Questions addressed in this post:
- How do I choose between startup alternatives?
- How long before startups reach profitability?
- Which startup idea is best?
All of these questions require a second question: “how complex is each startup idea?”
In “Lean Startup“, Eric Ries defines “runway” as the number of pivots a startup has remaining before it runs out of cash. This implies you could calculate a startup’s funding requirements by estimating the number of required pivots (provided the cost per pivot can be estimated, possibly from burn rate and frequency of “pivot or persevere” meetings).
A startup would only need to pivot when it realizes one of its key assumptions is wrong; for example, if the value hypothesis is invalid and nobody wants to pay. This is realized when the actual metrics don’t reach the target metrics, despite optimization attempts.
Ideally, a startup would pivot along until it finds the nearest viable model (which may no longer be an innovative one), but as Ries suggested, every pivot might be a startup’s last as it eats runway.
Since these costly pivots are caused by assumptions, it follows that the risk, complexity, and cost of a startup must be largely determined by the number of founding assumptions:
First-order startup complexity ∝ # of founding assumptions
A zero-assumption startup would be purely replicative: selling the same product to the same market under the same conditions as an existing successful business. Each additional assumption — such as those related to problem, product value, growth, or competition — creates a potential pivot, which increases expected startup risk, complexity, and cost.
Since every key assumption must be correct to successfully implement the founding vision, the probability of success is proportional to the power of the number assumptions:
Probability of success ∝ c(# of key assumptions)
The chart illustrates a simple example. The chance of a startup eventually succeeding is higher than shown because it can pivot around a wrong assumption.
Since the reality of business requires selecting from among competing opportunities, carefully counting founding assumptions may be a useful evaluation tool.