Startups Should Test and Learn Their Way to Success

I’ve been involved with 51 startup tech companies as a founder, executive, investor or consultant since the 1980s. Most were entrepreneurial startups but a few were “intrepreneurial” businesses inside Fortune 500 companies. The primary difference between the startups that succeeded (achieved the objectives of the founders or leaders) and the startups that failed, was how their leaders resolved the key decisions that make or break a startup business: what products or services to develop, which customers to pursue, which business model to implement, how much to spend on different initiatives or functions in the company, how to fund growth, and so on.

The approach that worked best in my experience with these startups was “test and learn.”

How does a startup test and learn? How do you know that your testing and learning efforts are focused on the right issues, have the right metrics, and yield the right answers? The founders and investors in a startup are in a hurry, so how can startups test and learn really fast?

The most complete answers to these questions that I’ve seen are in Eric Ries’ book, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. By following the “Build-Measure-Learn” process explained in Ries’ book, startups can get continuous feedback from the market, so that they can decide whether to continue with their current plan or “pivot” into other directions. Build-Measure-Learn becomes a cycle with a built-in feedback loop that improves the quality and “rightness” of decision making.

When I co-authored Building Routes to Customers in 2009, I had been applying the Routes-to-Market (RTM) methodology to help managers and executives make these same decisions more systematically and successfully for over a dozen years in both large companies (IBM, Microsoft, HP, Cisco) and small companies (Knoa, e-Smith, ShoreTel, HaloSource). When first-level managers in these companies were empowered to work as a cross-functional team and use RTM to make these decisions in their businesses, they outperformed the previous results in their businesses, turned around troubled businesses, and/or launched impressively successful new businesses. The RTM and Build-Measure-Learn methodologies have many things in common, but the linchpin is test and learn.

So how do you test and learn your way to success?

  • Step 1 is to develop an hypothesis about how customers will act when you provide a new or changed product or service to them.
  • Step 2 is to measure how the customers really act.
  • Step 3 is to analyze the information from the measurements and determine what the impact was on the customers’ actions. For example, did current customers buy more, or did new customers buy for the first time. Other kinds of change in customers’ behavior might be more important, such as telling their friends or colleagues about your product.

You need to test and learn scientifically, not subjectively.

Testing requires discipline, not the chaotic thinking of the founders of many startups. Learning requires an open mind that’s not wedded to the assumptions of the startups’ leaders. Test and learn is the yin and yang of making the decisions that drive success.