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How to test business ideas

How to test business ideas

October 20, 2021
Rossana A. Ammann

Entrepreneurs turn big ideas into reality. Alex Osterwalder, founder of Strategyzer, wonders why that is and how entrepreneurs could do it a bit faster and with better results. In other words, Alex thinks about entrepreneurship strategy. He has thought about it for so long, in fact, that he created a program specifically designed to streamline and clarify the business design cycle.

With his extensive experience, Alex is an expert on what makes startups work, and on the reasons behind why so many startups fail. One of the biggest failures, Alex believes, is a lack of proper testing.

This article was inspired by the opening keynote speech from Alex at the first no-code Minimum Viable Conference in Switzerland, organized by HuggyStudio in March 2021. He shares how systematically testing business ideas can dramatically reduce the risk and increase the likelihood of success for any new venture or business project. 

From Business Design to Testing: Lather, Rinse, Repeat

Good entrepreneurs conceive of a business design – a product, an idea, a new process – and then test it. This whole cycle involves multiple steps that are repeated over and over again, until the entrepreneur has a product that meets a market need and is ready to scale.

Those steps fall into two parts.

The initial stage of the process is the business design. In this stage, companies ideate, draw up a business prototype, and assess what they have.

Then they move to the testing stage. This stage is also known as the value proposition stage. In the testing state, innovators hypothesize about the state of the market, experiment with different products, and then learn from the info they've gathered.

From business design to testing and repeating; by Alex Osterwalder at the Minimum Viable Conference 2021

There are two keys to success in this process.

First, repeat the process multiple times. Don't skip the testing phase altogether – you won't have any real idea of what might work. Keen entrepreneurs are consistently conjuring up new ideas, and then immediately start the process of testing those ideas to see if they are valuable.

But the second point is nearly the opposite: don't get stuck in the testing loop. As Alex relates, too many companies get stuck in an endless loop of ideation and testing, without ever moving on. After all, what's the goal? To build a business.

Business design leads to testing, which is necessary to scale and to build a business.

Testing Doesn't Require Money

Steve Blank, entrepreneur and author
Image of Steve Blank, entrepreneur and author, presented by Alex Osterwalder at the Minimum Viable Conference 2021

Too much money can be a bad thing for startups, because it lets them bypass most of the testing. But when you bypass testing, you skip the part of the process that lets you know whether your product actually adds value. If you start scaling before you add value, you can end of with a product and no customers. Your idea failed, not because it was a bad idea – just an untested one.

6 out of every 10 ventures lose money. A few do ok, and about 4 out of 1000 hit it big. What's the takeaway? Failure is expected - but failures give experience.

6 out of every 10 ventures lose money. A few do ok, and about 4 out of 1000 hit it big
6 out of every 10 ventures lose money. A few do ok, and about 4 out of 1000 hit it big

Good entrepreneurs maximize the testing process. They test ideas mentally all the time, talking to potential customers and getting rid of stupid ideas as fast as they can. Testing isn't about eliminating risk – again, test too much, and businesses can get stuck. Testing IS about minimizing risk and increasing the odds of finding a good business idea quickly.

Embrace Multiple Methods of Testing

Alex Osterwalder co-authored a book with over 40 different ways of testing a business idea. In other words, testing isn't just interviewing people and building stuff. Those are the easy bits. Entrepreneurs who love to talk love giving interviews, while software engineers love building stuff. But those are two very limited ways of testing a concept, and they can easily give the wrong information.

The speed boat method, explained by Alex Osterwalder — in red lines — at the Minimum Viable Conference 2021

Instead, use different methods of testing – methods like the Speed Boat. By asking participants to weigh the pains and gains of your idea, you'll get a far better idea of how important different aspects of the process are. This gives entrepreneurs context for the answer people give, something a freewheeling interview can't give.

In fact, multiple testing methods can be used together to form a discovery chain. These chains start with easy tests first; tests like visiting or creating a discussion forum and then conducting interviews. Then the other tests refine the information you've gathered and become a bit harder/more expensive to do.

Cheapest and fastest experiments first, creating stronger and stronger evidence. Then, at the end, you build.

Score Your Evidence - And Your Idea

Feasibility, viability, adaptability. 

Is your idea doable? Can you build it? Can you adapt or change it?

Those are ways to score your idea. Testing produces evidence that will give you insights into those three aspects of your business idea. You should be slowly assembling evidence that strengthens the case you have for your business in regard to each area. If you discover that your idea fails on multiple counts, drop it and move to another idea. If you find evidence to adjust your idea, do it – and then test the new idea. And if you have increasingly strong evidence that your business design is a good one, then you're ready to start building and scaling.

Build a Better Business Model

First-time entrepreneurs focus on products and features, but experienced entrepreneurs know that the best opportunities lie in creating a new business model. They use products and features to unlock a new business model and value proposition.

Quick Takeaways

  • Testing is a constant loop. It can be a 24-hour-a-day process, at least when testing ideas mentally.
  • Regulate your testing. Work with your team to test your business idea hypothesis regularly – maybe one "big" test a week.
  • Don't be afraid to look stupid until you look smart. Some of these tests will result in you, as an entrepreneur, looking stupid. You might test ideas over and over and over again, and look stupid when your hypothesis fails again and again. But with enough testing, eventually one of them will succeed, and you'll look smart.
  • Your first startup will fail (probably). It's possible that you'll test well and get a great idea with a great business design from day one, but in all likelihood, your first startup will fail. But that doesn't mean your next one will.
  • Prove your idea. There can be a tendency for entrepreneurs to use jargon and be impatient with C-suite types reluctant to support their new venture. Be more pragmatic – realize that business leaders want to see demonstrable success. Slow down, test your idea, and prove yourself.
  • Don't ask customers what they want. Customers may not be sure of what they want. More like, what the customer "wants" and what they "need" is probably different. Research your ideal customer's dreams, struggles, and the task they're trying to complete. Then you'll find the pain point.  

Build a better business design through constant testing.