During my first tenure at Inc. (1998-2002), I could count on one hand the times I heard an entrepreneur or CEO use the word "iteration."
These days, it's practically all I hear. Innovators at companies large and small have a strong grasp of "lean" startup principles. They understand that the way to launch almost anything is to vet ideas with potential customers; to use that feedback to build a minimum viable prototype or MVP; and then to get further feedback on that MVP, so they can "fail fast" and revise the MVP (i.e. put it through another iteration). PayPal, for example, famously didn't hit on their idea until their 10th iteration--what they called "Option J."
On one level, it's a wonderful business-world adaptation of the way artists and designers often work: By drafting and revising, until they've reached that sweet spot where their subversive creativity intersects with consumer appeal.
Here's the challenge: It's sometimes hard to tell when a setback or a failed iteration is just a wrong turn--a signal to "pivot" from Option A to Option B or Option I to Option J--versus when it is a sign that you should give up on an idea entirely.
'Fool's Gold White Space'
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, thoroughly dissects this challenge.
"The most frequent reason why innovators make wrong turns is the lure of fool's gold white space," he writes.
He defines "fool's gold white space" as a seemingly attractive market space that actually isn't attractive. As an example, Anthony discusses the idea of "medical tourism." You're probably familiar with the concept: Say a medical procedure in a foreign market is significantly cheaper than it is here in the USA. Say the cost difference is so significant that an insurance company could pay for a patient's travel, lodgings, and the procedure--and still come out ahead. It sounds like a superb business idea, does it not?
That's what Innosight team members and their partners thought, too. "However, not until they'd put in nearly six months of work and spent considerable money on travel did they decide to do something they should have done early on: run two simple, high-ROI experiments to test key risks," write Matt Eyring and Clark Glibert in a Harvard Business Review article summarizing the ill-fated medical tourism venture.
After conducting these two tests--a seminar explaining the concept to prospective patients, and a round of phone calls to U.S. hospitals to gauge their unpublished discount prices--the team learned that "patient demand was actually quite tepid...and that U.S. hospitals were willing to lower their prices...if patients paid cash up front."
The lesson here is that no matter how promising a market space looks, the first thing you need to test for--obvious as it sounds--is the risk that there will be no customers. And if you learn that there will be no customers, well--it's a sign that you should quit on the idea, brilliant though it first seemed.
When to Quit, and When to Try Again
The decision to quit on an idea--as opposed to moving on to the next iteration--is never an obvious one. "You can never know with absolute certainty," Anthony told me in a recent phone interview. Even in the case of medical tourism, for example, there was a potential market opportunity for a venture restricted to regional medical travel (within the U.S and Mexico).
How, then, does Anthony make the call on quitting versus iterating? He offers three pointers:
1. Use the 70 percent rule. The US Marine Corps trains young soldiers to gather enough data so that they can be 70 percent confident in their decisions. The idea is that, in the fog of war, 100 percent confidence or anything close to it won't be possible. Better to act now with 70 percent confidence than to wait indefinitely to amass 100 percent confidence. So if you're 70 percent confident that you should continue, by all means, do so.
2. Get specific evidence of customer demand. If you have evidence customers will pay for your product or service, that alone should be enough to keep you going. But remember: Whether customers pay is not a yes-or-no question. You need evidence of what Anthony calls the 4 Ps: a target population for your product or service; that this population will not just pay, but pay at the right pricing points; that, in addition, the population will provide the necessary purchasing frequency (i.e., how often will this target population pay the right price for the product); and, last but not least, that you'll achieve the required market penetration to achieve viable revenue and profitability goals.
3. Ask a dispassionate outsider. As an entrepreneur, your brain is almost hard-wired not to quit. You think optimistically, and you execute until you drop. For that reason, you can't expect yourself to be rational or objective about the ongoing viability of your idea. "Having a cold-blooded idea assasssin look at your idea is the best thing," says Anthony. "Find the natural skeptics, and have them pour cold water over your idea."
Devil's advocates, he notes, get a bum rap. But if you know someone who can play the role to perfection, they will open your eyes to the flaws in your idea--some of which could be fatal.