Now that "lean" methodology has taken hold of startup culture, many founders and internal innovation teams grasp the virtue of creating a "minimum viable product" or MVP: An initial prototype they can show to potential customers and investors, in the interest of collecting feedback and making subsequent improvements.
Here's the problem: In their haste to develop MVPs and "fail fast" and "iterate," many creators are not doing enough homework in advance of their initial prototyping.
The good news? You can do a lot of necessary homework in just a few hours.
In his forthcoming book (due out May 6) The First Mile, innovation guru Scott D. Anthony, a managing partner at Clayton Christensen's vaunted Innosight consultancy, outlines eight crucial steps you can take in less than a day's work.
1. Conduct desk research. Your ego wants to tell you that no one has considered your idea before. But it's a likely reality that a public company is considering it--and has already declared something about it. To find out, Anthony recommends scouring both the S-1 and 10-K filings of companies that might be players in your space. You'll find them at www.sec.gov. Likewise, you can dig into the analyst calls that public companies hold. You can find transcripts of these at seekingalpha.com.
Going one step deeper, you can look into the patent filings of large companies in your space. "For example, analysts had a pretty good sense as to what Apple's iPad product would look like years before its release due to the patent filings Apple had made around critical design and usability elements," writes Anthony.
Remember, with all of this desk research, you're not just looking for competitive intelligence--you're also looking for potential partners. In a recent phone interview, Anthony told me about a startup Innosight had funded called YFind. Using the above research techniques to build a list of possible partners, YFind happened to find a company called Ruckus Wireless. Innosight brokered a connection to Ruckus. Ultimately, Ruckus ended up acquiring YFind. "We did the desk research to get smarter about the space, and it led to a liquidity event," says Anthony.
Obviously, a result like that won't happen every time out. But in this case, it all began with homework.
2. Run a thought experiment. What would it look like if your idea succeeded? This hypothetical question--if you ask it to outsiders who'll be objective about your prospects--can help you envision your strategy, unforeseen competitors, possible exits, and possible road blocks. For example: Right now, your supplies might have a certain cost. How would that cost change, if a large competitor began to buy the same supplies at astronomical volumes? You also might have a genius programmer who's doing the brunt of your brilliant work. What happens if she gets sick or gets a job offer she can't refuse?
3. Build a back-of-the-envelope 4P model. The 4 Ps are the target population of your product or service; your planned pricing points; your expected purchasing frequency (i.e., how often will this target population pay for the product); and the required market penetration you'll need to achieve plausible revenue goals. With this five-minute exercise, you can quickly create an easy reference sheet of talking points about your idea's potential monetization.
4. Make a phone call. Chances are, the success of your idea depends on several key assumptions. With one phone call, you can turn one of those key assumptions into a definite notion. In his book, Anthony tells the tale of a company targeting the universities market with a beverage dispenser. Traditionally, this company had sold through mass-market retailers. It had no experience "cracking" the university market. The sales team assumed it would take about three months.
Had they operated on that three-month assumption, they would've been left high and dry. Luckily for them, one member of the team picked up the phone and called a friend who sold security solutions to universities. The friend revealed that sales cycles for schools sometimes last as long as three years.
A finding like that would obviously influence your revenue projections, or perhaps even whether you want to pursue the business at all. Imagine what you'll learn about your own idea, if you pick up the phone to research just one of your assumptions.
5. Walk through a transaction. Anthony provides a list of five essential questions you should answer:
- How will the customers obtain the product or service?
- When will they pay for it?
- Where will the customers obtain it?
- How will the product or service get to the customer?
- Is there anyone else who'll get a piece of the transaction (e.g. licensing fee, inventor royalty)?
6. Build a MacGyver prototype. Note: This is not your MVP. This is homemade and inexpensive. You are not creating an actual prototype. All you are creating is a physical representation of your idea--something that can be damaged and quickly remade. This isn't a guitar; it's nails, wood, and rubber bands. It's a layperson's sketch, rather than an artist's rendering. "The idea is to focus on speed rather than aesthetics," writes Anthony. You just want to create an in-the-flesh illustration, so you can more easily explain your idea to others--and so it does not only exist in your head.
7. Talk to customers. It's incredible how many innovators go forward with their ideas without talking to potential customers. But it actually happens quite a bit. Anthony's advice on this front is consistent with what Tina Weber, who runs Boston's annual Lean Startup Challenge, told me not long ago about the importance of testing a concept before building a prototype. Whether you're surveying customers with online tools or simply building a landing page for your product or service, the bottom line is, you need some evidence that your idea has been vetted by prospective customers.
8. Build a reverse income statement. This one might sound like it takes more than a few hours, but it's actually not that difficult, if you've done a thorough job with your 4 Ps. For the reverse income statement, you want to start with your ideal annual profit level--and work backward, step by step. The first step, naturally, is parsing that annual profit into two big buckets: your revenues and your costs. From there, you keep going. For a full explanation, Anthony suggests reading "Discovery-Driven Planning," a classic Harvard Business Review article by Rita Gunther McGrath and Ian C. MacMillan from July, 1995.