My newest writing, The Power of Assumption in Entrepreneurship, is on Medium. The introduction to the article follows.
Introduction
Most of my books and major writings are prompted by a single comment or sentence that typically leads to two or three years of thinking about the related topic. This article is no exception and was prompted by a writer’s observation that every startup is based on a key assumption about the problem, the solution and scaling. These three assumptions can be simply illustrated by a proposed new medical device. The key assumption about the problem is whether the device correctly diagnoses the disease. Key assumption about the solution is whether doctors will use the device (and stop using their current approach). Key assumption about scaling might be getting FDA approval or Medicare reimbursement for a procedure using the device. It should be noted that once a key assumption is identified, it often leads to identifying other key assumptions about problem, solution or scaling. Such clear identification of assumptions also frequently focuses the entrepreneur on the viability of the business concept. The usefulness of this three-part technique and its easy adoption by entrepreneurs lead me to further study the concept of assumption.
Studying about assumptions, I realized that assumptions are one of those concepts that are critically important but with only limited writings on the subject. I see information theory, networks and incentives, as examples, to be similar subjects — critically important in multiple disciplines but almost ignored in popular and academic writing. While some would argue that these topics are widely written about by academics, I would point out that the themes in the academic articles have no practical application. For example, in information theory the positive asymmetry of information was presented by Kirzner to explain entrepreneurship and the negative asymmetry of information Spence used to explain poverty. However, I rarely see any discussion of asymmetry of information in the writing on poverty. The absence of writings on assumptions prompted me to write this article in an effort to facilitate practical applications about assumptions in entrepreneurship and related fields such as innovation and engineering.
While many terms have domain specific definitions or usage, especially in social, economic and political fields of study, “assumptions” is a term that remains unchanged as it crosses disciplines. Another concept that crosses domains unchanged is symbolic logic. Symbolic logic is a system of inference rules that dates back to Aristotle. What does the system of inference rules manipulate? Answer, the propositions, premises or assumptions in the argument. The entire nature of symbolic logic is domain agnostic and therein lies the “proof” for the first characteristic of assumptions — assumptions are domain agnostic, not changed in their behavior or definition by the domain. A simple example might clarify this point. A “set” in math is a “collection of individual objects which is itself an object” whereas in tennis a “set” is “the first player to win six or more games by two more games than the opponent, where a majority of sets alone determines the winner”. Obviously “set” is a domain specific term and “assumptions” is not.
The discussion of symbolic logic above reminds me of an important point. We cannot discuss assumptions without some references to philosophy, math and physics. George Polya, credited with coining the phrase “random walk” and a famous Stanford math professor, was once asked, “why did you study math?”. He responded, “I was too good for philosophy but not good enough for physics”. Any discussion of assumptions needs to include some philosophy, math and even physics, although the math and physics are very elementary and the philosophy may not even be identified as such. What is the significance of thinking about assumptions in terms of philosophy, math and physics? Philosophy, math and physics are the three ways to describe reality and the role of assumptions it turns out is a useful concept to better understand reality. This concept is fully developed in Section 2.
While philosophy, math and physics are widely disliked by many students, entrepreneurship and the related concept — social entrepreneurship — are increasingly popular with students at the five universities where I have taught entrepreneurship in various capacities over the last thirteen years. I have also designed, developed and executed two startup incubators and one accelerator in Miami, FL at Florida International University. Before that I built a billion-dollar publicly-traded company in Indonesia in seven years and served as the CFO of One Laptop per Child (OLPC). OLPC was a project that started at the Media Lab at MIT and gave me the chance to teach an IAP course in social entrepreneurship for seven years at MIT Sloan.
My practical experience combined with my academic pursuits have made me a serious student of entrepreneurship. One thing that I have realized is that entrepreneurship is best thought of as a process, whether one uses Eric Ries Lean Startup methodology or another approach. At every step in the process I have learned to identify the key assumption(s), to manage the validation of those assumptions as milestones and deliverables and to be extremely vigilant to not overlook a key assumption (as discussed in Section 4). Leading venture capitalist Mark Andreesseen put it well:
“So you come in and pitch to someone like us. And you say you are raising a B round. And the best way to do that with us is to say I raised a seed round, I achieved these milestones. I eliminated these risks. I raised the A round. I achieved these milestones. I eliminated these risks. Now I am raising a B round. Here are my milestones, here are my risks, and by the time I raise go to raise a C round here is the state I will be in.”
Note that milestones can also be intangible, like assumptions, and that such milestones and assumptions are linked to risk reduction. We will come back to this important point about the linkage between assumptions and risk in Section 3. I first explored the linkage between risk and assumption in my first book, Billion Dollar Company. Companies go out of business typically because they run out of cash. They run out of cash because they misjudge a known risk or miss an unknown risk. Systematically studying key assumptions in a business concept reduces the likelihood of unknown risks and may give new perspective on known risks, which in part explains why I keep writing about assumptions.
This article is organized in two parts, the first dealing with a definition of assumptions and some of their characteristics and the second part presenting some practical applications of assumptions in entrepreneurship…and many other fields. The Sections are shown below.
Part 1
Section I- Ignorance, Determinism and Complexity
Section II- Assumptions and Determinism
Section III- Pattern Recognition and Risk
Part 2
Section IV- Reframing the Problem
Section V- Additive vs Multiplicative
Section VI- What Physics Teaches Us
Section VII- Financial Modeling
Conclusions
The remainder of the article is here.