September 28, 2021

Startup Validation Step 1: Identify your risks

Mark Taylor


We determined from our last post that startup validation does have a logical process with key milestones that should be hit on along the way.

“Innovation is an unpredictable and decentralised thing, but that doesn't mean it cannot be managed”

Eric Ries, Author of The Lean Startup

This post dives into detail about what that first key milestone actually is, and how to undertake the first critical step; identifying your risks.

Ready to roll? Then let’s begin!

This Article Contains:

Level 1: Problem Validation

The first level in our workflow is Problem Validation. If this is done correctly the founder will have reached an important milestone: ‘Customer-Problem Fit’.

This is far lesser known than ‘Problem-Solution Fit’ and ‘Product-Market Fit’ and herein lies the problem. Many aspiring entrepreneurs will start at the solution stage, without falling in love with the problem first.

Problem Validation has two distinct goals:

  1. To verify that the problem exists by speaking with real customers.
  2. Identify who your early adopters are.

To successfully move towards Customer-Problem fit, the very first step is to properly define the assumptions you have around the problem you’re solving, and who you believe your customers are.

Step 1: Risk Identification

All innovative ventures are riddled with risks, so we must begin with this key activity. Our previous post outlined that startups are searching for a business model as opposed to traditional businesses, that are optimising an existing business model.

Searching for a business model that works is essentially a process of de-risking (validating) the riskiest parts of the plan.
The good news is that risks for innovative projects (at a high-level) are the same. You may have used such tools as a Lean Canvas, which can aid with this process, and will be covered in further detail below.

Done correctly, identifying risks should also be combined with strategically mapping out your business model - this represents the first step for all startups.

What is a risk?

The Oxford English dictionary describes a risk as “a situation involving exposure to danger”.
When applied to a startup project, this defintion is a tad extreme...

A distressed man

At BizNest, we define a startup risk as “Any definable risk that relates to an innovative venture”.
Another word for a startup risk is a ‘hypotheses’, which is a fancy word for an assumption, and all innovative ideas start with a ton of assumptions.

Your job as an innovator is to systematically test these assumptions in the market and then learn about what parts of your assumptions are true, and which ones are false.

Fortunately, the core risks that relate to innovative ventures all fit into the same categories, and are therefore relatively easy to identify. Our favourite framework for this is the ‘Three Lenses of Innovation’.

The 3 lenses of innovation
Source: Medium

The three lenses are Desirability, Viability and Feasibility, and here’s what they mean:

  • Desirability: [Customer aspect]
    Are customers actually interested in what you’re building? In other words - Does your solution solve an important pain point for your customers?
  • Viability: [Business aspect]
    Is the business model that you propose viable? In other words - Can you create a profitable business by selling your product?
    Is the market size of customers large enough to support a viable business?
    Can you acquire customers in a repeatable and scalable way?
  • Feasibility: [Technical aspect]
    Is it technically feasible to create the proposed solution? Is it actually possible with the current team and resources to build your product?
    An automated-drone pizza delivery service might be a great idea - but can you actually create that? Who do you need in your team to make that happen?

The good news, is that we can categorise all risks for innovative projects into each one of these lenses.

'Detective Jake Peralta' from Brooklyn 99

Why does it matter?

So why is it important to identify the riskiest parts of your startup idea?

Well, all new businesses have risks. But innovative startups have considerable amount of risk, or uncertainty. The primary job of the founder/s in a new venture is to systematically validate these.

The risks that you have are directly related to your hypotheses, or assumptions.

For example if you wanted to create an app that connected free tables in bars to punters looking for a place to drink you would be assuming several assumptions:

  • That this is a problem both customers have - e.g. that punters want to know where free tables are in bars, and that bar owner’s want to attract punters to their free tables.
  • That this is a business that could generate revenue.
  • That the market is large enough to support a viable business (in other words, there are enough people that have this problem).
  • That you have the right team and resources to build this product and that the product is technically feasible to build.
Properly defining what the risks (assumptions) will enable you to accurately test these in the market, and move towards creating a viable business model.

How do I identify one?

Before we dive into our approach, it’s useful for you to understand what currently exists, and also give props to some existing tools in this space.

There are certain tools that have been created which help entrepreneurs to identify their risks, and simultaneously map out the business model:

The Business Model Canvas

The Business Model Canvas, by Strategyzer
Source: Strategyzer

The Business Model Canvas (BMC) was created by Alex Osterwalder & Yves Pigneur in 2005. The purpose of the canvas is to map all of the key areas a business must consider to be viable onto a single sheet, or ‘canvas’. It took the business world by storm as it provided a quick way to run a health check of any business by assessing the 9 areas outlined in the boxes above.
It has seen a good application in the startup world after Steve Blank recommended using it as an early step in his Customer Development framework.
Steve identified some of the boxes were hypotheses (risks), and these were specified as:

  • Customer Segments - who you believe your customers are.
  • Value Propositions - what you believe the value your solution can offer. [Desirability]
  • Revenue Streams - how you believe you will make money.
  • Channels - how you believe you can reach our customers.

Whilst this was a good approach, the BMC had some drawbacks in the application for the startup world. Some of the boxes on the canvas were really not that important for early-stage founders to consider, such as key resources and key partners.

The Lean Canvas

Ash Maurya was one of the first to notice and act upon the drawbacks of the BMC for early-stage founders. Whilst he recognised the value of showing the key considerations on one page, he felt as though the tool needed to be adapted to suit the startup’s priorities - enter the Lean Canvas:

The Lean Canvas, by Lean Stack
Source: Lean Stack

The Lean Canvas adopted the same design as the BMC but made a few key changes to some of the boxes. This was done to make it more ‘startup friendly’ and enable founders to focus in on the key things they need to validate to test the viability of their idea. The risks on the Lean Canvas are:

  • Customer Segments - same as the BMC but with the addition of an ‘early adopter’ segment.
  • Problem - what you believe the problem to be that your customers have.
  • Solution - the solution that you believe will solve the problem.
  • Channels - same as the BMC.
  • Revenue Streams - same as the BMC.

Currently, the emphasis for properly defining risks rests on the entrepreneur. This is fine if you’ve done this before, but in our experience founders (particularly first-timers) generally need a bit more support.

Our Approach

At BizNest, we’ve decided to make things a little easier for entrepreneurs by making two key adjustments:

Labelling risks for you

In our adapted version of the Lean Canvas we have specified which of the boxes are risks:

Understand the top risks that need validating with your startup

Visually, this approach makes it much clearer which part of canvas relates to risks, and which relates to value proposition or financials.
In our platform, we’ve also placed a visual indication of your venture as it relates to validating these risks - helping founders stay focused on the most important tasks.

Asking the right questions

We believe that asking the right questions is one of the most powerful things you can do as an entrepreneur, and defining risks with your startup is no exception.

So in our platform instead of asking you to list the assumptions that you have, we’ll ask you the relevant question. For example, when defining your Problem Hypotheses we will ask:

“What problem(s) are you trying to solve?”

In our editable canvas we also provide further guidance, including examples from successful startups. In this example, we like to use Airbnb’s:

“No easy way exists to book a room with a local person in a city I’d like to visit”
Our question-led approach makes it easy to define your assumptions

Showing all risks

No canvas currently exists in the market which shows all innovation risks on a single page. This is something were are developing so watch this space!

Key takeaway

Defining your risks properly will get you off to the best start to validating your startup idea the right way, as you will understand the areas that need to be tested for the business model to work.

What’s coming next?

If you’ve read our previous post, you will remember our 4-step validation loop. The repeatable cycle sets out how startups can validate their idea.

Well, to reach ‘Customer-Problem Fit’ this cycle applies, only now the steps are more specific to this stage:

This graphic shows the 4 steps to reach 'Customer-Problem Fit' in BizNest's platform
From Idea to ‘Customer-Problem Fit’

So what comes next? Yes, you’ve guessed it, the next post will be all about how to Plan and Run Interviews with potential customers.

If you’d like to sign up to our waitlist, and stay in the loop about future blog posts then please sign up below:

Until next time!
The BizNest team

The image shows a Llama bouncing away
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