21. Build a strong foundation for your startup by testing assumptions first

Building a business is risky and expensive, but you can minimize the risk and avoid unnecessary expenses by testing your assumptions early in the process.
Businesses often fail because some of the founder’s beliefs turn out to be wrong. This can be caused by wishful thinking or when an idea seems so self-evident it is never questioned. As an entrepreneur, you need to be asking yourself, “What must be true for my business to succeed?”

A sobering statistic is that, according to CBInsights.com, 42% of startups fail because there was no market need for their solution. This is, by far, the most common reason for new businesses to collapse, well ahead of running out of money. Founders tend to assume that the market will want what they have created, often with little or no supporting evidence beyond the fact that they themselves wanted it.
We test assumptions in order to pivot as quickly as possible. However, as there are an almost infinite number of possible assumptions, you will need to prioritize your tests. Start with those ideas that are most likely to fail, where you have little confidence in your assumption. You don’t want to wait until the end to verify something that is only 20% likely. Testing the most uncertain ideas first lets you learn and adapt as quickly and cheaply as possible.

Testing the most critical assumptions is the other priority. What would destroy your business concept if it turned out to be wrong? Test that theory, even if you are almost certain you are right, because the consequences are disastrous. Market need for your solution sits at the top of this list. Other examples include the interest of channel partners or existence of cost-effective direct marketing approaches.

When creating these tests, I strongly encourage you to look at them as attempts to disprove your assumptions, rather than validating them. This helps avoid the problem of confirmation bias. You already think this hypothesis is true, so it is natural to try to support it. Focus instead on proving yourself wrong.

These tests are simply experiments, so you can apply well established scientific methods. Split your tests up into many small experiments, rather than trying to test many ideas at once. Each should be a simple and small trial focused on only a single question, and independent of the other assumptions. When creating the test, define your success criteria in advance. It is no good to run a test, and only then decide what would count as a positive result. That makes it far too easy to tilt the scales towards what you wish were true.

These tests don’t need to be fancy or sophisticated. To start, I suggest going quick and dirty. In most cases, your results will not be subtle. Either the idea is definitively true or disastrously wrong. In the rare cases where the analysis is grey, I treat it as false. For example, if you are testing whether people want to use an app you are planning, a “meh” response is terrible. App adoption involves a change in user behavior throughout a large population. Overcoming that hurdle requires widespread enthusiasm to have any chance at all.

You will use different methodologies for testing various kinds of assumptions. One might require a wireframe prototype, another could use surveys, or fake advertisements, or interviews, or something else. The details of these experiments will be unique to the assumption and your business plan.

After each experiment you have three options: continue, pivot, or quit. If an experiment validates an assumption, repeat the process with the next one until you don’t have any unproven theories of significance left untested. When an assumption proves false, you need to pivot your business in a way to work around that inconvenient reality, then continue testing the new assumptions.

If you can’t pivot in a way to circumvent the business plan breaking reality, it is time to quit and move on to new opportunities. Fortunately, if you have been doing these tests before spending money and building products, you don’t have significant sunk costs.

Conducting these tests also makes it much easier to raise funds. Investors love to see that all these potential failure modes have been explored and addressed. I think Bret Waters, former CEO to Tivix, said it best: “When spending investor money, prayer shouldn’t be your primary strategy.”

Discovering early that your business plan is not viable is the best money you won’t have to spend.