hypothesis was that “colleges and universities want to provide financial services to their students through their ID card, but can’t do this as well as if they hired an outside provider.”

Most startup’s premises are INCORRECT. This is because generally you are making assumptions about the market, sales and distribution channels, etc with less than perfect knowledge. As Dick Cheney might put it : “You know the known knowns, but you don’t know the unknown unknowns.”

Therefore it is important for startups to develop and adopt a methodology for testing the problem. How can you do this without your product? Simple, go speak to potential customers. Get introductions to people who are potential buyers, influencers, or experts in the market you want to enter (or if you are creating a market - from places where the market will emerge from). As a founding team, institutionalize methods for capturing known unknowns, new unknowns, and strategies for answering them.

In short:
1. Write down your problem / opportunity assumption and known unknowns
2. Seek out people who can help you test this assumption
3. Create a framework to use with those discussions (so you get the knowledge you need)
4. Iterate your problem as you learn more.
5. Repeat

Here is an example of how this worked with Higher One.
1. We started with our assumption that the problem for schools was that although they wanted to, they couldn’t easily provide sophisticated financial service products to students through the ID. This was in our first executive summary.

2. We got introduced to 3 local university CFO’s and setup time to speak to them about our ideas.

3. We prepped for the meetings by focusing on what questions to ask to confirm our hypothesis and to uncover where there might be other problems relating to our general area of interest (students + financial services offered through schools).

4. We learned that while our problem was valid, there was not a huge amount of pain or incentive for the CFO’s to look for a product here. However, we uncovered that colleges and universities often had to make payments to students and that making these payments was expensive, difficult, and not easily solved by traditional payment products. We iterated our problem - which impacted our product design, but less than one might expect. The important part was that this was the MUST HAVE in our product. We had to develop a payment solution.

5. We sought out further CFO’s to validate that our revised problem hypothesis was correct. This lead us to some of our first customers.

Recently, there has been much debate about “Fat vs. Lean” startups. This debate appears to center around two points. One, how much capital is necessary (Capital Intensity) - defining lean as using little money, versus fat as lots of money. The other point is how capital is utilized (Capital Efficiency). I think this is much more important. Lean startups are capital efficient. So a company like fellow South African entrepreneur Elon Musk’s SpaceX is Capital Intensive, but it could be Capital Efficient if it is accomplishing business building in the most efficient manner possible.

A great way to be lean is to incorporate problem testing into the mesh of the company. If you are quickly uncovering whether your problem hypothesis is correct, or iterating it to be more acute, you will be able to be efficient with your resources (including capital, sweat equity, etc), and will give yourself a much great chance of success.

To that end, I’m currently engaged in this process with my new startup (If you’re a senior HR executive or consultant involved with hiring, please contact me at sean (At) p2institute (dot) com. I’ve spoken to tens of people involved with HR and hiring. My problem hypothesis has been iterating, and I believe this problem testing has already saved time, money, and effort that would have been wasted had I not taken on this process.

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