The scientific method for venture creation and growth

Daniel Saunders

Chief Executive Officer

Photo by David Travis on Unsplash

The era of cheap, plentiful cash is behind us. Economic uncertainties have taken their toll, and global venture capital has dramatically dropped in the first quarter of 2023, down 53% YOY.

While tightening the purse strings will stop investors from throwing money into risky, unprofitable startups, there’s concern about its impact on innovative ventures that need financial support. But in reality, this isn’t the big threat to early-stage innovations–the method used for venture building is. 

Over recent years, startups have relied heavily on funding to compensate for a lack of business validation and sustainable growth. Fortunately, there’s a systemic approach to creating viable innovations, leading to quicker profitability and greater prospects of attracting investment if required.

The science of building businesses

The scientific method of business building is so effective because it addresses one of the main causes of business failure: flawed decision-making. Humans are prone to irrational thinking, biases, and incorrect interpretations. When applied to businesses, these tendencies lead us to make assumptions about consumer preferences and prevent us from adjusting our course when new information becomes available.

Instead, the scientific method requires decisions to be informed by data and not gut instinct.

What is the scientific approach to building a business? 

Inspired by concepts such as Kaizen, Lean, and Agile, businesses conduct experiments to validate their assumptions and, based on the results, improve their positioning, features, marketing, website experience, etc. 

Within the Lean school of thought, it’s recommended to start by establishing a Minimal Viable Product (MVP) or an iteration of the MVP, which is quick to build and test. This approach enables entrepreneurs to address fundamental questions with real customers, such as the level of demand, how much people will pay, and which features customers see as value-adding. The importance of these insights cannot be overstated when trying to build and grow a successful business. However, it is important to note that experimentation extends beyond a startup’s early stages. Astute founders continually iterate and test assumptions no matter their business stage. 

Your choice of experimentation method will depend on the specific context, but below are some ways to test assumptions; 

• Website A/B testing  
• Painted door experiments
• Surveys
• Focus groups 
• Moderated user testing 
• Heatmapping 
• Field experiments, e.g., placing a prototype in a natural setting and observing how people interact with your innovation. 

However, finding users willing to participate in these experiments (beyond biased family and friends) can be challenging, especially when adhering to the sample size thresholds needed for statistical significance. For instance, conducting an A/B test on a website may require a sample size in the hundreds of thousands for the results to be reliable, but most early-stage startups don’t have these levels of traffic.

To overcome this, the best approach is to form partnerships with established businesses that have a large audience or user base. You can do this by participating in innovation labs, where collaborations between startups and established organisations are forged. The lead organisation often shares valuable resources like market access, research, users, and customers so that you can validate your ideas. 

Why is a test-and-learn approach the best way to innovate?  

Picture this: an entrepreneur toils away in isolation, spending months perfecting their game-changing idea. But when the big public launch finally happens, it’s greeted with silence. It turns out the founders’ assumptions were way off. Customers wanted something completely different, with a special feature they hadn’t even considered, and to top it off, people weren’t willing to pay as much as they expected.

Where do you go from here? You’ve got great insights into what would work, but it’s too late. 

You spent all your time and money perfecting the original idea that is about to end up on the rubbish heap. Thanks to the sunken cost fallacy, many founders continue with their doomed idea rather than pivoting. 

Now, imagine a different scenario using a test-and-learn approach. Instead of aiming for perfection from the get-go, an entrepreneur creates a Minimal Viable Product (MVP) that’s rough around the edges but good enough to test with real users. This way, they can get answers to questions in hours or days. They can learn what people will open their wallets for and what features matter most. And because they’ve invested significantly less time and money getting those answers, it’s much easier to change direction based on new information, data, and findings. 

By embracing the test-and-learn approach, you save time and money figuring things out as you go. Plus, you’re making your business irresistible to potential investors because you can demonstrate that there’s a market eagerly awaiting what you have to offer. 

To summarise, the key principles that connect the scientific approach to venture building and growth are:

• Develop fast, lean, iterative versions of your business for testing and validation.
• Continuously test and use the results to inform decisions.

However, there’s an important missing piece: the need for scientific rigour when using these methods. In a randomised controlled trial, early-stage startups were all introduced to the Lean Startup method, but half of the participants were also taught how to use scientific rigour. This involved:

• Learning how to generate hypotheses from theories.
• Identifying what was an assumption.
• Taking a holistic view by understanding connections between different aspects of the business.
• Learning how to conduct rigorous experiments and data analysis.

They found that the group taught to apply scientific rigour gained notable advantages, such as being more inclined to recognise flawed ideas, pivot away from poor ideas, and generate a higher revenue than the control group. Effectively, the scientific approach meant founders avoided the detrimental effects of path dependence, where early missteps would have otherwise led to enduring negative consequences.

So, for the best results, it’s not enough to just embrace approaches like Lean; you must apply them with scientific rigour. 

I encourage you to reflect on your business, identify assumptions, and adopt a rigorous test-and-learn approach to validate or disprove them. By doing so, you’ll harness the power of scientific methods, building more viable businesses and reaching profitability quicker, often without the need for funding.