A better approach to starting a company – learnings from the software and venture studio world
My journey starting ventures
The story of many (first-time or not) entrepreneurs could go like this: you try and try many times to solve a problem, till you get it ‘right’, or run out of stamina. Getting it right could mean having many customers for your business, but that doesn’t mean you’ll have a good outcome – you could be running an unprofitable business, or run out of cash regardless. The likely outcome, however, seems to be running out of stamina and moving on to something bigger/better.
When I started my first venture, Cycloid, I wanted to build a product/service to help young people make better career decisions. I wanted to solve a specific problem and went from idea to idea sequentially, following the sequential ‘pivot’ story for startups. First with students and parents as the main users/customers, then with schools/school boards as the main users/customers, and so on and so forth. Testing ideas and ‘pivoting’ sequentially requires lots of luck. I now know this in hindsight, knowing what I have learned since then about testing and validating business ideas. I was hoping for luck and something to ‘click’ if I tried enough things sequentially for long enough to solve this problem. Eventually, I ran out of stamina, knowing that the opportunity had sequentially ‘pivoted’ into something that I didn’t feel connected to anymore and that still had very high chances of failure (long sales cycle, government customer, low-intensity and urgency pain point, and lack of macro-trends indicating good timing). The luck didn’t arrive in that problem space. There were too many more problems and opportunities to work on that I cared about. Swing and a miss, over and over, on a bowler’s pitch. Cleaned up.
There’s an ideal that’s preached by philosopher-entrepreneurs of taking multiple shots: one of them is bound to be hit sweetly, and eventually get over the line. That all you need is to get it ‘right’ once, after which you’ve unlocked financial freedom for yourself. This line of thinking makes sense, both from a risk-taking perspective and from the many anecdotes of entrepreneurs. But how does one get through as many innings in as little time (before running out of money/stamina)? This is a question I asked myself when I had freshly moved on from Cycloid.
After spending a couple years helping build FutureSight I, like some others, think it is by a shift in approach: not committing to an opportunity before considering many alternatives and testing each cheaply. As a result, you take many shots quickly, and are able to turn back the time to really put your weight behind the few that you want to hit out of the park. This can help on a number of levels. You don’t need to feel pressured to choose to solve a specific market problem when you care about X others. It also requires a shift in mindset – from being 100% sure about the fact that one is a good idea, to being 80% sure that it is a bad idea. That makes decision-making easier. What if you didn’t have to make tough decisions, and let the business-viability and rules of probability guide the decision?
Not testing different opportunities/ideas could get you stuck in low-value areas. The venture studio way (that I learned at FutureSight) is to systematically pick upfront what idea you’ll choose to spend your time and resources on. Here the ‘quality of opportunity’ could be defined by your own metrics – be it market potential, impact potential, etc.
Read on to learn about what you need to run such a process well. I’ll go over:
Why luck plays a bigger role than you think in how first time entrepreneurs think about business building
The alternative approach: measure n times, cut once
How to implement the alternative approach now
The general approach entrepreneurs may take
The general approach, which I took with Cycloid and don’t mean to take again, is to get an idea to solve a problem, and iterate your way through different/better versions of it. That approach can create a lot of waste. It can work too, but the chances are low. In my example above, I started in a slow industry (public education) with budgetary constraints and inadequate incentives (no ownership/skin in the game). If you think of industries and markets as a terrain of opportunities as in the diagram above, I started in a low-lying place, in an opportunity that didn’t allow me to generate/capture enough value. I think marrying an opportunity early on, without sufficiently testing it (relative to other opportunities) against certain criteria, leads to higher chances of wasted time on an opportunity. If you don’t pivot substantially, you may still be stuck in local maxima (see diagram above) when you really want to be around the global maximum.
The approach looks something like this, and why the right opportunity may come too late (see where the stamina horizon ends):
Why the approach is a trap
This approach is a trap because of the time you could waste on a futile or unworthy cause relative to your opportunity cost. Every investor loves a conviction-full entrepreneur, but how many convinced entrepreneurs have been delusional? The opportunity cost for pursuing dead-end opportunities is not only another more-fruitful opportunity but also another problem that you deeply care about/connect with. There are many problems worth solving.
The benefit of the sequential approach is that you will know with a high amount of certainty whether that path has gold or dust at the end of it, but at a cost of time, resources and stamina. These tend to run out if the opportunity is not worth going after and you discover this late in the game. As in my Cycloid story, this approach depends on luck more than it should (because you always need some luck, and can choose to be in places where more happens serendipitously).
I think an analogy will help. Starting a restaurant business is probably going to be as hard (if not harder) than an exponential tech company which can have orders of magnitude more impact and upside [I forget where I have heard this analogy before]. So, wouldn’t you rather do some pre-work before landing on the idea/opportunity you would want to devote the next 3-6 months validating? A business opportunity you are testing/validating might be impactful/valuable if you’re lucky. But why not start a more impactful/rewarding company instead, if it is going to be just as hard? That doesn’t mean just following the process with one idea, but starting the process and following it systematically for multiple ideas/opportunities in parallel, objectively evaluating it for the criteria desired – be it impact, number of customers, value generated/captured, timing, etc.
In summary, the alternative approach: source multiple problems/ideas and rank the opportunities (that solving the problem would create) against a set of predefined criteria. This will land you on the problem that is worth your time, from a resource and impact perspective.
The alternative bowtie approach
Consider the two-sided ‘bowtie’ approach (see diagram below), as opposed to a parts-explosion of any one idea you have. This is a visual representation that was first brought up at FutureSight by John, because it looks like a bowtie. I think you can save a lot of time up front by killing ideas that don’t meet your pre-defined set of criteria (or handing them over to someone else who may love working on the idea – arguably better than killing it). The alternative of time-consuming experimentation with the fallback of ‘pivoting’ your business model is costly, a poor use of time, and over-reliant on luck as seen above. The chances of success in the bowtie approach will be higher (because you are evaluating future paths and learning) and that is better decision making.
Once you land on 2-3 high quality opportunities, your time and money is better spent on them than the 10s that you kill along the way. That money and time should then be spent de-risking the business and its various facets/aspects. Resources that can support this phase of business model de-risking include: Running Lean and Testing Business Ideas. This de-risking phase is akin to converting a 2D stick-figure sketch into a 3D printed model of any particular object, and interacting with it – getting familiar with all its curves and edges. All this, within one’s stamina horizon – before you run out of money, time, or motivation. This is done after the prevailing below.
During the subsequent phase where one opportunity is the area of focus, time and resources are spent de-risking parts of the business model (which are unearthed using tools such as the business model canvas, the value proposition canvas, the financial model, and a pitch deck). By running closed experiments, more information is learned about the idea and what the new business needs in terms of capabilities, activities and strategy. This helps construct a more holistic picture of the opportunity before you raise/hire/scale.
So, what does that mean for those building a (next) venture?
I think it is hard to kill bad ideas the right way (unless you have an abundance of them). The right way gives you the most amount of learning (directional) up front that you can combine with your instinct/intuition to systematically identify high-value ideas to focus on.
So how can you implement a similar approach right away?
While this has been tried mostly on software opportunities, I believe the framework and principles apply broadly:
Ideate.
Start in multiple places on the ‘terrain’ of opportunities. Generate multiple ideas/opportunities broadly, and have systems/processes in place to generate ideas. This could just be as simple as ‘being around smart people’ or as robust as brainstorming sessions, like IdeaLab does.Evaluate ideas by answering specific questions that require specific information.
Have multiple stages/gates along the way, where you ask important questions about an opportunity that must be answered in a certain direction for the opportunity to go ahead. The purpose of using criteria/‘stage gates’ is to decide whether or not you’re in the right place in the terrain. You must define what the stages of an opportunity are and what the criteria are at each stage that need to be met. Stages could be: speaking to subject matter experts, business model canvassing, doing customer discovery, doing technical due diligence on the solution, etc. Why this could be so applicable to anyone: you can set criteria you care about at every stage and follow business-building best-practices at the same time. Build the business you want to build, which you can make your life’s work.Select opportunities to focus on.
Choose an opportunity to focus on that lands you on a decent maximum (as defined by your criteria). Through the process, zero in on a specific opportunity that qualifies criteria and business principles.Dig into the opportunity further – to confirm.
Once you see a satisfactory future terrain to explore with decent maxima, focus on that one opportunity, and run experiments to de-risk parts of the business model and learn about other parts. Having multiple suitable opportunities on the terrain in your back-pocket will increase the chances of one of your at-bats being a success. Or maybe more than one.Form a venture and review your criteria.
Go full steam ahead on building the one venture that survives your process. Iterate on your compass/criteria/intuition as you review more and more ideas. Your compass ought to get stronger after the 100th idea seen, relative to what it was when you were reviewing your first 5 ideas.Repeat (if you want to form more than 1 venture) or double down on the one business and grow it.
It really is painful when we decide to pass on a good business opportunity that doesn't ultimately pass stage gates, but that’s just part of the process that one must trust. Since these are long term bets we make, following a process and doing the work leads to higher chances of a great outcome for all of us (people, planet, profit) involved, as many other studios have demonstrated. Making long term bets requires a significant amount of work upfront, and I believe that this shift in approach to founding a business is the way to go.
At FutureSight, we tested multiple ideas in parallel cheaply before investing time and resources to de-risk unknowns. ‘Opportunities’ went through 4 stages; each with their own entrance and exit criteria, and each requiring more time and resources than the previous. Most of the ideas and opportunities are passed on in earlier stages because we realize the opportunity cost of not focusing on good opportunities. Once an opportunity passes later stages, we form the company and spend even more time in these stages than the previous ones, preparing it for the ‘growth’ phase. We are more likely to spend a lot more time and resources on opportunities in subsequent stages/phases. Therefore, it is critical that we be really good at validating the great ideas, and passing on the not-so-good ones – a compass with super sensors of sorts that takes time to develop.
End Note
Before you dedicate your time and resources to any one specific customer problem/venture opportunity, I encourage you to think about what other problems you could dedicate the next 5-10 years to solving through venture creation, and give each of them a fair shot at materializing. Think ‘bowtie’, not the classic-pivot-story. Test multiple ideas/opportunities to solve a problem-theme even, and be prepared for the enjoyment and heartache – the roller-coaster before the roller-coaster.
If you thought this was helpful, follow me on my journey, as I reflect on my learnings from the trenches of the different stages of venture-building, and as I search for climate venture opportunities to double-down on myself.