How To Use Your Blog To Document Business Model Assumptions

In a previous post about minimum viable blogging I briefly discussed how a blog might transform into a potential product. I learned from several entrepreneurs and bloggers that they have had similar experiences.

So today I'm launching a small experiment taking this idea one step further. Here is how I'll use this blog to document our own business model hypothesis.

Business Model Customer Development

Simple structure of the business model testing scheme

As a part of some recent changes to this blog (moved to own domain), I have added a new structure that follows the Business Model Canvas.

This means that all posts will be categorized with one or more of the 9 business model blocks; customer segmentation, value proposition/product offering, distribution channel, customer relationship/demand creation, revenue models, cost structure, key activities, key partners, and partner development.

For subjects regarding external and competitive hypothesis I've added Strategy as an additional category. To this I attend to use Lean Startup and Customer Development techniques to develop our problem/solution hypothesis.

Why use a blog to test business model hypothesis

Why would I do this? First of all, I hope to share lessons learned in documenting business model hypothesis in the context of a digital startup. Posts will be living examples of how to do or not to do this.

Second, by documenting such hypothesis we'll be able to measure our own progress and decisions, and at the same time receive valuable feedback from fellow entrepreneurs as your self.

Third, by watching the emergence of methodologies such as Lean Startup and Customer Development, I believe that the social web has given breed to an academic sub-culture. I hope to contribute to such research in the field of entrepreneurial management.

For an example, we'd be able to see at what frequency which business model blocks are tested and if we'd need any additional blocks other than what the framework covers today.

"Speed Wins"

One major challenge though lies with broadcasting own ideas just about ready for any competitor to pick it up. However, as I do believe in the startup methods I here cover, "speed wins" is the winning argument.

Transparently documenting business model assumptions and receiving feedback from potential users would in principle be a source of advantage.

I hope to give fellow entrepreneurs a sense of what went wrong, what went right, and how to to better document business model hypothesis for their own business.

Update: Make sure to check out the Business Model Press WordPress plugin to begin "business model blogging".

What’s in a Startup Methodology?

Back when I did the transition from studying software engineering to entrepreneurship, one question kept coming to me - while methodologies are inevitable for successfully building software products, why isn’t there an integrated methodology for launching and taking that product to market?

Take for an example the Perpetual Beta and Spotify, a successful online peer-to-peer music streaming service. Spotify did not only use beta versions to test engineering requirements with early users – using beta-invites enabled Spotify to create demand for their service at the same time.

Software developers have been embracing agile practices such as Continuous Deployment for years, but merely from a technical viewpoint. I believe that the Perpetual Beta represents a new line of ambidextrous practices that not only enables a startup to plan, test and build – but also serve, distribute and market their product at a lower cost.

Astonishingly, methodologies that help entrepreneurs facilitate software product development alongside commercialization are still scarce. At the one hand there exist a variety of methodologies to manage risk in agile software product development, including Scrum, Extreme Programming and Adaptive Software Development.

However, none or few of these methods, to my best knowledge, encapsulate risk in commercialization. To simplify, think of it as Scrum + marketing (Scrumm). At the other hand traditional management practices have been argued not to fit the extreme uncertainty in startups, and often comes too short in terms of aligning with disruption driven by Internet technologies.

At the time I was also more than inspired by Crossing the Chasm that addresses the specifics of marketing disruptive high-tech products. But I still find the Pre-chasm phase left unintended. In my last post I wrote about diagramming the product-market fit, which I here have aligned with the Technology Adoption Life Cycle.

Pre-Chasm Startup Methodology

In many ways I think that new-product introduction is about ramping the Pre-chasm, where building and taking new products to market are not two separate activities.

Obviously a startup needs ambidextrous qualities. Working engineering and marketing in parallel will enable a startup to discover the holy grail of product-market fit – a key tenet with Customer Development and Lean Startup thinking. Together with elaboration on 37signals' Getting Real and Rework, I look forward to seeing what this emerging school of startup methodologies brings.

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Diagramming Product-Market Fit at Lean Startup

Continual iteration is a fundamental principle in agile thinking as well as in startup methodologies such as Customer Development and Lean Startup. Basically, its premise is that a startup will mitigate risk and uncertainty by shortening product and customer learning loops, and adjust its product-market fit accordingly.

A startup achieves product-market fit when it masters the balance of building a solution, or product that acts on a customer’s problem, or vice versa. Both product development and customer development each has its own iterative loop structure. I believe that the two should be reciprocally acting and proceed in parallel towards the goal of product-market fit and that this makes a multiple-loop system. This invokes an ambidextrous challenge to early-stage ventures.

Building on my former post on Disciplined Creativity with Mihály Csíkszentmihályi’s Flow diagram, I would add to the Lean Startup model.

The diagram above shows product-market flow as a result of efforts in parallel iteration between agile product development (at the y-axis) and customer development (at the x-axis). In order to achieve a product-market flow state, that is product-market fit, a balance must be struck between customer development and product development. If a startup is drifting too far along one of the axis without iterating, flow cannot occur.

I believe that iteration beyond the product-market flow zone could be considered pivoting - that is when you change a fundamental part of your business model in regards to products and customers. To successfully iterate between product and customers and achieve product-market fit, you would develop a minimum viable product offering that enables you to learn about your customers needs and wants.

At startup you must pay close attention not only to the iterative tasks within customer development and agile product development separately, but also to the feedback loops in between the two. However, time is limited, and you should be aware of trade-offs in achieving flow in a Lean Startup. This is where continual iteration and validated learning allows for greater risk reduction under extreme uncertainty.

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How to Design Your Business Model as a Lean Startup

If you spend time exploring innovation frameworks you know that their configuration to a large extent apply, assembly or build upon previous work (hat off to science). Here, I explore the conformity of two emerging frameworks: the Business Model Ontology by Alex Osterwalder and the Lean Startup methodology by Eric Ries. The result, the Lean Startup and Business Model Canvas pattern.

Osterwalder's Business Model Ontology proposes a single reference model based on the similarities of a wide range of business model configurations. The business model canvas (used as basis for the illustration above) describes nine building blocks that form a high-concept business model.

Eric Ries coins the Lean Startup, a methodological approach for creating and managing startups using principles of Steven Blank's customer development  methodology alongside agile development methodologies.

The Lean Startup Business Model adopts key principles from the Lean Startup (i.e. agile development and customer development) with the building blocks of the business model canvas. In his recent book, Business Model Generation, Osterwalder uses the notion of Design Patterns alongside the ideas of Christopher Alexander and Tim O'Reilly among others to describe common configurations of business model components. Hence, the Lean Startup Business Model Pattern.

The Lean Startup Business Model Pattern aligns the pillars that constitutes the Lean Startup methodology; customer development and agile software development as well as technology commoditization.

As illustrated in the business model canvas above, one key tenet with the Lean Startup methodology is the Product-Market fit, which optimally results from agile product development, the solution offered, to match with customer development, the problem that is solved for a customer.

The Customer Offering or Value Proposition component of the template can be understood with the Minimum Viable Product concept used with Lean Startup method (see also whole product or doughnut diagram in Crossing the Chasm). The Customer Segments in which the Minimum Viable Product is offered, typically is characterized by early adopters or lead users in the social system.

Eric Ries also speaks of how free and open source software (FOSS) availability and user generated content reduce startup costs. This is typically allocated the Key Resources component. That is, technology leadership is a key resource to a Lean Startup. Similarly, open web hosting services are recognized with the Partner Network component. As is convenient search engine marketing with the Distributions Channels component. Social media supports the Customer Relationship component, enabling user-generated content, viral loops, and interaction with customers.

Data-driven approaches based on customer-centric metrics applies to Distribution Channels, but can be considered a key activity as well. Among the Key Activities are agile software development methods and techniques, and use of metrics (e.g. Dave McClure's AARRR, Startup Metrics) to help a startup measure performance and adjust its direction accordingly.

Although “listening to customers” is considered a technique within the agile development methodologies, this is central not only to customer development, agile development and the Lean Startup – it is also central to Business Model Generation (Emphatic Design), disruptive innovation (Jobs-to-be-done), lead user innovation, and voice of the customer among other customer-centric innovation frameworks.

The conformity of the frameworks is not straightforward though. One challenge is that the level of abstraction differs - think numerator and denominator. How to distinguish between tactics, process, strategy and concepts herein? According to Steven Blank’s customer development methodology (slide #29 in this presentation), product development and customer development can be viewed through the tactical lens, while the business model view could be viewed through the strategic lens. Osterwalder understands business models as a facilitator between business processes and strategy. Myself, I would start from the premise that strategy or goals often come as consequence of continuous learning in early stage ventures where resources are scarce and uncertainty is extreme.

Another challenge is how to make the pattern illustrate iterative development and internal feedback loops that are fundamental to the Lean Startup methodology. When working with models and methodologies there is a general challenge in uniting behavior (process) and structure; to what extent the two frameworks are integratable in terms of methodologies and notations.

Borrowing from areas such as software engineering and system dynamics, future work would envision a tool that aid in rapid entrepreneurial learning and aggregates key metrics in order mitigate risk in new-product introductions.

Further discussion should consider which principles from the Lean Startup methodology that should be included in the Business Model Pattern and where they belong. Coming up, I will address how a startup could use this pattern to validate their business model as a part of their lean methodology. Stay tuned.

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