206. The Ultimate Testing Framework (Alex Osterwalder)

206. The Ultimate Testing Framework (Alex Osterwalder)
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Alex Osterwalder of Strategyzer joins Nick to discuss The Ultimate Testing Framework. In this episode, we cover:

  • Take me back and talk through the origin of the business model canvas?
  • Just to refresh listeners can you provide a high-level overview of the business model canvas and how it’s used?
  • Let’s chat about your new book, Testing Business Ideas, co-authored with David J. Bland… Why’d you right the book?
  • Who is the target audience?
  • If I’m the reader, what outcome can I achieve after reading this book and applying it’s principles?
  • What are the four phases outlined in the book?
  • Walk us through the objective and key elements of the testing phase.
  • A significant focus is the elimination of risks?  How does one systematically reduce or remove risks from their business?
  • We recently had Leo Polovets on the program and discussed the challenge of balancing testing with executing.  I think it can be difficult to know when something is working well enough that you should stop testing and move forward quickly in that direction.  What’s your guidance here?
  • How does one avoid getting too caught up in rigid frameworks and checking boxes vs. finding that key insight that warrants 90+% of their attention?

Guest Links:

Key Takeaways:

  1. It’s important to understand the challenges of companies, whether you’re a startup or a large corporation. At Strategyzer, they focus on building the tools and the technology stack to help companies innovate through challenges.
  2. There are nine core components to building a business model, that Alex has mapped out in the Business Model Canvas: Customer Segments, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Value Proposition, Key Partners and Cost Structure. 
  3. If you take one of the elements in the Business Model Canvas away, you do not have all the components needed to build a successful business. With these 9 building blocks, you can successfully define all of the key elements of your business model.
  4. What about competition? Alex advises that after you’ve defined the 9 core components, you can zoom in to more detailed elements, such as the corporate culture. Or you can zoom out to look at more macro elements, such as the competitive environment. 
  5. The more you can structure or visualize each element, the more tangible they become. When you make things visual, visible and tangible, you’ll have a shared language and understanding, which leads to greater alignment across the team and better execution when testing assumptions.
  6. One of the challenges that companies face today is the difficulty of competing on technology, products and services alone. Generally, founders focus too much on just the product/tech, without a full understanding of the value behind a superior business model. Articulating what makes your business model special is key. 
  7. There are 3 target audiences for Alex’s book “Testing Business Ideas”: The individual with an idea or side hustle, looking to find desirability, feasibility or viability within their idea, the funded entrepreneur, and corporations that are ready to scale.
  8. In order to scale a business from idea to success, you first need to reduce the risk and uncertainty of your idea. The way you reduce the risk and uncertainty is by testing it rigorously with the right experiments, at the right time. 
  9. Often people have the false assumption that in order to test, you need to build the product first. However, if you build the product and don’t get any traction, you now have a big problem that you don’t know how to fix, because the idea was never tested. 
  10. In “Testing Business Ideas,” the 2 main components of the process are business design (shaping your idea) and testing the idea. It’s a rigorous process where, once you have shaped your idea, you then need to ask what is the most fundamental assumption, the most important hypothesis, what needs to be true for this idea to work?
  11. Alex’s rule of thumb is to begin testing at the very beginning when risk and uncertainty is high, doing very quick experiments with relatively weak evidence. The more you experiment and learn, the stronger your evidence should get. The stronger your evidence gets, the more you refine the testing and dig deeper into more granular elements of the business, until you’ve de-risked the challenge. 
  12. It’s important to be relatively stubborn about the vision, but not about the direction of how you get there. Being very curious, flexible and open to discovering new patterns will lead you to the right next steps and ultimately your vision. 
  13. If you believe there is an opportunity in a particular market, the testing phase really helps to figure out how to get from point A to point B. Compromising on your vision is often not necessary, however continuously adjusting your next steps is. 
  14. Creating a static business plan often does not work. Over time as the company evolves, the business model should also have enough flexibility to evolve simultaneously. The teams that are flexible with their strategy, are often the teams that succeed. 
  15. By investing in a business plan, you’re actually investing into one idea and one way for it to be executed. Instead, it’s most beneficial to invest in a team and the team’s ability to continuously adapt the value proposition and business model until it works.

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran and this is the full ratchet

0:23
Welcome back to TFR today’s a special one as the creator of the business model canvas. Alex Osterwalder joins us. Alex is the co founder of strategize er, a SaaS company that helps organizations develop better value propositions and powerful business models. He is also the best selling author of multiple books including Business Model Generation and testing business ideas. In 2015, Alex won the strategy award by thinker’s 50, which has been called the Oscars of management thinking by the Financial Times, and he’s currently ranked number seven among the leading business thinkers in the world. In today’s interview, we discuss the origin of the business model canvas in an overview of the framework. The reason for releasing his newest book testing business ideas, how both founders and corporate innovators can implement its concepts, the four major phases in a thorough experiment, how to eliminate risk from an emerging business, how to strike the right balance between testing and execution, the importance of mindset throughout the entire process. And finally, we get Alex’s advice for those who get stuck trying to find product market fit. It was a real honor to do this interview. Here it is with Alex Osterwalder.

1:39
Alex Osterwalder joins us today from Switzerland. Alex is the co founder of strategize er, a SaaS company that helps organizations develop new growth engines, better value propositions, and powerful business models. Alex is also the author of best selling books, Business Model Generation and value proposition design that have sold over a million copies in 37 languages. And Alex just released his new book testing business ideas, which we’ll talk a bit about today. Many know Alex as the inventor of the ubiquitous Business Model Canvas, a strategic innovation tool used by entrepreneurs, investors and leading organizations around the world. Alex, welcome to the program.

2:19
Thank you for having me. It’s great to be here. It’s

2:21
such a pleasure to talk. I mean, we’ve, we’ve probably heard your name on the program, at least 10 times over the years, many different folks have cited your work. So this is a true pleasure to finally meet you. Great

2:34
to be here. I hope it was good things they said, Of course.

2:39
Awesome. Well, maybe just to start out, I’d like to hear a bit about your background, particularly like, I know, You’ve had some startups back in 99, you had net net finance, and you’ve done a variety of different businesses over the years. So can you walk us through sort of your backstory in your path to, to where you’re at today?

2:56
Yeah, I’ll go way back, you know, to my studies, you know, I did political science to what you do there. And that was fascinating studies, you, you start to learn why institutions are the way they are. And that was kind of the foundation when I went to business school, and then did my PhD on business models in the information systems department. To question you know, do business models need to be the way they are? Could they be different? And that’s what brought me to the topic of business model innovation, and today, even organizational design, can we design different kinds of companies that are managed differently, you know, that can be really world class at execution, and exploration at the same time, that kind of comes from, you know, even my education back then, as a student and as a PhD student, then I’ve always been fascinated by business models by creating stuff. So kind of naturally, I became an entrepreneur, which led up then to founding strategize er, which was kind of the result of the successful first book we wrote, This is my generation tariff, because once you have a book out there that sells, you know, a couple of million copies, you have to ask, what are you going to do? And I already had a consultancy, I did a consultancy before. So just I didn’t want to do another normal consulting firm. I didn’t want to build a training company. So naive as I was back then, I asked the designer of the book, Alan Smith, who’s very visual book, if he wanted to start a company with me, became my co founder. And we said, Let’s build business model software. You know, not ever having done a software startup. That was pretty funny. I’ve done startups before. Nothing extremely scalable, I’d say. So we went into that and had a lot of fun. First, we started with an iPad app that sold a couple of 100,000 copies for $30, which is our first experiment we said let’s do that to test if there’s a market. Well, it turned out there was of course, you can build a business on an iPad app. So we moved web, etc, etc. So we learned along the way. And what’s fun to certain extent is we build tools for business people, while doing it at the same time, because I do believe, you know, from the practice, you can build better tools, you really need to understand what are the challenges of companies. And that’s where startups and corporations actually have some very similar challenges. They have a lot of different ones as well. But they also have some very similar ones. And we build the tools and the technology stack to help them innovate.

5:30
So was the the first appearance of the Business Model Canvas was that in the book, Business Model Generation,

5:38
the original stories is kind of funny, because I did a PhD and a doctorate on business models. And the title was called the Business Model Ontology. So that was a, you know, more complicated, because obviously, you don’t get a PhD for simple framework like that. So the Business Model Ontology, which is very similar already, but just had boxes and arrows, it was more conceptual. And that started spreading around the world, because people downloaded my PhD. I had slide decks out there on SlideShare, which just started out. So an early form of the business model canvas, which was the Business Model Ontology already popped up, you can Google it, so you’ll see it, then what happened afterwards, because I had a consulting firm at the time, together with colleague Stefano, Master Jacamo, who founded it actually, we at one point, drew lines around the model around the Business Model Ontology. So it would become a tool where you could put sticky notes up. So it happened on a whiteboard. And then in the slides, we just map that out. And that became the business model canvas. So that was even before the book. And then obviously, when we launched Business Model Generation did it with an innovative business model. And that spread around the world, then, the business model, Canvas became very popular, but it was already out there before. And you know, at the very, very beginning, when I was working on my PhD, I think that’s the difference with many of the models that were out there, we were not the first to talk about business models, we did a lot of rigorous testing of the concept itself. So we didn’t just put a couple of boxes together and said, Hey, this is you know, this is now the theory in this space. Because you know, if you want to be scientific and ontology stands for defining a domain, you know, ontology is in birds, and you know, reptiles, whatever, we create an ontology for business models, you better be sure that this works well. So we tested it rigorously. With business people out there, we iterated until we had the right thing. And then, you know, I do believe, because we had such a rigorous testing to make it practical and simple and visual, then it really took off on the web, even before we wrote the book. And then with the book, and the free downloads around the book, it just took off, you know, beyond what we would have ever imagined. We knew it worked, but doesn’t mean because something works, it’s gonna get global adoption. So today, literally millions of people are using the business model canvas, which is really fun to see. I mean, it’s very, very intriguing. And based on that we then build other tools, because the Business Model Canvas does one thing. And that’s what it’s supposed to do. It’s to map out business models.

8:20
It’s quite powerful. It seems like any incubator I go to or startup pub, you know, that’s one of the formative steps that entrepreneurs are taking and structuring their concepts around. So yeah, it is. It’s a really powerful tool. And just to touch on that, I don’t want to go super deep on business model canvas, because I think a lot of the listeners have a good appreciation. But can you touch on kind of the high level components? An overview of it? Yeah. So

8:46
you know, the the principle of what you have in business a lot, when you’re an entrepreneur, you’re your manager, or leader, there’s some things you just want to make tangible. And nobody could really make the topic of business models tangible or corporate culture or value proposition. So we said, Let’s map this out. What are the core components, and there are only nine core components, you take one away, you don’t have all of the components, you need to build a business. So it’s customers, you need to have customers, you’re gonna serve the value proposition to serve them, the channels to reach them, once you reach them, you build a relationship with them. And you need to capture value with the revenue stream. So now we’re, you know, at six, well, now you need to figure out how are you going to actually do that. So you need to define the key resources that you need and the key activities to actually create that value proposition, the partners you’re going to work with, and that gives you the cost structure. So with nine building blocks, you’ve defined all of the key elements of your business model, then people say, but what about competition? Well, competition is not part of your business model. It’s part of the environment in which you design a business model in which you compete, right. So there are nine building blocks for every business model. And then you can see Coming to look at more detailed things, or you can zoom out to look at more macro things like the environment. It’s just one topic. It describes how you create, deliver and capture value. But then you need to maybe zoom into the value proposition, how do you create value for your customers, then you might need to zoom into the corporate culture you want to create if you want to scale your business. So there are all these kind of tools that you use together, to, to work on, you know, the topics that are important for you as either a startup or an established company, the more you can visualize them, the more you can make them tangible, the more you will get alignment across the team. So the power of these visual tools, very simple. It’s when you make things visual, visible, tangible, you’ll have a shared language, you’ll have a shared understanding, and you will be lot better at execution, or in the case of a startup around testing the assumptions. So these visual tools will help you do things you might have done before without tools a lot faster, a lot better, and make a lot less mistakes. visual tools are incredibly powerful. And we kind of still underestimate them when it comes to more strategic topics. Part

11:09
of the reason I’m a huge fan of your book, books, multiple books, but I love the visuals, it really helps frame everything so much better than pure text. And quick tip for founders in the audience. If if you can’t articulate a thoughtful perspective on these nine building blocks, you’re not ready to raise capital, I can’t tell you how many early calls I do with, you know, very, very early founders. And I’m always happy to give advice and feedback and input but just do a Google search for the canvas and make sure you have some thoughtful perspective on each. You don’t need to have all the right answers, but at least explore those. So Alex, you know, I’d like to talk about your new book. This is testing business ideas that you co authored with David J. Bland, just to start, you know, why’d you write the book?

12:00
So let me add one more piece to what you said before, I think what founders also need to get better at is to articulate why they have a better business model. Because one of the challenges that companies face today is it’s a lot harder to compete on technology products and services alone, it’s not enough anymore, you need to really start to understand how is this business model going to out compete others, you know, recurring revenues? How are you going to create a resource Castle, et cetera, et cetera? So I think generally, founders focus too much on product and tech alone. And, or science, if you’re in the science space, and they don’t understand the value of a superior business model. So I think the best companies, yeah, just take apple shifting from selling phones to building an ecosystem. That’s the you can’t disrupt like, it’s impossible to disrupt the, you know, Android or iOS platform, because they have a superior business model. So you want to think of those things from the beginning. Because at the end of the day, you know, it’s not a product alone, that’s going to give you success. So just that as a little thing, there’s so much potential in understanding business models, it’s under exploited. It’s actually an easy win win still, because so few founders really understand business models. Well, founders and senior leaders

13:19
couldn’t agree more. And now to

13:21
your question, right? Yes, the book, testing business ideas. So the question we always ask when we write a new book is why the heck does the world need another book? Right? There’s so many books out there. Why another one? Why another one on this topic? Well, for us, it was very simple. Steve Blank and Eric Ries have done a phenomenal job of getting, you know, the lean startup out there, getting it into startups, getting it into companies. And Steve is very good friend, he changed the way we teach entrepreneurship the way we do innovation. So that’s unbelievable, right? Yeah. Now we’ve struggled with as we saw, well, companies still not that good at it. They’re doing it. But it’s kind of basic, right? They do couple of interviews, and they’re just not really good at it yet in testing their ideas. So with David, we said, well, what if we created a library of experiments to help people get a lot more professional at what they’re already doing? So it’s almost like graduating from the kindergarten level, you know, to the maybe high school level or so by doing this better? So rather than just doing interviews, which is a great start, what if we start doing more sophisticated experiments, sometimes very simple, like doing a card sort, you know, putting jobs pains and gains in front of people so they can stack rank them? So you start to understand what are the biggest jobs pains and gains simple stuff like that more sophisticated interviews are then landing pages the obvious suspect, how can we go beyond that? How could we do this wizard of oz test, meaning that people think they’re interacting with a real solution? While behind the curtain everything is done, man annually. So we wanted to create a library, where people could go pick the right experiment, for the right hypothesis that they need to test. Because I do think there’s still today huge potential in getting better at testing ideas and creating better evidence. So we just believe people weren’t good enough at this yet. Great start. But let’s help them get to the next level. So we created a testing business ideas, which is in a really nice library. And then we added a little bit to the methodology as well. So people would start doing little bit more metrics based stuff and not just kind of winging it. Did you

15:38
test some of your methodologies and some of the components of the book as you were putting it together? You

15:44
bet. Everything we do. And you know, a lot of things, you know, what we get his feedback often is, Wow, you guys make very simple and practical tools. Well, the thing that they don’t see is how we started out, like, of course, we spend a lot of time thinking of, okay, how do we make this simple? How do we make this practical, but we test this stuff in the field all the time, David has done hundreds of projects with teams. So he understands, you know, okay, this assumptions map that didn’t come out of nowhere, it came out of that struggles, that, you know, we couldn’t accompany teams the right way at the beginning. So everything we learned in the field is a constant iteration. So the time something makes it into a book, it’s been through hundreds and hundreds of iterations. And from a pure content perspective, you know, the tools are tested in the field iterated until they really work and for the really simple, but even the book itself, you know, if we take a couple of spreads, spread is a double page in a book. So we don’t think in terms of pages, we think about one spread, which is a surface where we shape an idea, and it just covers when one spread, we make it clear. Can we test these things? They go through some of these spreads went through 1015 iterations, we adapt the visuals, we test them with people to see, do they understand it? Is it clear what’s not clear? So we definitely apply this the cover of the book, you know, we tested this was a bit last minute. So the time constraint was crazy. We started testing this on LinkedIn to figure out which cover really works and resonates, what do they understand what don’t they understand? So you can’t, you can’t make this stuff tangible, visible and simple. If you don’t do it yourself. So when people say it’s simple, and practical, it’s because they don’t see how much iteration went into it until the UX and UI works, I believe, tools, business tools and business books have a user experience, they have a user interface. And if you don’t really take care of it is not going to work, right. That’s why I don’t believe in words alone. Because it’s a pretty bad UI, or UX for business ideas. Writing stuff is good for some stories where you want a lot of imagination. But when it comes to business, you want a good mix, where do we need imagination? And where do we need very, you know, strong clarity. So we iterate a lot. And as you can see, I get I get very, very excited about these things. And I go on, you know, kind of rambling?

18:15
No, I love it. I mean, it rings true. Definitely, if you’re in the audience, and you haven’t experienced one of Alex’s books, certainly recommend the newest one, testing business ideas. I’m looking at it right now it’s in front of me, as well as some of the previous books, including Business Model Generation, but you know, who, who is the ideal target audience for this book, Alex?

18:38
So for us, it was, you know, three target audiences. The first one is, you know, anybody who has an idea, you want to start testing their ideas, you know, there’s, they still have a job and they just side hustle, they want to figure out, Is there anything there? You can apply this methodology as an individual, you just wants to test, you know, is there any desirability feasibility or viability in this idea? And then, of course, the funded entrepreneur, because once you start taking on money, you better do a good job, because now you have investors who expect you to do this work. And, you know, innovation and entrepreneurship is not about raising money. So sometimes, young founders confuse VC funding as a revenue stream. It’s not. At the end of the day, at one point, you should figure out a business model, right? Yes,

19:30
customers are the best source of funding. There you go. So funded

19:34
teams, you bet. But then also, who we really target is companies that want to scale this because the challenge of going from idea to validated business model to scale. The challenge is actually very similar for an individual a funded startup or a corporation. Then of course, there are additional things that are very different for each one of these three segments, but the foundation is actually very similar, you need to reduce the risk and uncertainty of your idea. And you reduce the risk and uncertainty of your idea by testing it rigorously, with the right experiments at the right time.

20:11
Got it? So if I’m reading this book, assuming I’m a founder side hustle, or you know, all in on on a new business, what outcome can I expect to achieve after, you know, reading the book and applying its principles?

20:27
Well, what you will understand is, how can you test ideas systematically. And what you will get is, we really see it like a handbook, it’s not just you read it once, but when you’re working on a project or on a new venture, you can go back to the book and ask yourself, Okay, what’s the right experiment for this particular thing, oh, I need to understand something around viability, I want to test the cost structure, I want to test the pricing, I can go to this library of experiments and go look up, which one, you know could be the right one to do. Now, obviously, at a certain point, you get so good at it, that you master the library is like a doctor, you need to really start working on your anatomy books, to deeply understand before you really snip it around on it on a real body. And you know, the longer you practice, the less you’re gonna go back to the basic anatomy and physiology book. So that’s kind of the way we look at it. It’s the tools. But what was really fun to see is we wrote it not just for beginners, but also for really good practitioners who coach others. And we got good feedback from very experienced coaches who said, Well, it’s a great reference book, because we didn’t want to make it, you know, look too simplistic, because it’s not easy. And we wanted to create something that also creates value for the partitioning coaches out there. And even VCs, you know, asking the right questions, you know, asking, could you do this experiment or that experiment to prove to me that you’re worthwhile, you know, investing in? So I think it’s a book that covers nicely, from the beginners level, to the more experienced level is a good reference book around this library of experiments. Yes,

22:08
yes, I definitely can see how one could remove a lot of risk, certainly from the the investor standpoint, but also also from the business standpoint.

22:18
If I may, let me let me give you an example. Right, so we’re talking about conceptually, so let me give you a concrete example. So maybe, you know, a team has a hypothesis that people would pay, you know, 40 bucks for some kind of widget right? Now, that’s a hypothesis, when you start out, you put in a spreadsheet and say, we’re going to, we’re going to sell a million of these 40 $40 widgets. That’s, that’s an assumption. That’s a fantasy. Now you need to go and start testing that assumption. First, you might do you know, 100 interviews with different potential customers, and you start to learn, that’s the first piece of evidence because very light evidence, what people say, and what people do is different. So you want to take the same hypothesis, and maybe you start creating a landing page, and you start collecting maybe just emails to start with, that’s already a little bit of a currency, people are not going to sign up to something, if they’re not interested. It’s an anonymous space, there is no risk for them to say, This is bullshit. They’re not going to sign up for this. When you’re doing an interview, it’s already a bit harder to tell a person and interviewer this this project, you know, this product really stinks, right? So you start to have a little bit stronger evidence, but then it’s still email on it’s not 40 bucks yet. What if you start to simulate a sales? What if you start to put that one product into one store doesn’t prove any scalability yet, and it’s just for a couple of customers in that one store. But if for you put that in a store for a week, and you start to see that people are actually going to the counter and want to pay for it? And he’s so sorry, this was an experiment? This doesn’t exist yet, actually. Yep. So then you start to have stronger and stronger evidence. Right? So So what’s what’s important here is that you do it in a systematic way, where you show people you need to test the same assumption with stronger and stronger experiments that produce stronger and stronger evidence. So you can be more and more confident that your assumption is actually true, right that your hypothesis you can you validated it. So people are usually too happy to quickly or or they immediately go to a product market fit. Like there’s a whole space in between before you even get to product market fit right for sure. So so that’s where people can learn a lot. Yeah,

24:35
I mean, from personal experience, we do a lot of investments in hardware with a subscription revenue stream. But you know, I’d suggest to many of the founders very early stage because we invest super early, don’t build it yet and don’t finalize the design. It’s very easy to spin up like a squeeze page or a landing page online and send traffic there and test out if you know is this I mean you make it appear as If the product exists, but is this a concept that sells? How is the messaging? How is the branding? How is the checkout flow? Right? How many people actually enter their credit cards before you tell them? Oh, I’m sorry. You know, the products not quite available, or we’re out of stock. So you

25:15
mentioned a very important point there. So the Lean Startup, you know, approach kind of says, build, measure learn? Well, that’s pretty misleading to certain extent, because that incentivizes people to build something. So engineers, software, engineers immediately going to build something, right. So people have this false assumption that to test I need to build that is crazy wrong in the sense that sometimes, making a prototype can actually already cost you millions of dollars, depending on the domain you’re in. So the more you need to invest to build something, the more you should actually have evidence that there’s a concrete Customer Job pain or gain there, that people have a budget that they’re willing to pay. So what you mentioned is not a small thing, it’s one of the innovation myths I need to build to test. That is that we couldn’t be more wrong, right. So I like to see evidence about existing jobs, pains and gains first, even pricing evidence, simulated sales, as you said, before I build anything. So a lot of people build too quickly, which is one of the crazy, crazy misconceptions of the lean startup movement, I actually need to build something to test. No, you don’t. And the more it cost to build something, the less you should build it quickly. Yeah,

26:29
I couldn’t agree more, it often feels backwards. And I think a part of that is that most technologists, and many, many of the builders out there can code right developers that can speed something up and their natural skill set might not be strategy and finding a customer pain point. And exploring that further and validating constructing a business model. And so their, their natural impulse is to build. And then we get into this weird cycle of recommending, you know, move fast and break things. And, you know, it’s a little counter intuitive, just to build for building thing.

27:05
And one thing you know, that that makes it very clear is, if you build something, and people don’t like it, you actually have a problem, you don’t know if they don’t like it, because they don’t like what you built, or if they don’t like it, because they don’t have the job pain or gain. So if you have evidence that they are actually struggling with something, and then you build something, you know that you built the wrong thing, but you know, exactly, because you have the evidence that there’s a jump pain or gain. So if you build too quickly, you’re actually not going to learn what you need to learn, because you first need to understand if they even struggle with that, yes, you spend, I mean, so and so that means if you don’t pass the fundamental assumptions first and you go too quickly to building, you’re probably not going to understand why the thing is, you know, not getting any interest, because you don’t know, it’s because you built the wrong thing, or because they don’t even have that challenge.

27:59
100% I mean, a conversation I have frequently with entrepreneurs is is really about that problem, identification, you know, that the key pain point and make sure that we identify that appropriately, because there’s, there’s limitless solutions that can be built, that you know, are aiming to solve that problem. And it can be challenging to find the right solution. But if you haven’t appropriately identified the issues and the problems upfront, then the solution most certainly will will just, you know, be looking for a market or it will not be designed appropriately.

28:32
And then one more thing, you know, because because it can go completely in the wrong direction, where and I’ve seen a couple of people saying it always needs to start with a customer pain, that is then the other extreme. And I said no, you can have a great science, you know, technology or patent and start from there. It always needs to end with the customer, job pain or gain and you know, could be not maybe a pain, but actually an objective they need to achieve so can be framed positively as well. So you can start with the technology. But you need to find as fast as you can, you know the appropriate pain or gain because if we just focus on the problems, the pains, you know, the thing the iPad didn’t really solve the pain, it actually addressed, you know, one of the gains that people were looking for, which was you know, carrying around their collection of music and being able to select the songs pretty quickly. So there’s a lot of positive things that we can also do not all the things we solve for our challenges. Sometimes we help people achieve a goal, which is not a problem, but it’s an objective that they have. So there are a couple of misconceptions, I think, that are easy to overcome. But we need to kind of break those innovation myths and those common misconceptions because we now know how this works, right? It’s not it’s not a blackbox anymore.

29:49
So we’ve got four high level phases in the book here the design phase number one, the test phase number two, the experiments number three and mindset number four, I don’t want to spend Too much time, but can you kind of you just give us an example of a situation to bring some tangibility to it? But can you maybe give us an overview of these four phases? And why they’re important in this? You know, testing business ideas process? Yeah, I

30:16
would actually look at the process first, right. So rather than those those kind of overall phases in the book and look at the process, and the process is two big components. One is business design, shaping your idea. And the other one is testing. So sometimes people get fall. So in love with the testing that they forget, it’s about actually making business decisions and adapting your idea. And sometimes people are, so fall so in love with their idea that they, you know, fall into analysis, paralysis and forget to test. So it’s a constant back and forth in the entrepreneurs mind, I shaped my idea, what’s the value proposition? What’s the business model? So I need to have an understanding of what that is, how do I create value? How do I capture value? If I’m happy with the idea, I go out there, and I start testing it. And that is a rigorous process that in most startups and companies is not done rigorously enough yet. So it’s not really so rigorous, that it’s stifling your process needs to be good enough. And that means, once you have shaped your idea, you need to ask, what is the most fundamental assumption, the most important hypothesis what needs to be true for this idea to work? For example, I’ll give you a silly one just for the sake of illustration, you make an iPad app for a specific challenge, you better be sure that your targeted audience actually has an iPad, right? It’s as silly as that. But that’s the most fundamental assumption. Yeah. And sometimes people don’t test that this is a silly one. But in many cases, people don’t test the fundamental assumption. They just say, no, no, that’s, that’s clear. Well, show me the evidence. If it’s clear, I want to see the evidence. So first, prioritize your assumptions, your hypothesis, and then you start to test the most important one the most the most appropriate experiment, you learn from that, and then you make a decision. Based on what you learn, do I need to shave my idea, and here’s where that little fine detail of this process testing means you make a decision if you need to adapt your value proposition or business model. So it’s not just per se, pivoting? You know, the idea? No, you’re going to change the value proposition business model, what are you going to change? Are you going to change the key resources you need, again, change the pricing, are you going to change, and you switch from one customer segment to another, that’s a business decision, and then you go back into the testing loop. So it’s a constant back and forth between shaping the idea and testing it, shaping the idea and testing it? And here’s where people are not structured enough. They just kind of wing it. Oh, I think I’m going to talk to this customer segment to learn. I’m going to put an MVP in front of them. No, this is now a lot more professional than it used to be five years ago. Yeah, let’s dive into

33:02
that a bit further. So you know, we recently had Leopoldo vets on the program, and we’re discussing the challenges of balancing testing, with execution, right? How long do you test? And how much data do you acquire, that provide some direction? Before you just begin, you know, moving in that direction very fast. And it’s, I mean, that’s a really difficult problem, right? Like, when you stop testing and move forward? What are your thoughts on that? So,

33:30
you know, there’s, it’s a balance between pure vision where you need to be sure, you know, Steve Blank likes to say there’s, you know, you’ve got to be careful that your vision is not a hallucination. So, if you don’t test, you can go fast, you can build something big. And you know, there was some backlash against the lean startup movement was, oh, you can’t pursue big ideas when you test them. I think that’s silly. It’s a nice excuse to not test right. I think it’s quite the contrary, the bigger your, your challenge, your idea, your vision, the more you should test, you just need to do it the right way. So I’d say the extreme on the left, you know, on one side is we just follow our vision and we build the thing because we’ve got a billion dollar in funding. And you know, Vinod Khosla, famous VC, you know, co founder of Sun Microsystems likes to say that if you have too much money, you decrease the probability of success, too much funding, you decrease the probability of success? Why? Yeah, you can’t because you’re gonna build something, right. So that’s the extreme. But then there’s the other extreme, you test for too long, right? You test you test, you want the perfect data, entrepreneurship and innovation is always going to be about contradicting data. You’re never going to have you know, the path opening up with you with lights on the left and the right showing you a clear path forward doesn’t exist. So the question is, how do you figure out good enough? And here’s the recipe that we like to follow. It’s, we say, you have one eye okay, people are going to pay $40 for this device. Well, just doing interviews is probably too weak of evidence, right. So you shouldn’t be very confident, even if 90% Say, Yeah, we buy this, you shouldn’t be very confident, because you still might go wrong, you don’t want to invest a million dollars based on a couple of interviews. So then you need to go to the next experiment, which then might be, you know, a landing page or whatever, or you might go to a real physical transaction. So we say, if you start to do three or four experiments very quickly, for the same hypothesis, but they’re different experiments, with different strength of evidence, strength of evidence is the big one, then you start to see patterns, if all of them are against you, or all of them are for you. It doesn’t need to be rock solid data. But you did three very different experiments, that all show a pattern that there’s something there. So what happens if you get really good at this is you will do enough experiments to start to see the patterns to start to feel confident about this. So the rule of thumb is at the very beginning, when uncertainty is high, when you don’t know risk and uncertainty is very high, you do very quick experiments, with relatively weak evidence, interviews, etc. The more you learn, the stronger your evidence should get. That means maybe your experiments get a little bit more costly, you’re talking about real transactions, your evidence gets stronger. And the more you learn, the more you get granular the more detailed things you start to test. Once you start to figure out yeah, there’s that right, that we have enough evidence for that challenge, we have enough evidence that we can actually create value. Now you’re going to work at the feature level, which feature do customers care about most? Because success and failure can be indifferent in the feature you choose. But you don’t start with that. Because first you need to figure out is there even a challenge there right before you go to the feature level? So you get more and more granular over time? So there’s no defining moment, this is it. This is not it? No, you get more and more granular, your experiments get more and more refined, you invest more and more. So it’s a gradual, gradual process. And where granularity gets more and more fine grained. So that is the way you work forwards. Because the evidence from several experiments is going to show you the path. So you don’t compromise the vision, you figure out the steps. And sometimes you’ll figure out that there’s nothing there and you need to kill the project. So I think, too little. This is why venture capital capital is pretty good because venture capitalists stop investing at one point, this is where corporations are bad. They continue funding zombie projects that should be killed. Right. But back to the your main question. There is no clear moment. It’s a balance between analysis, paralysis, too much testing, or vision, you know, hallucination syndrome. But the more different types of experiments you do, the more the path will open up, the more granular you get over time. So the best teams, they do tend to 20 experiments is not a one time thing. Yes, experiments get more granular. And the investment gets bigger based on the traction you create, right. So it’s really just a thing about granularity. You start big picture light evidence, you get more and more granular you work down to the feature level. And then you work to know from regional to global level, etc, etc. So it’s no magic moment. It’s an overall process over time, where you start to understand what’s working, what doesn’t.

38:40
It’s kind of interesting, because I’ve noticed, we’ve made close to 30 investments as a venture firm now. And I’ve noticed that entrepreneurs that are super open minded, and flexible, you know, with high EQ, do much better in this process. And it’s strange, because it’s like they need these combination of skills, they need to be super open minded, but they need to be super stubborn and rigorous about pushing forward. Yeah. And if you find that entrepreneur that super stubborn with like, my idea is right, or my vision of the world is the only one that’s going to work. That’s when it falls down, right? Because they’re not seeing, you know, the tea leaves in there. They’re not absorbing all the information that they’re experiencing during these testing phases. So it’s a really unique combination. It’s like this weird combination of being super open minded while having this sort of irrational commitment to just pushing forward. Yeah,

39:36
and that and that. So that’s definitely something else to learn from Steve Blank, right. And there’s some quotes out there. I think it’s from Jeff Besos, where you need to be relatively stubborn about the vision, but not about the direction of how you get there, right. So you need to be very curious and flexible and discover the patterns of what could be the right steps to get me to that view. Imagine. So if you believe there is an opportunity in that particular market, you’re seeing the world moving in that direction, where the testing really helps is figuring out how do I get from here to there. So you don’t really compromise on the vision that much. But you actually do change the steps of getting there, right. And I do think, you know, take companies like Tesla, they didn’t compromise on the vision, but they’re compromising everyday on the steps. So while Tesla still has this vision, you know, of an overall solar company, the reality now, and now they’re becoming more and more of an established company. But the reality is, they first have to deal with scaling production of cars, before they can really go, you know, big scale into batteries and solar panels. However, they are keeping that alive, because their vision still is, you know, the overall business model. So, again, I think you need to be very flexible on the steps and very curious and open minded and actually very good at pattern recognition. Yes. And I think the entrepreneurs who are not good at pattern recognition, they fall in love with the science and they believe in the science or the product, the technology itself, they usually fail. Those teams that are flexible in how we’re going to make this work, they often succeed, and you know, venture capitalists, they first invest in the team, and then only second in the business model, because obviously, the team is going to figure out the starting business model, actually, often the starting business model doesn’t even matter. Because it’s over time that we’re going to figure out the right, you know, scalable business model. So that’s why business plans don’t work. If you invest in a business plan, you’re actually investing into one idea and how it should be executed. That’s nonsense. You’re investing in a team and the team’s ability to continuously adapt the value proposition and business model Intel it works, right? That’s a completely different ballgame. Yes, that also means that the team needs to be very good at this process. Now, in the past, founders have a lot done a lot of this intuitively. So I asked Steve Blank, but why do you need these? Why do you like these tools, you’ve done it without, right? You’ve sold, you know, you created set, you’ve been in volved, in creating seven companies. And the last one has given you, you know, pretty beautiful ranch and a lot of enemy and so on. So he says, well, guess what, I would have done it a lot faster. And it would have been a lot less painful if I had had these tools and processes from the start. So it’s not that we’re doing a completely different thing. We’re just doing it a lot better, a lot faster, a lot more systematically, wasting a lot less time, money and energy, right. So that’s where tools and processes make a difference. And that’s where this thing is getting a little bit boring, because we now figured out how it works. It’s more like accounting, and actually the Wild West. So so that’s where people, you know, they like the Wild West. Sorry, this is not the Wild West anymore. This is actually a process that works.

43:03
Yes, I mean, your point about sort of these founders in being adaptable, and investing in people that can figure it out over time, not investing in just a concept that’s fixed and static. I mean, that might be one of the one of the best insights we’ve heard on the show, and in a long, long time. So thank you for that. But you know, another thing I’d like to touch on that’s related heavily related to this is mindset. And it’s the title of sort of the the last phase or stage and section of your book, you wrap up with some really good guidance, the importance of mindset, and how it relates to this entire experimentation and testing process. Can you talk about common pitfalls and mistakes that founders make? And how it relates to this, this portion of the book on mindset?

43:53
Yeah, I want to maybe, you know, when we’re talking about mindset, just add a little bit of flavor also, in terms of the innovation myths, you know, because when it comes to breeding something new, and in particular, in the startup world, and innovation, sometimes, when we say innovation, when we say startups, we think technology. And that’s a subset of innovation and entrepreneurship, at the end of the day is actually very simple. It’s about creating value for customers with a business model that allows you to capture value for your organization and your stakeholders and investors. Right. So that’s the overarching goal. So and that’s where people sometimes get a little bit stuck, where this is a big, big pitfall. It’s about creating value for customers and value for the business. So the pitfall there is I just want to build a product, right? No product doesn’t matter that much. You’re building a business. So you really want to start testing all different kinds of ways of creating value for your customers, which may or may not be related to technology. And then you know, use still need to have a successful business model because even with a really successful product, you can go bankrupt if you can’t earn more money than you spent, which sounds trivial. But how many startups have we seen doing exactly that wonderful product? And they go belly up? Yeah. So so, you know, first, immediately start thinking about the business model from the start, Could this really work testing the assumptions, they’re very important. But back to the technology part, because that’s one of the big myths. I’d like to you know, really, investors and founders open up more to the idea of, we can innovate and create value. So take the Nintendo Wii. Nintendo Wii is a fascinating, you know, thing, because when Nintendo launched the Wii, it was an inferior technological platform, right? Because they built a game console gaming console based on off the shelf technology. That’s right. But the big thing was, is that they served an underserved market of casual gamers who didn’t care about graphics power, who didn’t care about processing power, they cared about fun games. So Nintendo gave them motion control and simple games. And guess what? They got people into the living rooms like millions? Yeah, much larger. Right? Yeah, they disrupted think of this. They disrupted the gaming industry, with inferior technology, inferior technology, larger market, larger profits. Wow. So we need to change our even our approach to innovation and entrepreneurship. And say, Yeah, technology can be very cool. And it can be very helpful. But at the end of the day, trivial question right a little bit back to the basics. It’s about creating value for customers and capturing value for the business. And we need to be very open how we can do that. Let’s figure out the right business models. So even investors, sometimes they fall in love with certain technologies or certain marketplaces, certain industries. Let’s open our minds a little bit and look at all of the possibilities of business model innovation, right. So that’s one of the pitfalls, that we fall in love too much with technology. And the other pitfall is we think it’s about product, when it’s about business models at the end of the day, right? So those are two of the big ones, that I like people just to kind of drop open their mind, because this is an innovation. These are two innovation myths that are holding people back from exploring big potential.

47:24
Alex any resources or books that you’d recommend to the audience, aside from, of course, your own testing business ideas? Yeah, so

47:32
I’m a big fan, obviously, of Steve Blanks work. So all of his books, but then also, in particular, also the blog where he constantly kind of shares the things he knows. So I’m a big fan of Steve’s work. And I don’t think Rita McGrath that’s maybe less for the startup world, but for the innovation world, you know, from Columbia, she talks about transient competitive advantages. Now, she has a new book about seeing around corners, how do you understand inflection points. So there are just too many books out there that I would recommend. But in the innovation space, you know, for me, those are already two leading thinkers and friends that I look up to, and that I recommend to everybody

48:12
else, what do you know that you need to get better at?

48:16
I need to get better at listening. So you know, I always thought as a good listener, and maybe not the worst, but you know, when you really put in place rigorous feedback mechanisms, you realize that, yeah, you know, sometimes just a space for improvement. So for me, one of my big goals is to get better and better listener and, you know, get more and more humble in the sense that you can learn from every single conversation you have every day in your life. And that has to do with becoming a better listener in every single situation.

48:51
It’s perfect. And then finally, what’s the best way for listeners to connect with you?

48:56
Go Google, Alex Osterwalder, you’ll find a lot of the stuff we put out there. I’m you know, share a ton on Instagram, on Twitter, on LinkedIn, so you can have direct conversations with me through those channels.

49:09
Well, here again, you know, this was such a pleasure, you know, I have been a huge fan of your material for so long. And I think you’ve, you’ve helped a lot of, you know, the founders that we work with, and well beyond that, to realize sort of their vision and, and build something transformational. So thank you for all of your work. And thank you for sharing your time here today.

49:30
Thanks for having me great questions and a lot of fun.

49:38
That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in Each startup we choose, as always show notes and links for the interview are at full ratchet dotnet and until next time, remember to over prepare, choose carefully and invest confidently. Thanks for joining us.