The business community may remember 2016 as the year when crowdfunding surpassed venture capital in financial support for startups. The unbridled success of crowdfunding platforms such as Kickstarter, Profunder, Microventures and GoFundMe should not surprise anyone given that they open up a new path for entrepreneurs to rapidly prototype their ideas in front of real customers.
Kickstarter alone has seeded at least 8,800 new business ventures over the past seven years, including the lucrative and influential Oculus Rift. Many, but not all, of these project leads lacked a proper network of VCs and investors. The success of crowdfunding methodology is perhaps the best demonstration of the power of the hypothesis-based approach.
What Is Hypothesis-Based Innovation and How Do You Do It?
The Hypothesis-based approach to innovation consists of four steps:
- Formulate a hypothesis
- Design and run experiments to test the hypothesis
- Measure results
- Verify or discard hypothesis and return to step 1.
It may sound reasonable, yet it is rarely practiced in the business world. Instead, teams responsible for innovation often follow a solution-based approach preferred by local experts. In a solutions-based approach, a problem is defined and a solution proposed based on expert opinion. That solution is justified by reporting, then funded and it enters the market. As a result of gut-instinct or prior experience, the expert is convinced that their solution is the best way to solve the problem.
When asked to support their reasoning, experts can normally cite countless statistics and case studies that back them up, thanks to confirmation bias. Confirmation bias is the natural human tendency to perceive only the data that confirms initial assumptions. It requires a carefully structured experimental design to counter the effects of confirmation bias. The fact that this approach is so prevalent may also be at the root of a breakdown in innovation execution, as identified by McKinsey. They reported that although executives agree on the critical value of innovation, 94 percent are not satisfied with their own results and they lack clarity on how to improve the situation.
Hypothesis-based Innovation and the Lean Startup
If the hypothesis-based approach to innovation looks familiar, it’s most probably because it is closely tied in with two of the principles of the Lean Startup by Eric Ries. In his proposal for new rules to govern startup management, Ries introduced the following among his five principles.
- Validated Learning – Startups must discover their own unique pathways to making the business sustainable. This can be done by conducting iterative experiments, testing out each component of the founder’s greater vision for the startup.
- Build-Measure-Learn – Startups must turn dreams into marketable goods. Based on how customers respond, they can adjust, adapt, and build on what they produce. Through rapid and incremental iterations, startups grow more innovative, agile, and disruptive.
It’s to be expected that the first time a business attempts to do something it hasn’t done before it will make mistakes and not reach its potential. However, overcommitment of resources to failing projects and late corrections have doomed many commercial ventures. Given the new normal of hyper-competition and economic uncertainty across the globe, firms have a better chance of survival using the hypothesis approach. It creates a framework where companies can make serious mistakes as early and as cheaply as possible.
Lessons from The Medici Effect and What Matters Now
Two authors of management books in recent years have delved into the heart of innovation to reveal what works and what has been a persistent illusion in the market. Frans Johansson in The Medici Effect emphasizes the diversity of concept sources and intersectional thinking, while Gary Hamel in What Matters Now promotes innovation training for the entire organization. However, both agree that one of the most important practices that distinguish a company as more successful at innovation is the sheer number of attempts that are fully tested. Sometimes this is expressed as “Fail fast and learn fast.” In this case, “failure” is just a rhetorical device referring to the validation or refutation of hypotheses.
From this perspective, crowdfunding projects really ought to be even more commonly employed by the greater business community. Crowdfunding encourages innovators to find a first paying customer to prove out their concepts on, using a Minimum Viable Product (MVP). It’s a direct way to test MVPs in a real marketplace without overburdening company resources. Innovation, by its very nature, does not conform to rigid structures but emerges organically from a supportive environment and iterative experimentation.
If an organization can only do one thing to kick start innovation, their best option would be to start applying the above hypothesis-based approach in validated learning cycles. It can start on any level: from a single project (i.e. what underlying assumptions produced the hypothesis that this project is the best way forward?) to the macro-level of the company itself (i.e. creating a business model canvas, or BMC, to map out every unstated hypothesis behind your business model).
Only the best ideas can survive this kind of test.
How to Support Innovation
One time is no time. Nevertheless much is won by getting a flying start and therefor kick-starting complemented with a deeper understanding of the nature of the organization, and its capabilities for innovation multiplies the chances for innovation delivering success after success. Assessing the leadership, culture and capability is essential to uncover the true nature blocking, hindering or stimulation the process from ideation to commercialization. For this we developed the InnoSurvey™, ready to use free of charge in a simplified version or an extensive enterprise solution via our consultants or licensed practitioners in + 45 countries. From projects all around the globe we have learned that kick-starting in parallel with building the right capabilities, and building on the right capabilities, is what leads to success. Not necessarily the best strategy or the best idea.