Once upon a time in innovation, there was a general rule: get to market as quickly as you can, meaning you should start on your “long-pole” development activities as soon as possible. But there’s a growing consensus in the innovation community that the best way to succeed isn’t to start developing quickly, but instead to do as much work as possible on paper, to validate assumptions cheaply and quickly, and defer more expensive, riskier (and even long-pole) activities until after some of the basic assumptions are validated.
Part of this thinking encourages innovators to rank their risks – to work on critical assumptions first. In case those assumptions don’t pan out, the entire venture might fall apart: all the better to look at them early. That’s the premise behind the article “Beating the Odds When You Launch a New Venture” by Clark Gilbert and Matthew Eyring in the May Harvard Business Review.
The authors identify three types of risks that should be evaluated early in a new venture’s life:
1) Deal-killer risks – risks that can sink the venture. Often these seem to be marketing and sales related risks: will anyone buy the product we want to build? Given that engineers often start with a product idea, it’s easy to see why market testing is often left to last. However, prototyping and beta launches (common with internet products today) can provide cheap and quick data about a product’s attractiveness to the market.
2) Path-dependent risks – these are situations that could go down multiple paths – for example, a new product that could be useful to consumers or businesses. Committing to one of these paths, and later learning the other path was a better choice, wastes time and money, and risks the venture never fulfilling its potential. The authors recommend entrepreneurs carefully evaluate these alternate paths early on, and consider outsourcing or other ways to cost-effectively pursue both paths until the correct one becomes clear.
3) Risks that are simple and quick to evaluate – validating other assumptions, that may not be as critical as the above two, but which can be simply and cheaply tested, can reduce the overall risk of the venture.
This thinking is similar to ideas put forward in last year’s book “Innovation Tournaments” by Terweisch and Ulrich, which also discussed testing high-impact risks early, before expensive steps like building supply chains.
And, of course, all these efforts owe a debt to the thinking of McGrath and MacMillan, whose book “Discovery-Driven Growth” is the bible of the test-assumptions-first school.
Image source: Stuck in Customs
Original Post: http://caddellinsightgroup.com/blog2/2010/05/hbr-article-recommends-confronting-new-venture-risks-early/
