Look before you flop

Failed ventures are the norm. Ask questions first.

Most new businesses fail. Whether startup or venture initiated by large corporate, success is rare. Startups fail when they run out of money, before they have demonstrated valuable product-market fit. Corporate ventures – having no such discipline imposed upon them – often fail far later in their development and cost vastly more.

Discovery-driven planning arose partially out of a fascination with such flops. It was introduced in 1995 as a novel way to plan new ventures in volatile business environments. Giant failures then were characterized by hubris, heedless risk-taking and a drive for breakneck growth at all costs. Almost three decades later, little has changed. Those factors that drove those expensive flops in the 1990s continue to drive costly failures today.

NewTV became Quibi, a short-form video venture that burned billions
of dollars before it was shuttered. Drinkworks, an at-home bar-tap venture between Keurig and Anheuser-Busch, was unceremoniously discontinued. Google abandoned Stadia, a gaming platform introduced with great fanfare in 2019, less than four years after launch. And let’s not mention the collective $100 billion efforts by multiple companies to create a business model for autonomous vehicles – only to discover that profitability is likely a distant dream.

Given that enthusiasm for venturing is being eclipsed globally by a reborn passion for financial discipline, it is timely to examine the key questions which shape a discovery driven plan.

1 Have you defined success?

Problems often emerge at the outset. Entrepreneurs simply assume the existence of future revenue streams. Witness proposals that include naked optimism of this variety: “The market is projected to grow by 3,000% in the next five years, and all we need to do is capture 2% of that market.” This is compounded by classic ‘capital market myopia’ whereby an opportunity is sufficiently attractive for multiple competitors to chase it – thus making market share projections unrealistic. A third common problem is psychological. As Kahneman and Tversky found, people systematically understate how much time or resources are required for projects – such that even ventures that show promise are liable to be delivered later and at greater expense than planned.

2 Are you being realistic?

In a document I call a reverse income statement, you calculate how many units you must sell to be viable. You can then work backwards – does your plan demand that every customer must spend 75% of their disposable income on the offering? At this stage, many ideas are revealed as wildly unrealistic. This part of the process is intended to force teams to counter, where possible, inevitable biases in judgment.

3 Have you defined success?

Ask what would have to be true for the idea to work. In this part of the process, you flesh out questions such as: “How many transactions per hour does this imply?” or “How much warehouse space might be necessary?” This is summarized in a document called an operations specification. These numbers can further be fed into the reverse income statement and continuously checked for common sense.

4 What critical checkpoints are implied by the plan?

The final step in creating a discovery-driven plan is to design the plan without a massive drive to a perceived finish line. Rather, one should push to the next learning event, called a milestone or checkpoint. If key assumptions fail to be borne out, the project can be redirected (called a pivot) or stopped entirely. None of this is particularly difficult, but it’s easy for the excitement of starting something new to gain momentum, leading to the escalation of commitment to it.

Ask yourself these questions. Don’t be the next case study that ends up in the flops file!

Rita Gunther McGrath is professor of management at Columbia Business School.