As founders, we could be doing any of the hundreds of things on our lists, especially if we run early-stage startups. Nothing is ever finished in the early stages. Our product and marketing need serious work. We need more clients and partners. There are important conversations to be had around financing. Emails need responses, conversations need scheduling.
Out of all of the things on our lists, only a few of them will result in our business really moving forward. Naval Ravikant calls it the 1% —the 1% of total possible actions that completely pay off. But how do we know which 1% it is, and how do we do more of it?
The answer is focusing on the unknowns. Why?
Startups Are the Combination of Ideas and Unknowns
When you’re managing an early-stage startup, you have ideas, a big vision, some capital, and hopefully, a few people that will support you no matter what. Everything else is unknown. You will have some assumptions or ideas about these unknowns, but they are not confirmed.
Business Is the Processes and Learning through the Process
In contrast, a “finished” business is a set of processes and learnings. Everything works like a turn-key value-making machine. You just press the button, and it works.
The Process of Discovering and Eliminating Your Unknowns Transforms a Startup to Business
A useful way to think of your startup journey is that it’s a process of finding and eliminating your unknowns one by one.
At Lumi, we take teams through this process every day. To uncover and understand the key unknowns, and then use those learnings to build the right things, in the right way, especially for early-stage startups. This process, when mastered, will turn an exciting vision into a feasible business plan that your team can actually execute.
Let’s look at what that those unknowns are and how to eliminate them.
Three Types of Risks
These unknowns, or risks (they are the same thing) in early-stage startups come in one of three types.
Simply put, this is the money you’ll need to move from idea to real, sustainable business. If you have a low-cost service business, such as when you freelance, your financial risk is low. When you’re a startup like Uber, your financial risk is very high. Uber, despite global coverage, recognition, and valuation of around $80B, is still not a profitable business. Financial unknowns are best understood by practice and won’t be the focus of this article. If you’d like to learn more, I highly recommend digging deeper into Business Administration or even doing an MBA.
Markets risks are the assumptions you make about your customers, how many of them there are, and what it is that they want. Market risks are the most overlooked, and most businesses jump straight to scaling a product without verifying their market first. That’s unfortunate. Market risks are the cheapest and easiest to eliminate.
Product risks are the assumptions you make about your product or service and your ability to deliver what you promise to your customers. “Lean Startup” sparked a startup revolution that helped thousands of founders get their product risks right. But even in 2021, many startups still struggle with basic product unknowns.
Let’s look deeper into market and product risks, and how to systematically uncover and lower them.
How to Eliminate Your Market Risks
Market risk in the early-stage startups can be captured in three questions.
- Do they want it?
- Will they pay us?
- Are there lots of them?
These are absolutely fundamental questions for any business. Without a strong market, you don’t have a business, you have a hobby. Yet most startups build expensive MVPs, even full products before they answer any of these critical questions.
The good news about market unknowns is that you can eliminate market risk without building anything.
You can answer all those critical market questions in less than a few months. And the best part is that you won’t need to build anything that takes more than a few days to build.
That’s because the market risk is not about your ability to build; it’s about how well you understand your customers. As soon as you un-collapse product and market unknowns, both become a lot easier to identify and act upon.
The other good news is, if you demonstrate that you can understand and lower your market risks cheaply, investors will love you for it. It shows great business sense and the ability to see through complexity. Something that few entrepreneurs can demonstrate in practice.
Examples of High Market Risks
There are two big examples of ventures with high market risk.
“New Idea” Products
These are the products that don’t have a clear competitor in the market. Everything we take for granted today from light bulbs, through baby monitors, to solar panels, was a new idea at one point. These are the products that can revolutionise the world. But make no mistake, “new idea” products and services still have competition. People already spend all their time and money. Whatever your new idea is, it needs to be a demonstrably better use of people’s resources than what they currently spend them on.
Sustainability & Positive Impact
Most customers are demanding businesses to become a force for good today. That’s great news, but do these ventures still have a high market risk?
In reality, the vast majority of people are optimistic about their future, but habit-based at the point of making a choice. They want to live sustainably and contribute to the planet, but it doesn’t mean they will not buy from Amazon next time they run out of something. At the point of decision, they will take the action they are used to rather than try a new unfamiliar behaviour. And tech giants are investing tons of money in User Experience and Gamification to keep it that way. When building a product or service with a positive impact component, take time to learn the game you’re playing and who the players are.
Three Practices to Eliminate Market Unknowns
Practice #1 Interview People (The Right Way)
Most of us have no idea how to interview customers. We pitch our idea, they say “this sounds great,” and we leave happy, thinking we validated our business and are ready to invest in an MVP. Oh, how wrong we are!
There are three golden rules to interviewing people:
- When you’re learning, never ever pitch. Just talk about them. Learn. You don’t even need to say you’re working on a startup.
- Ask about specifics in the past. Learn how people really act instead of how they’d like to act. You shouldn’t care if people like your idea, you should only care if they’ll actually use your product and get enough value from it to give you money. Everything else is wishful thinking.
- Break your ideas. That lingering doubt in the back of your mind about the core of your value proposition? Get it in front of real customers as fast as possible. Validate your deepest, most deeply held assumptions. If you’re wrong about them, you want to know now, not after you spent £200K building your MVP.
Practice #2 Learn, Refine, Pivot
As you move through customer and stakeholder interviews, you will learn a lot about the core assumptions you hold. Some of them will be spot on, some of them will be wrong. What you need to do is adapt, refine, and if necessary, pivot. At this point, it’s still cheap to do so.
Practice #3 When Pitching, Don’t Leave without a Clear “Yes” or “No”
Whenever you are pitching, don’t settle for a vague answer. Seek commitment, such as a purchase, a pre-order or investment. Or a clear “no.” Don’t be pushy, but be absolutely clear whether you are getting a “yes” or a “no.” A “no” is much better than a “maybe” because you can learn from it. A “maybe” only gives you hope. Don’t let someone’s politeness cloud your judgement. Your business depends on it.
How to Eliminate Product Risks
Product unknowns in the early-stage startups can be captured in two simple questions.
- Can I build it?
- Can I scale it?
Once people are using your product or service, your success is determined by how well you deliver the value they signed up to get.
The good news about product unknowns is that you can eliminate product risks by following a proven, reliable process.
Eliminating product risks can be expensive, but if you’ve done your work on market risks and can demonstrate it, you’ll have no trouble raising investment to cover those costs. At Lumi, we’ve helped many early-stage clients raise great rounds by helping them eliminate their key market risks and prove them to investors.
Examples of Product Risks
Here are three possible product unknowns you may encounter throughout your journey.
“Uber for X” has become a kind of a startup joke, but the truth is that many new ventures are multi-sided marketplaces. They rely on multiple groups of customers or partners coming together in a single ecosystem to exchange value among each other.
This business carries a high product risk because while it’s easy to validate the need (market unknowns), it is much harder to build enough supply and demand on all sides for the business to generate any value. The usual tactic to address this is to hyper-focus on a specific location or niche and then expand, one by one.
Even then, it is a business that needs to continuously build, expand, and can become a “race to the bottom,” where one of the marketplace partners suffers —gig economy drivers are not the happiest group of people.
Billions of people use social apps every day. Indeed, it’s how most of us interact with one another these days. But social media innovation is an intense one. Every app blatantly copies from others, major and independent. Instagram first did it when they launched Stories —a feature taken from Snapchat. So, on one hand, the innovation potential is huge, on the other, it’s a hard business to build.
Just look at Clubhouse, the social media darling of the pandemic times. A year later, it’s still hard to say if they have a viable business, but every major social media platform already launched or is launching a close competitor. Clubhouse definitely contributed to how we communicate and connect, but it is unclear whether they were able to build a business doing it.
“10x promise” Products
Finally comes the classic 10x product —10 times better, faster or cheaper than the competition. This is a great promise no customer will argue with… if you can really deliver. With 10x products, delivering is the trick. No 10x product starts at 10x, and the road to get there is iterative and methodical. Then there are trade-offs, perception, and brand; altogether contributing to why people actually buy what they buy. Just focusing on 10x is often not enough in today’s crowded landscape.
Three Practices to Eliminate Product Risks
The process for removing product unknowns for early-stage startups is well documented and proven. Every successful company will develop their own internal “playbook,” but the key principles are often the same.
Principle #1 Solve the Hardest Problems First
You know that hard challenge at the core of your product, the one that will make or break the business? That’s the one you should put all your effort into solving now. It’s easy to get distracted by building simple things and making fake progress and push solving those hard problems back into the future. But all successful entrepreneurial stories, from Airbnb to Netflix, are about the founders being smart about validating those core bits of the product, on which everything depends.
To solve your hardest problems first, think in terms of MVPs. What is the least amount of work you can do to learn whether the aspect of your product is feasible, desirable, or viable? That may involve building the technology behind, but it may just involve doing a few things manually, or simply having conversations.
Principle #2 Learn from Mentors and Experts
This is another way to be smart about your business and maximise learnings. Every once in a while you’ll have a conversation that really moves things forward. A single conversation with the right person at the right time can save you months of trial, error, and resources you don’t have, especially if you’re an early-stage startup. Involving experts and mentors to help you identify and lower your product risks is one of the ways in which you can really speed up the process of learning.
Practice #3 Use Best Practices
There is no need to rethink every single part of the process when building a business. Most industries have a set of best practices that make things a lot easier.
For example, you should use technologies that are fast, popular and easy to hire for when building a tech product. Hiring experienced developers and following agile best practices with them is another smart move —it’s a reliable way to build solid, functional software that performs intended functions quickly. There are cheaper options, there are faster options. But they come with serious trade-offs you need to understand before you stake the future of your business on them.
Playbooks for Success
There is nothing new in looking at your business through the lenses of financial, market, and product risks. In fact, these are some of the most trusted and reliable factors in building a modern business.
Sometimes you should take those key steps yourself if you operate an early-stage startup. Sometimes though, it’s like the saying goes, “You can’t read the label from the inside of the bottle.” You need the right experts around you who will help you steer your vision so that it can be fully realised.
Having worked with hundreds of teams, we know that founders want to use their time and resources in the best way possible. They know they can’t build their businesses alone, but often don’t know what kind of partnership or step in that process will make the biggest difference to them. With this in mind, we built Lumi design, a unique digital product studio, focused on business results and positive impact.
Through our tried and tested Product Playbook, we design and build apps that support real business. Software we helped make is used by over 10 million paying customers today.
Through our Product Marketing Playbook, we helped scale some of the fastest growing startups in the world. More marketing isn’t an answer to product problems, but when you do really need to marketing, we know every step of the way.
Finally, with our Business Innovation Playbook, we help founders and leaders pivot, reinvent and realise their business goals. We help entrepreneurs go through the process only other experienced entrepreneurs would know, through experience.
We built Lumi to support businesses through navigating that hard journey to success. Our insider knowledge and years of experience make us a partner businesses can trust. And most importantly, we believe in people – we want to see technology bringing us closer to each other, and to our world.
If you have a project you think we can help with, give us a shout.
About the Author
Milosz Falinski is a product strategist, entrepreneur and co-founder of Lumi. With over 12 years of design and leadership experience, his biggest accomplishments include leading design on RoboKiller, a spam call blocking mobile app acquired by IAC; developing Paws for Trello, which was later acquired by Atlassian and became the official Trello desktop app. He co-founded Lumi to support mission-driven startups on their way to success.