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The Lean Canvas Diagnostic - Part 3 of 7: Identify Riskiest Assumptions

What most people get wrong

Prioritizing what’s riskiest versus easiest on the Lean Canvas is the next step in the diagnostic process.

This is the key step in getting a team to focus on “right action, right time” — the few key actions that help drive the biggest impact in their business model.

But while starting with what’s riskiest is a simple enough concept, too many advisers/coaches rush this step with costly ramifications.

Incorrect prioritization of risk is a recipe for wasting time, money, and effort on suboptimal actions. This depletes the already limited runway for finding product/market fit.

You can’t simply guess or “map and rank” a bunch of risks on a 2x2 matrix to surface the riskiest assumptions because:

  • Guessing at risk is highly subjective and prone to individual bias.
  • Voting on risks is prone to specialization bias — what’s risky to a developer differs from what’s risky to a marketer.
  • Even seasoned advisers often disagree on what’s riskiest.

Who do you listen to? The most vocal or most experienced aren’t guaranteed to be correct because startups are in the business of creating something new and a bit crazy.

Is there a better way?

The answer is yes... And it requires using a systems-based approach that doesn’t require any guessing — specifically applying the Theory of Constraints (TOC) to business models.

What is the Theory of Constraints?

TOC is a constraints-driven approach to system optimization, pioneered by Eliyahu Goldratt and described in his groundbreaking book: The Goal.

The basic premise of TOC is that at any given time, a system is always limited by a single constraint or weakest link. Imagine being tasked with improving the throughput of a factory. You could interview the line workers or managers for input, but doing that would most likely result in a list of problems and a list of possible solutions. Which do you follow?

Sound familiar?

A better approach would be to start by baselining the factory’s throughput as a series of steps. Your objective is to identify the slowest machine on the line. The slowest machine represents the current limiting constraint (or weakest link) in the system. There is always one, and this is where the riskiest assumptions live.

Identifying the riskiest assumption then is a 3 step process:

  1. Baseline the factory throughput
  2. Identify the constraint
  3. Get to the root causes

Mental Model #3: The Customer Factory

A business model is a system too. The universal output of all business models is making happy customers. There are 5 steps to making a customer:

Identifying the riskiest assumption, then is a matter of

  1. Baselining the customer factory with metrics,
  2. Identifying the slowest step,
  3. Mapping the slowest step to assumptions on the Lean Canvas.

Let’s walk through these steps

1. Baslineling the customer factory with metrics

There are two types of startups:

  1. startups without traction and
  2. startups with traction.

All the metrics in the customer factory above are zero for startups without traction.

For startups with traction, we need actual numbers for the five steps above in order to determine the constraint.

Running a business without metrics is like flying an airplane without instruments.

Neither is a good idea — especially when the early stage always comes enveloped in a fog of uncertainty.

If the team doesn’t have these numbers on hand, I assign that as homework while I continue the diagnostic qualitatively.

2. Identifying the slowest step

For startups without traction:

The current constraining step is acquisition.

In a real factory, you can’t make finished products without first acquiring the raw materials. This seems like common sense, but it is common to see the exact opposite in practice when it comes to the world of products.

Most teams don’t start with acquisition and defer building a customer pipeline until they have a product ready to use/sell.

This is backward.

For startups with traction:

We need metrics to determine the current constraining step. However, I still focus on asking questions about acquisition because while getting to paying customers is a good first step, establishing repeatability next will be a necessary precondition for scalability.

I aim to determine whether the team knows

  • who their customer is.
  • what problems do they have?
  • what attracted them to the solution?
  • How will they repeatably acquire their next X customers?

The business model isn't yet repeatable if the startup’s paying customers come in randomly or represent many distinct customer segments, channels, and/or price points.

3. Getting to the riskiest assumptions

The boxes that map to acquisition are the same ones that represent desirability, i.e., do customers want this product?

Contrary to popular belief, one doesn’t need a product to test for desirability - just a unique value proposition.

Does the unique value proposition communicate a difference that matters to customers?

That is the stress test I’ll cover next time.

The Lean Canvas Diagnostic 7-Part Series TOC

  1. Backstory
  2. Structure
  3. Identify Riskiest Assumptions
  4. Desirability Stress Testing
  5. Viability Stress Testing
  6. Feasibility Stress Testing
  7. Right action, right time

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