By Mike Kirkup: Director, Velocity
Danger of Chained Assumptions
A common challenge for early stage entrepreneurs is finding a problem that is worth solving but struggling to come up with a viable business model that supports it. This is a challenge that tends to impact student entrepreneurs more than most because it is very difficult to make money when solving student problems.
One of the common reactions to an inability to find a business model is simply to avoid that part of building the business. Common mantra on this front sounds like – “Facebook didn’t have a business model and they are worth billions now” or “SnapChat still doesn’t have a business model and look at how much money they can raise”. By taking this approach, founders are intentionally optimizing the business for growth from the beginning in the hopes they can build the audience to support advertisement or similar business models in the future.
However, one of the big dangers in this approach is what I call “chaining assumptions”, which can be very hard for first time founders to spot. Let’s use a concrete example. A founder wants to build a marketplace website (e.g. travel reviews like Trip Advisor) and needs to offer it for free to both producers and consumers of the solution. The business model is to “sell the data” once the website reaches a certain threshold (e.g. number of users, number of posts, quality of data, etc) where selling the data becomes viable.
In this example, the founder is chaining together a list of assumptions. Here they are in order:
1. Users are looking for a website to read travel reviews.
2. Users are looking for a website to share travel reviews.
3. The founder can build a website that will bring together these users and can overcome the “chicken and egg” problem.
4. The founder can cover the operating costs of the website until such time that selling the data becomes viable.
5. There are customers looking to purchase data from a travel review website and they would be interested in the founder’s data.
6. The founder can make enough money selling the data to cover (and hopefully exceed) the cost of running the website!
As you can see, the major assumption that needs to be tested is #6 but the founder won’t get an opportunity to actually test that assumption until they have spent years to build and operate the solution for users. If anyone of the assumptions above fails before reaching #6, the founder is likely to fail. This is what I call chaining assumptions since each one depends on the previous assumption.
My typical advice to founders is to figure out a way to test assumption #6 from the beginning. Find out exactly what kind of data is interesting, why it is interesting and how much someone might be willing to pay for it. Determining whether the business model is viable should be something you do at the beginning rather than chaining everything together.