The Leap from Failure to Success: Why Entrepreneurs Should Test Their Assumptions
Recent data paints a clear picture of the critical role small businesses play in our economy. There were over 33 million small businesses in the United States in 2020. This means that small businesses account for 99.9% of all the businesses in the US. Meanwhile, the data is also clear on the challenges that entrepreneurs face when launching a business. Roughly 20% of small businesses close within their first year and roughly 50% close within their first five years. What this data tells us is that small businesses are the lifeblood of the economy, yet many fail early on. So it’s important to ask the question: “How might entrepreneurs reduce the risk of failure?”
Making Assumptions Makes An...
As the old adage warns, making assumptions can have a devastating, if not catastrophic, consequence on the survivability of a business. When developing their business concept, many entrepreneurs fail because they make many assumptions about their business idea. For example, they might assume that customers will love their product. They might assume that their customers are willing to pay the price of the product. They might assume that their suppliers will have the ingredients or parts needed to produce their product. They might assume the salary they’re offering will be attractive enough to recruit and retain talented employees. Not knowing whether these assumptions are true presents an enormous risk to the viability of a business concept.
If only there were a way to test these assumptions before the entrepreneur starts their business. Luckily there is and Intuit calls this “Rapid Experiments with Customers,” which is a key component of their Design for Delight methodology. The key to this process is the identification and testing of “Leap of Faith Assumptions” or “LOFAs” for short. LOFAs, are a special type of assumption that entrepreneurs make about their business that: 1) MUST be true for the business idea’s success and 2) haven’t already been proven to be true by others. Because LOFAs are critical for the business idea to be successful and there is no prior evidence from others that can tell us if the assumption is true, it is crucial for us to test and validate LOFAs first and then proceed with testing other assumptions.
I say “us” because I learned the hard way about how an entire business concept can crash and burn when LOFAs are not identified and tested.
Learning about LOFAs the Hard Way
In 2019, I teamed up with two teammates and competed in the West Virginia Innovation Business Model Competition (WVIBMC), a statewide pitch competition for college students. Our business concept’s name was “Millions for Medicine” and it was a lottery system that aimed to alleviate medical debt.Similar to a 50/50 raffle, a recipient with crippling medical debt, a lucky lottery winner, and our company would split the pot three ways. We quickly identified one big assumption we were making about our concept-- that people would be willing to purchase lottery tickets where a portion of their potential winnings would go to help alleviate a recipient's medical debt and to our company. This assumption was a LOFA because it was critical to the success of our “Millions for Medicine” business concept and because it was a “new to the world” idea that hadn’t been proven to be true by other lotteries. We tested this LOFA on real lottery ticket buying customers and found that they were not only willing to split the winnings, they were excited to do so. With this business model and validated LOFA, we won first place in the WVIMBC and advanced to the International Business Model Competition at Brigham Young University.
I traveled to the international competition alone as both my teammates graduated that weekend. With many nerves, I pitched Millions for Medicine in the first round of the competition. During the question-and-answer section a judge asked, “Is this concept even legal?” We assumed the legality of the lottery system but had not tested and validated this LOFA. I tried to answer that question as best I could, but ultimately since we had not validated this LOFA, we did not advance in the competition.
There were easy ways we could have gone about testing and validating that LOFA. For example, we simply could have consulted with legal practitioners and asked their expert opinion of our concept’s legality.
Learning about LOFAs the Easy Way
Although our time at the competition was marked with disappointment, I hope you can learn from our experience and it empowers you to take the risk to start and operate a business. By continuously identifying and testing the LOFAs that exist in your business you can mitigate the biggest aspects of that risk. And in doing so, not only increase the likelihood of your business surviving years one through five, but thriving in the years thereafter.
2021 marks the third year of the West Virginia Innovation and Business Model Competition (WVIBMC).Due to ongoing COVID-19 concerns, this year’s competition will be hosted in a virtual format. WVIBMC is open to all Marshall University undergraduate or graduate students. To register visit:https://www.marshall.edu/wvinnovates/registration/
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