The Power of Assumptions to Make or Break Startup Success

We all make assumptions. It’s part of our everyday life from how we deal with friends and family to making business decisions. While most people think little about them, I’ve become fascinated by the power of assumptions as a key to unlocking personal and professional potential. After spending years disciplining myself to constantly analyze, challenge, and reframe my own assumptions, I began to apply the same methodology to startups with outstanding results. Building a startup is one of the most risky and challenging endeavors a person can take — fraught with uncertainty and high likelihood of failure. I’ve helped early stage companies raise major rounds of capital and reach $100M+ valuations, built relationships with entrepreneurs of $B companies, but also seen many more startups fail. Through this work I’ve developed a keen interest in the underlying traits of successful entrepreneurs as a way to identify great startups in their early stages, but also to help aspiring entrepreneurs in their journey.

While there is growing literature on the mindset and values of founders (NFX has fantastic resources on frameworks as one example), little has been written specifically about the role of assumptions and beliefs in the process — the true underlying psychological layer inside the minds of the people behind the success. We also have an overabundance of data about everything and we’ve become obsessed with it. Crunchbase, Pitchbook, IVC, and many other startup databases provide valuable information about companies, but this alone cannot tell us why a certain company was more successful than others. Unlike late stage or public equity, early stage success cannot be ascribed to numbers alone.

Therefore, my goal here in this blog is to accomplish 3 things:

1. Shine a light on the importance and power of assumptions.
2. Share my framework and 2 step process I’ve created to analyze assumptions to results and each step in between.
3. Share insights from the best founders on how they evaluate assumptions.

Let’s dive in!

Part 1: The Assumption Framework — Become a learning machine

Let’s first take a step back and define 2 key terms: beliefs and assumptions.

Beliefs are what we hold to be true with some level of certainty — how the world works, how sales works, how marketing works, etc. It’s usually based on our experiences, surrounding, studies, and influences.

Assumptions are the logic behind our beliefs and things we assume to be true, but unproven. They guide how we behave, what we plan, and what we execute. Assumptions are the basis for our beliefs, behaviors, and actions.

Although we like to think that our actions are based on a conscious decision making process, research shows us that every one of us brings a lifetime of experience and cultural history that can shape our assumptions. When making assumptions becomes a habit, it becomes ingrained into our decision making process and hard to change — sometimes leading to bad decisions or faulty expectations (for more on this see The Power of Habit by Charles Duhigg).

Beliefs and assumptions are not only linked to each other, but importantly are also linked to the actions we take. For most of us, there is little awareness of the assumption and most of the focus is on the action and to launch, grow, and do as fast as possible, sometimes forgetting about the assumptions and beliefs that got us here. Therefore, as a startup founder, I believe it’s absolutely critical to understand one’s own assumptions and how they shape your startup. This mindset can ensure you’re working on the right idea, in the right direction, and making the right decisions as time goes on.

Part 1: Assumptions to Action

With this in mind, let’s take a look at the steps in something I created called the “assumption framework” — a tool to visualize and evaluate how our assumptions shape our actions.

The most important part of this process is understanding that our actions ultimately stem from assumptions we hold. Often, we are only aware of the idea and the action. Now, we can start to trace back the roots of the actions and decisions we take and find out what was behind them.

I’ll analyze Airbnb as an example:

Once we are able to map the underlying assumptions for each of our actions, we proceed to the critical step 2: the review.

Part 2: Measure It!

Once entrepreneurs have a good idea, sometimes they can be in such a rush to execute that little thought is given about how the idea appeared and usually less about evaluating the assumption behind it. But startups need to be learning and data machines — constantly checking, measuring, evaluating, rechecking, and adjusting based on feedback.

A great example of how to do this is a startup company I’ve worked closely with in the smart kitchen space, creating a totally new device for consumers. In order to validate their idea and assumptions prior to going to market, they did a critical step to validate consumer interest.

If an action is producing great results, keep it going — probably even hit the gas and go faster! If the results are unclear, continue and re-evaluate again in the near future. If the results are not so good — low/no growth, high churn, etc. — then it is likely there may be a flaw in the original assumption. Don’t simply look at the action as the starting point, but go back to the very beginning — what was my belief and assumption that caused me to do this? Ultimately the results should be ones that cause you to keep going or to start over again.

Part 3: Which assumptions?

Now that we better understand assumptions, their direct impact on our actions, as well as the importance of the review and evaluation process, let’s take a look at some specific assumptions to challenge and to plug into the framework. This is not comprehensive, but several key points for every startup to think about in the initial stages and on an ongoing basis.

• What do I assume the market need is?
• What assumptions do I have about my startup’s solution?
• What do I assume my customers want?
• What assumptions do I have about the sales cycle with this customer type?
• What do I assume they will pay?
• What assumptions do I hold about my competitors? How sure am I about them?
• What do I assume investors want to see?
• What assumption do I have about how long this (product to build / fundraising / partnership / pilot with corporation) will take?

With each of these assumptions, write out clearly what your answer is as well as the proceeding steps (belief, idea, etc.). Then evaluate the results honestly. Was my assumption correct? Should I gather more data? Could it be that my assumptions were off? Build this into a regular habit and it will become second nature to question your assumptions and notice how to evaluate them better.

Part 4: What The Best Do

I’ve heard it so many times, in strikingly similar ways: “We were too early for the market”, “ I thought it would be much easier to scale in the US with our local partner”, “I thought he would be the perfect guy for business development” “We expected to have 5x revenue growth after our first year”, and many more complaints from founders when things didn’t go well. Each of these is based on a faulty assumption — they thought someone or something was going to behave in a different way. Reality can be tough love. Through these experiences, I often analyze what went wrong and consider what could have gone differently.

What I’ve found is that the people who have built successful startups have 1 of 2 things in common: they had an accurate assumption about something before other people did, or they were willing to adapt their original idea (based, of course, on their assumption) and quickly adapt to another one. This applies to all areas — from product/market fit, timing, team building, and more. The most successful entrepreneurs begin their journey with multiple assumptions and are able to adapt and evolve.

The best entrepreneurs are also the best at analyzing themselves — they know quickly if something is working well and can put full gas on it. Alternatively, they know if something isn’t working and how to change it (pivot or fail fast). This is what I have found time and time again with the best companies.

Wrap Up

I hope this blog shared a valuable new perspective and insights to think about ideas, decision making, and the success of startups. Happy to hear your comments!