Discovery-Driven Planning (DDP) is an older (from the 90’s!) technique for systematically addressing the risk involved in a startup venture. Though it lacks the marketing muscle behind the Lean Startup movement, DDP is another valuable tool in an entrepreneur’s toolkit. In fact, it is a strong complement to the Lean Startup approach.
In the entrepreneurship press, all you hear about is “The Lean Startup,” a concept promoted by Eric Ries, who wrote a book of the same name. The popularity of the Lean Startup is a testament to Mr. Ries’s marketing expertise. The book debuted at #2 on the New York Times bestseller list; the Lean Startup Conference in San Francisco last December filled up the Hotel InterContinental; and he continues to be a sought-after speaker and evangelist for his movement.
In my work, I certainly strive to adhere to Lean Startup principles. I see Lean Startup as primarily a mindset that forces an entrepreneur to confront the riskiest assumptions in his or her business plan by developing minimum viable products to test those assumptions. The process of Customer Discovery and the Business Model Canvas help facilitate the process of “getting out of the building” to learn by testing those assumptions with would-be customers.
But how do you know which assumptions to test? I think it depends on what type of business you are founding. Daniel Tenner makes a distinction between “entrepreneurs” and “startup founders”. While the two terms may sound synonymous, Tenner says entrepreneurs are focused on making profits while startup founders view profits as secondary. By his definition, the David Karp of Tumblr and Kevin Systrom of Instagram, whose companies failed to produce much revenue but sold for billions of dollars, would qualify as “startup founders.” On the other hand, Steve Jobs of Apple and Michael Dell, the founder of Dell Computers, are but two of many “entrepreneurs.” They focused on profits right away. Another way to put it is: there’s the “moonshot” companies in Silicon Valley (God bless ‘em) and there’s the rest of the world.
More from Tenner:
The even bigger difference comes when considering the concept of closing the loop. A business is not viable until the loop between creating value, delivering it to customers, and being paid for it, is closed. For entrepreneurs, closing the loop is essential, the main task on their task list until it is done. There is no business until the loop is closed. For startup founders, closing the loop is often secondary, perhaps even toxic (since if the loop does not generate large profits as soon as it’s closed, funding will often dry up).
If you’re an entrepreneur focused on closing the loop, DDP is an excellent tool for helping to identify the critical assumptions inherent in a business plan. As originally laid out by Wharton’s Ian McMillan and Columbia’s Rita McGrath (paywall for full article), DDP says an entrepreneur should plan by working backwards from the financial end-goals in five steps:
- Specify the required profitability. Declare the financial outcome required to make the venture successful and worthwhile. Spend some time in Excel and use a reverse income statement that starts with the bottom line: profit.
- Estimate major cost factors. Lay out the entire customer experience by mapping out a consumption chain, from awareness of the product to purchase to use to receipt of services to disposal of the used up product. Use this consumption chain to lay out all the physical operations called for to deliver this chain, called an operations specification, specifying all the activities needed to produce, sell, service, and deliver a given product or service. This provides more detail as to what costs–both fixed and variable–will be, should the venture be pursued and it also helps uncover the underlying assumptions that have been made in building the plan.
- Determine required sales levels. Since you have the required profit and the costs in generating that profit, determining the required revenue is just simple math. From there, you will need to make sales price assumptions in order to arrive at unit sales figures. Then be sure to test those unit sales assumptions against market sizes, bottom-up analysis, and industry benchmarks.
- Isolate key variables and assumptions. Design check points where assumptions can be tested ahead of serious investment
- Periodically revise estimates and validate feasibility of projections. Iterate and circle back!
I can testify that taking such an approach is extremely effective in making the riskiest assumptions painfully obvious. Due to the results of some recent assumption testing, I am having to adjust my thinking on some projects in progress. From now on, I am going to build a DDP model as Step #1 in assessing a business idea. In some cases, DDP can shoot down an idea in a matter of hours, which is a blessing to an entrepreneur. For example, I heard a story of a team discovering that their business plan required 240% market share in order to be successful! Better to drop it and move on as quickly as possible.
Even if I don’t invalidate an idea in an afternoon, DDP helps me produce a well-thought-out list of assumptions. Now it’s time for Lean Startup! I can take that list, build tests to validate the riskiest assumptions, measure the results of those tests, and learn from the results. I can then adjust my DDP model as I adjust my thinking about the business idea.