THE 3 UNDERLYING PROCESSES OF ENTREPRENEURSHIP

“The dignity of the movement of an iceberg is due to only one-eighth of it being above water.”

—Ernest Hemmingway

KEY DEFINITION

Underlying Processes: The processes an entrepreneur utilizes to build every component of an entrepreneurial mission.

It’s not enough for our carpenter from the previous example to learn how to learn. No matter how good he becomes at learning about carpentry, or how well he understands what good carpentry looks like, until he can actually apply the core processes of carpentry to create great results, he won’t be a very good carpenter. For our carpenter, using a saw, hammer, and drill effectively will enable him to complete many critical tasks. Getting really good at those core processes will help him be more successful, more quickly.

Entrepreneurs must also become experts in their own core processes. To build the most successful entrepreneurial mission, entrepreneurs must maximize the performance of many different systems working together. To do this well, quickly, entrepreneurs must become experts in the application of three processes to the construction of all the elements and systems that make up your entrepreneurial mission: iterative design, turning assumptions into facts, and effective communication.

Process 1: Iterative Design

“I have not failed. I’ve just found 10,000 ways that won’t work.”

—Thomas Edison

KEY DEFINITIONS

Iterative Design: The process of improving design through a continuous cycle of development, testing, and analysis.

Alignment: The process of optimizing the net result of how different business components work together.

Filtering Feedback: The process of determining how to apply the information you collect.

Minimum Viable Product (MVP): The most cost-effective version of a product or service that you can create to get customer feedback to test your assumptions.

If you’ve ever written a long paper or scripted a presentation, you’ve likely practiced iterative design even if you never referred to the process by name. To create a high-quality paper, you likely created a rough draft, read it, edited it, made another draft, read it, and kept improving the paper to find the optimal result, or the best result you could create in the time allowed.

Each time you reviewed a draft, you likely reordered many of your arguments, such that if you began with arguments A, B, C, D, and E in that order, you likely reordered concepts and realized that when you moved one point to one section of the paper, you had to move another point somewhere else for the paper to make the most sense. You may repeat this process by creating several different iterations of the same paper with different orderings of the key information:

The Evolution of Your Paper

	1st Point	2nd Point	3rd Point	4th Point	5th Point
Draft 1	A	B	C	D	E
Draft 2	A	C	B	D	E
Draft 3	A	C	D	E	B

Throughout this process, you may realize that additional information could make the paper more powerful, or that certain information is redundant or best left out, leading to a much improved paper that looks, at first glance, quite different than the original:

The Evolution of Your Paper

	1st Point	2nd Point	3rd Point	4th Point	5th Point
Draft 1	A	B	C	D	E
Draft 2	A	C	B	D	E
Draft 3	A	C	D	E	B
Draft 4	A	X	C	D	Y
Final Draft	Z	X	C	D	Y

Entrepreneurs use this same process of building, evaluating, and rebuilding to optimize any entrepreneurial mission, and they refer to that process as ‘iterative design.’ Entrepreneurs must optimize the way that many different, moving parts work together in a changing environment. In this uncertain and complex environment, entrepreneurs must utilize their scarce resources to create something valuable to the marketplace. Most entrepreneurs fail because they spend too much time working on things that don’t add value or have them going in the wrong direction. The best way to combat that uncertainty and make real progress is to apply an iterative design process to constantly analyze and improve your mission.

The path of progress is generally forward, but it is rarely a straight line. In entrepreneurship, it is more often a process of two steps forward, one step back, three steps sideways, and a well-executed hop. By continuously piecing together all the critical components of your mission, evaluating it in its entirety, and redesigning it based on that evaluation, you will arrive at the optimal solution in the quickest way at the lowest cost.

KEY DEFINITION

Cycle to Nowhere: Continually reiterating without getting closer to an optimized result.

In The Lean Startup, Eric Ries divides the iterative process into three sequential steps, each performed in a continuous loop of improved development:

1. Build (or Rebuild): Creating an iteration of your product.
2. Measure: Collecting data on your product’s performance.
3. Learn: Analyzing the feedback and data you have collected to create a better iteration.

Eric’s analysis is a great description of the way to optimize a mission that is already actually creating a product or service. However, in the earliest phases of entrepreneurship entrepreneurs are still trying to figure out what to build, but they should still apply the iterative process to the development of their idea. When you are still in the idea phase, we only slightly modify Eric’s process to more accurately describe what you are doing:

1. Build (or Rebuild): Creating an iteration of your concept.
2. Evaluate: Collecting feedback on your concept.
3. Learn: Analyzing the feedback and your own analysis to create a better iteration.

For entrepreneurs to succeed in the iterative process, they must successfully learn with each prior iteration more of what does and does not work. If entrepreneurs do not successfully collect data and learn from it, then they will keep randomly building new iterations that will not be any closer to the optimal result. When rebuilding doesn’t make progress, entrepreneurs become stuck in a cycle to nowhere: a repeated development loop that makes no progress.

To successfully navigate the iterative process and avoid getting stuck in the cycle to nowhere in the earliest stages of entrepreneurship, you must get very good at collecting, filtering, and analyzing feedback. To collect feedback, you must engage the right people with each iteration of your idea and collect their responses. In this process, you must figure out very quickly what to do with the feedback you receive. There are three options for processing feedback:

1. File It Away: Some feedback isn’t helpful and would best be ignored or filed away. You must move quickly, and you can’t waste time on feedback that is extremely unlikely to be valuable to you. If you get feedback from a source who isn’t a potential customer or partner of your mission and who doesn’t have expertise on the topic, kindly thank the person but file it away. If you keep getting this feedback from other people too, then there might be an opportunity to improve your concept or your messaging to address the issue. Otherwise, don’t let it affect your decision-making—whether it supports or opposes your existing strategy.

2. Follow It: If the feedback comes from a potential customer or someone with relevant expertise and does not require a significant departure from the direction you were already going, follow it.

3. Investigate it: If the feedback comes from a relevant expert or potential customer but requires a significant shift in strategy or is in opposition to other expert advice or market research, you should investigate that issue further before making a decision.

As you move from the idea phase of your mission to the actual creation of its tangible results, the process of iterative design accelerates, because the quality of the feedback you can get drastically increases. No matter how good you are at having hypothetical conversations with customers, you can get much more data with actual customer interactions. And as soon as you are able to create versions of your product or service, the sooner you can more easily measure performance to guide your decisions.

In the early phases of entrepreneurship, the goal is to get to that point where customers can interact with a version of your product or service in a meaningful way as quickly as possible. The cheapest version of your product or service you can build to get that valuable feedback is your minimum viable product, or MVP. All entrepreneurial missions benefit from the execution of a well-designed MVP.Your MVP, like everything else you do, should be built to research assumptions that will significantly affect the nature of your next iteration.

Process 2: Turning Assumptions into Facts

“In God we trust. Everyone else must bring data.”

—W. Edwards Deming

KEY DEFINITIONS

Assumption: An unproven belief about why things are or will be a certain way.

Fact: An undeniable truth.

Validation: The process of turning assumptions into facts by gathering evidence.

*****

Suppose you’d had a stomachache for a couple days so you went to the doctor’s office. You waited for the obligatory hour beyond your appointment time and once the doctor was ready, you walked back to the examination room and hopped on the table. Once the doctor walked in, you began to describe your symptoms but the doctor shushed you, telling you that she was the doctor, not you.

She then began conducting an examination. Checking your nasal passages, poking and prodding your body, taking your temperature, and releasing a series of ‘hmphs’ and ‘uh-huhs.’ Seemingly finished, the doctor stepped back, paused for a moment while looking you over once more, and told you “We need to amputate your foot.”

You would understandably be confused. You might protest that your foot didn’t hurt, that you just came in because you had a stomachache, and that you didn’t really believe that you needed to have your foot amputated. But the doctor again reminded you that she’s the doctor, not you.

So you might ask for some sort of evidence that you need your foot removed. You might ask what symptoms made the doctor reach that conclusion. You’d probably ask to see an x-ray or MRI or some sort of actual test results that verified the doctor’s hunch. But the doctor refused to give you any of that information, told you to trust her, and booked you to have your foot amputated.

Would you trust that doctor?

*****

We certainly hope not. You’d probably want a second opinion because you would never do something as serious as removing your own foot without some sort of evidence that it was necessary to remove it. Unfortunately, many entrepreneurs expect other people to part with their own money, time, or other resources to support their entrepreneurial missions based on no more evidence than ‘because I said so.’ These entrepreneurs fail.

Entrepreneurs must execute their missions in a state of uncertainty: uncertainty of future market conditions and uncertainty of the optimal construction of their startup to thrive in those conditions. In this environment of uncertainty, entrepreneurs must make assumptions about what they think the market will look like, what the market wants, and what they can actually do. The more accurate their assumptions prove to be, the more likely their mission is to succeed.

The process of verifying and improving assumptions is ‘validation.’ You must take the time now to validate your critical assumptions so that you have the best possible chance of launching the optimal mission. Even with all the validation in the world, it is likely some of your assumptions will still prove to be inaccurate, however they should be much closer to the optimal startup than they otherwise would have been, and enable you to make a successful course-correction rather than leaving you so far from the optimal startup that you run out of resources before your mission succeeds.

Assumptions are unproven beliefs. An assumption is something that you based your own performance on that isn’t a certainty. An assumption sounds like ‘the market will grow ten percent each year for the next five years.’ An entrepreneur must make assumptions to launch an entrepreneurial mission, but some assumptions are better validated than others.

A fact is an undeniable truth. A fact sounds like ‘according to our research, the market grew ten percent each of the past five years.’ While the future is never certain, the distance between assumptions and facts can be narrowed through research and critical reasoning. We call this the process of validating assumptions, or turning assumptions into facts.

In the process of turning assumptions into facts, you will find that some of your assumptions were wrong, some were somewhat wrong and somewhat right, and some were right. In all these instances, you will have the ability to improve your idea or your ability to persuade other people of its grandeur by gathering evidence to support more accurate assumptions. The more accurate your assumptions are, the better your chances of success.

When we analyze the data supporting an assumption we place it on a spectrum from assumptions to facts. On one end of the spectrum we have what are essentially wild guesses, and on the other end we have facts about what is already happening. We divide this spectrum into four main sections from wild guesses to facts:

1. Your Intuition: Your own beliefs, independent of evidentiary support.

2. Secondary Market Research: Research compiled from historical market actions and outside expertise.

3. Interactions With Potential Customers: Feedback from potential customers of your startup.

4. Actual Customer Behavior: The actions of existing customers of your startup.

Section 1: Your Intuition

Entrepreneurs must develop a sixth sense for what people want, what people mean, and what the future will bring. The challenge for many aspiring entrepreneurs is that they trust this intuition wholeheartedly and don’t bother to challenge it with evidence from the market. Daily, aspiring entrepreneurs walk through our doors and spout out assumptions that they incorrectly consider facts. They see things like “everybody knows” or “everybody hates” and then they say something that we don’t know or don’t hate.

Good data fuels good intuition. To give yourself any chance of building a successful startup, and to not sound like a total amateur in front of everyone else, you must work your way up the spectrum of validation.

Section 2: Secondary Market Research

The second section of the spectrum from assumptions to facts consists of secondary market research. You can search databases, read great market reports, or analyze all the data you can find. This sort of research is useful for shaping the key hypothesis your business will rest on, or giving meaning to things your business might be seeing, but this is a very low level of validation. This sort of research is most valuable when used to support, amplify, or illuminate work in the field.

Section 3: Potential Customer Interactions

The third section of the spectrum from assumptions to facts consists of market interviews. By interviewing potential customers you will get closer to the information you need to validate the main hypotheses driving your business. Many entrepreneurs pursue this knowledge in surveys or questionnaires, but we strongly encourage you to sit down with potential customers and have meaningful conversations about their needs and your startup. You will learn much more from a good conversation than dozens of excellent surveys.

Section 4: Actual Customer Behaviors

The fourth section of the spectrum from assumptions to facts consists of actual interactions with your customers. This could be anything from customers using a product for free, to a paid beta, or an actual full launch of your product. That information will always be the most valuable, and is a core component of what makes your mission successful.

We encourage entrepreneurs to engage in this process and spend more time talking to customers than thinking with themselves or their teams. Most entrepreneurs make the mistake of spending about 80 percent of their time thinking about their idea and 20 percent of their time talking to customers, when the reverse would be a more valuable use of their time.

As you work to turn your assumptions into facts, target the assumptions that will have the most impact on the success of your mission. The quicker you can turn your assumptions into facts, the quicker you can launch your startup from a validated, solid understanding of the market.

Process 3: Effective Communication

“Simplicity is the ultimate sophistication.”

—Leonardo Da Vinci

KEY DEFINITIONS

Simplification: The process of making concepts easier to understand.

Concision: The process of shortening the time it takes to communicate a point.

Persuasion: The process of convincing others to agree with your viewpoint.

Have you ever watched a politician, having been asked a seemingly straightforward question worthy of a straightforward answer, launch into a confusing monologue full of acronyms, hypotheticals, and political jargon that all serve to lock away more information than they convey? When the politician finishes the long-winded, self-serving response, what’s your reaction? If you’re like most people, you probably draw one or more of the following conclusions:

1. The politician is hiding something.
2. The politician has no idea what he is talking about.
3. The politician has no interest in actually communicating with people outside of his area of expertise.

None of the above conclusions is good news for the politician, which is why they work so hard to communicate the information they want us to remember in simple, short, significant phrases, and when they don’t want us to focus on something they suddenly start speaking in tongues.

Unfortunately, many entrepreneurs explain their missions no better than nervous politicians and wind up unable to access the help and support that they need to make their missions successful. To launch a great entrepreneurial mission, you need other people’s time, knowledge, and resources. To access those resources, you must effectively communicate your mission to them. Effective communication is three parts: simple, short, and significant.

Component 1: Simple

True mastery of a complex subject is demonstrated by communicating it simply. Many entrepreneurs feel compelled to show off their understanding of complexity by explaining it complexly: using industry specific language, focusing on minute details, and showcasing as much knowledge as they can cram into their allotted time. These complex explanations, rather than exciting the audience, turn the audience off just as a similar explanation would frustrate you from your congressional representative: the audience will conclude that you don’t understand your topic well enough to convey it simply, that you are hiding information, or that you just don’t have the ability to connect to people who don’t share your expertise. All of those conclusions mean you will likely fail.

The best entrepreneurs take big, ugly, complicated problems and create elegantly simple solutions. A simple solution does not mean an easy solution to think of or create. A simple solution means a solution that solves the problem in the best way. It is the entrepreneur’s responsibility to understand it so well that the entrepreneur can explain it simply to people from all backgrounds. A simple solution requires more work, more thought, and more intelligence on the part of the entrepreneur.

No matter how complex your idea might be, you must understand it well enough to convey its basic meaning to people unfamiliar with your industry or the problem that you solve. At The EC, we make our own startup companies pitch to high school students. We put our entrepreneurs through that process because we know that they will have to think about their mission more critically, and understand it more deeply, to have any chance of conveying its meaning to young students. The team that students like the most often has an idea that seems, at first glance, like it would be much more difficult to explain than the other ideas. However, or perhaps because of that, the entrepreneur put more effort into explaining it simply. The difference between simple communication isn’t the complexity of the idea. The difference is the skill and effort of the entrepreneur.

Component 2: Short

Entrepreneurs must convey a lot of meaning in a short amount of time. By being able to convey more information in a shorter period of time, entrepreneurs are better positioned to engage others for assistance or support, whether they are customers, mentors, investors, employees, or anyone else who might be able to help them succeed.

In a mentor meeting, an aspiring entrepreneur might get upset when a meeting seems like a waste of time. The entrepreneur might even reach the conclusion that the mentor didn’t know anything, couldn’t help, and shouldn’t be advising startups. Certainly there are times that mentor meetings are less successful than they should be because of a bad match or a bad day.

However, 99 percent of the time, the reason the meeting was fruitless was because the entrepreneur failed to explain what the entrepreneur was trying to do. In those instances the entrepreneur usually spent the meeting rambling in a disorganized, incoherent manner for the entire meeting, and the mentor had to spend the entire meeting trying to understand what the entrepreneur was doing rather than mentoring the entrepreneur on what the entrepreneur was doing.

A more effective entrepreneur would have successfully conveyed the idea in the first 10 percent of the meeting so the mentor could spend the remaining 90 percent in a constructive dialogue. If you communicate more effectively, quickly, then you will more successfully connect to the assistance of others. You will also strengthen your own understanding of the business, because, as Emerson said of communication, ‘it takes a great while to make it short.’

Component 3: Significant

You must say things that are significant to your audience if you want to galvanize their support and call them to action.

Entrepreneurs must galvanize the support of mentors, investors, customers and partners. To do that, entrepreneurs must explain their businesses not only simply and briefly, but also persuasively. Part of persuasion can certainly be tied to delivery: The enthusiasm the entrepreneur shows for what the entrepreneur is saying or talking about. But much of persuasion is more tactical: It is the delivery of the right information to the right people. Some audiences will be more moved by certain information than others. The better you understand your mission and your different audiences, the better you can craft your message to persuade more people to believe what you believe.