How to Use Thought Experiments to De-Risk Your Startup
“In preparing for battle, I have always found that plans are useless but planning is indispensable.”
- Dwight D. Eisenhower
In the early days of building a company, it’s hard to step back and think about the bigger picture when there are always so many fires to fight or opportunities to chase down. That’s a shame, because looking at your business from a 50,000-foot view often reveals areas of misplaced focus or resource misallocation.
One technique that can break through the bubble of always being in the weeds is conducting occasional thought experiments that give you insight into your company. This post is a catalog of sixteen useful thought experiments. Each experiment consists of a thought-provoking question and an explanation of that question’s purpose/motivation. Most of these thought experiments require a different frame of reference on your company — either from the perspective of another person or another time period. Many of the experiments directly correspond to the risk categories discussed in my previous post, How to De-Risk a Startup.
Caveat: some of these experiments are aimed at seed stage b2b startups, but most are applicable to the majority of startups.
Looking at the present
How do competitors view you?
🤔 Think about your 2–3 closest competitors. If you asked their CEOs to truthfully describe your company’s strengths and vulnerabilities, what would each of them say?
Motivation: Competitors will view you differently based on their traction, their leadership, and their own strengths and weaknesses. For the most part, your competitors are not dumb and they are not just going to lie around waiting for you to steamroll them. Looking at yourself from their perspectives can give you a better sense of your own company’s strengths and weaknesses.
Are you ready for a Series A?
🤔Imagine you suddenly have access to an additional $10m of capital to scale your business. Would you know what to do with it? If not, what would you need to figure out before you could make good use of more capital?
Motivation: Most Series As provide capital to double down on what’s working. If you’ve figured out some good strategies for sales and marketing and need to staff up in those departments, or if your engineering team is struggling to keep up with paying customers’ feature requests, then those are good reasons to raise more money. If you need more capital to keep the company alive but don’t have a clear plan for using that money then you’re probably not ready for your next major round of financing.
The other side of the table
🤔Imagine that instead of being the founder of your company, you’re an investor who doesn’t know anything about the company or the market it’s pursuing. What would you want to know to understand the business? What questions would you ask? Where would you be skeptical? If you invest in 1%-2% of the startups that you research, what would get you excited enough to invest here?
Motivation: It’s easy to forget that other people — including investors — know much less about your business than you do. Your pitch should be designed to get investors excited about the opportunity and to allay concerns they might have. Thinking about your company from a layperson investor’s perspective can help you understand which aspects of your company should be emphasized and which ones need longer explanations.
The debate from hell
🤔You’re in a debate competition. The subject of the debate is the viability of your startup (whether the problem being addressed is legit, whether the market is big enough, whether your approach is right, et cetera). You’re taking the “pro” side and an award-winning debater is taking the “against” side. Your opponent does their best to rip your idea to shreds. What arguments does your opponent make? How do you respond?
Motivation: during first meetings, most investors are looking for “reasons to say no.” An investor might only invest in 1% of the companies they see, so a typical investor process is to pass on >80% of pitches quickly so that more time can be spent on the remaining 10–20%. Considering your startup from the point of view of someone who is (initially) trying to dismiss your idea can help improve your pitch and address its weaknesses.
Looking back from the near future
For the following thought experiments, pretend that you’re looking back on your company one year from now.
Was your MVP truly minimal?
🤔You’ve hit product-market fit. One of your learnings is that your Minimum Viable Product ended up going far beyond “minimal.” Which features could you have left out?
Motivation: People often overestimate what’s required for an MVP. An MVP can be as simple as a founder armed with a cell phone and a spreadsheet. Stepping back and thinking about your product from a future perspective might give you ideas for what you can cut before launching. The sooner you launcher, the sooner you can learn about what your customers really want.
Stomach-churning churn numbers
🤔Half of the customers that signed up last year decided not to renew their annual contracts this year. Why did that happen? What parts of your product/service/customer experience made them leave?
Motivation: Once they starting booking revenue, companies sometimes over-focus on growth while neglecting engagement and retention. Thinking about why users might not renew can help avoid churn issues before they become serious.
The missing key
🤔You realize your company would’ve made a lot more progress if you had hired earlier for a key role. What was that role? What were the signs that you should’ve hired someone for that role a little sooner?
Motivation: Because time and money are so limited at most companies, founders will often take over jobs they’re unfamiliar with in order to keep costs manageable. That might mean the CEO is doing sales despite coming from engineering background, or it could mean the CTO is doing basic company accounting. Wearing many hats is a necessity at startups, but sometimes you need to hire a professional for a certain hat. Thinking about the “appropriateness” of what founders and employees are doing each month can uncover areas where additional full-time or part-time hires are necessary. There are often early warning signs that some function is being handled very inefficiently or even dangerously.
Laughed out of the room
🤔You recently started your fundraising process. One of the most respected funds that you talked to (e.g. Sequoia, Benchmark, etc) said your pitch is one of the worst they’ve heard all year. What made them say that?
Motivation: The earlier “debate from hell” thought experiment was about looking for flaws in your business plan. This experiment is about finding flaws in your pitch, like claims that are true but which sound crazy or implausible, or ideas that require much more explanation than what you typically offer.
Sunk Cost Fallacy
🤔As you look back on last year, you realize you spent too much time on several initiatives because of sunk costs. What were those areas, and what were the signs that you should’ve cut your losses instead of continuing to waste more resources?
Motivation: People are prone to continuing dead-end projects because they’ve already invested so much time and effort into them. This is especially dangerous at startups, which have very limited time to reach key milestones before running out of money. This thought experiment is designed to help you see if sunk costs are causing you to waste your time.
🤔As you look back on last year, you see periods of time where your company focused on the wrong things. Reflecting on these periods, you realize that you overlooked many signs that your resources were being wasted. Where did you waste your time and what were the signs that you should’ve been working on something else?
Motivation: Sometimes you miss signs that things aren’t working. Maybe engineers keep going to Google or Twitter instead of accepting your job offers, or maybe very few customers agree to see your demo after an initial discovery call. When you’re scrambling day-to-day, you might think, “if 5% of people want to see a demo, then I should call at least 40 people daily.” Months later, you realize that the low demo rate was a sign that your product didn’t fit the market’s needs. It’s helpful to step back and ask yourself if the things that you’re struggling with today are a sign that you need to optimize or double down on your processes, or if they’re a sign of something more significant, like working on the wrong product or targeting the wrong job candidates.
Looking back from the distant future
For the following thought experiments, pretend that you’re looking back one your company 5–10 years from now.
Unexpectedly large market
🤔You’re company is very successful at this point, and you’ve learned that your target market is actually 10x bigger than your original estimate. Where did the extra market size come from?
Motivation: This experiment might help you see opportunities in selling to adjacent target audiences, or selling additional products to your existing target audience.
Unexpectedly small market
🤔Your company’s growth has plateaued, and you’ve learned that your target market is actually 10x samller than your original estimate. Why did the market initially seem so much bigger than it actually was?
Motivation: This is a good way to scrutinize how many people have the problem you’re solving, and whether the problem is severe or mild. It’s tempting to throw out impressive market size statistics, but sometimes numbers are misleading and you waste years of your life chasing a market that turns out to be unattractive.
The world of the future
🤔How does the trajectory of the world over the next 5–10 years align (or misalign) with what you’re doing? Which trends will help you and which trends will hurt you? What’s the expected timeline for those trends?”
Motivation: an idea that is good or bad today might look very different 5–10 years from now. For example, solving parking problems is a big deal in 2016, but perhaps fleets of autonomous vehicles will eventually make parking garages obsolete. Thinking about relevant trends can help you pursue the optimal path for your company. It would be a shame if you found a solution to a major problem and started scaling your company just as technological or regulatory or social trends made that problem disappear.
The badass competitor
🤔Elon Musk, no longer content with developing solar-powered autonomous vehicles that roam the surface of Mars, decides that his next company will be a direct competitor to you. What barriers to entry and competitive moats have you built up that will keep Elon’s efforts at bay?
Motivation: A lot of founders think their special sauce is how well they execute. The problem is that almost everyone thinks they have superior execution skills. Thinking about what you would against competition that executes even better than you can provide clarity about your true strengths, as well as how you can apply those strengths to build a strong competitive moat around your company.
The nightmare competitor
🤔After you raised your $100m Series E, a lot competitors emerged. Everyone wants a piece of your pie. Most of these competitors don’t worry you, except for Company X. Company X has tons of cash and is in a particularly strong position to compete with you. What makes them so formidable?
Motivation: There are often one or two companies that would be particularly intimidating as competitors. These companies might have great access to your target customers, tons of world-class talent, or a product that lets them get between you and your users and slowly take over your relationship (e.g. how Google uses its search engine to highlight its own reviews at the expense of Yelp and TripAdvisor). It’s important to be mindful of the companies that are best positioned to compete with you. These companies might not care about your market today, but they could change their minds in the future once your company has reached an enviable size. Knowing which companies to be cautious of can help you plan and set up barriers that prevent those companies from pursuing your market.
The disgruntled competitor
🤔After almost a decade of working together, you just had a falling out with one of your key execs. They quit their job and decide to start a company that will put yours out of business. What actions have you taken over the years to address this threat?
Motivation: This is subtly different from the “fearsome competitor” scenario. That scenario is focused on realistic worst-case competitors. This scenario is focused on the hypothetical worst-case competitor: someone with funding, a chip on your shoulder, and insider knowledge about everything related to your company.
How to use these thought experiments
While not all of these questions will apply to every company, it’s a good exercise to think about them one-by-one. By analyzing your company from different perspectives and asking yourself challenging, through-provoking questions, you’ll be able to have a better understanding of your strengths and weaknesses, areas where you might be mismanaging your resources, and future opportunities.
The best way to get value out of these thought experiments is to occasionally pick a question and think about it for 5 or 10 or 30 minutes. If a train of thought proves useful, discuss it with your coworkers and revisit the question every few months.
I hope you will find these thought experiments to be a helpful exercise for moving your company forward. If there are other thought experiments that have been valuable for you, please let me know on Twitter.
Originally published at codingvc.com.