BarshBits

Assumptions Kill Your Estimates. How to Fix the Problem.

Last week I wrote a post as the first step to help solve a problem I see most people have -- creating accurate and reliable estimates.  The technique is called confidence-based estimating (CBE).  When building a product, company, or just about anything, how or why do you expect people to believe your estimate if you are really just "winging it?"  In last week's post I started by saying there were 2 easy questions you need to ask to increase estimating accuracy quickly.

I said that the first question you need to ask is:

What’s your level of confidence in your estimate?

It looks like a simple little question and it is.  But dozens of times I have seen this "little question" be the first huge step to creating highly accurate estimates.  For a detailed discussion on the question above, please read the post here.

I promised at the end of that post to "take you through the 2nd killer question to ask."  So, here we go...

The 2nd Killer Question to Ask:

What assumptions are you making?

Again, it looks like another simple, innocuous question.  But wait until you see what happens as the question starts getting answered!  Here's how it works...

It's great to get a detailed list of all the assumptions someone is making when they are creating an estimate.  In my first post on estimating I talked about asking the person to give you their estimate at a "95% level of confidence" (after they've given you their initial estimate).  When creating that estimate, make sure to capture all of the assumptions the person or team is making.

Categorizing Your Assumptions

I would strongly encourage you to think about classifying / categorizing assumptions.  Here is a simple (but not complete) example for a software development project:

Example 1: Assumption Categories for a Software Development Project

• Methodology (e.g., Agile Development)
  
• Development Framework (e.g, Ruby on Rails, Django)
  
• Development Environment
• Requirements & Scope
• API's
• Widgets
• Interfaces
• Staffing (on shore / off shore)
• QA and Testing
• Other

You would use something like the above to ask about assumptions by category when you are going through the estimating process and trying to get to a 95% level of confidence.  The questions would be phrased / presented using the Assumption Categories using the following type of pattern... "What <Assumption Category> assumptions are we making when we think through this estimate?"  So, based on the Assumption Categories listed above you would end up with questions like: "What Requirements and Scope assumptions are we making when we think through this estimate?" "What API assumptions are we making when we think through this estimate?"  And so on..

Example 2: Assumption Categories for an early stage Web 2.0 company:
This is just a subset of the assumption categories and yes, there are overlaps in the below...

• Management team
• Marketing
• Positioning
• Competition
• Pricing
• Cost of customer acquisition
• Viral coefficient
• Customer churn
• Customer adoption
  
• Development environment
• Development team
• Product development
• API's / widgets / interfaces (inbound and outbound)
• Business model
• Financial
• Funding / valuation / capital requirements
• Other

Again, use the following type of pattern with the assumption categories.. "What <Assumption Category> assumptions are we making when we think through this estimate?" So questions look like "What pricing assumptions are we making when we think through this estimate?"  "What competition assumptions are we making when we think through this estimate?" "What product development assumptions are we making when we think through this estimate?"  And so on.

Assumptions = Risks

All of the assumptions that you come up with are risks that need to be managed.   As Josh Kopelman likes to point out when he and his firm are looking to invest in early stage companies, one of the things he is trying to do is "de-risk" a company/idea at the earliest possible time and as capitally-efficient as possible.  I urge you to spend time trying to flush out the assumptions and risks.

So, think about how you can verify or de-risk your assumptions.  How can you really justify your assumptions?  How can you be sure?

Recently, I was listening to a pitch and I quickly went through this confidence-based estimating process with the entrepreneur when they stated their estimated product launch date.  This was a May 2008 meeting and the launch was forecast for Q1 2009 (so let’s call that March 31, 2009 – 10 months later).  Assumptions came back along the lines of:

1.    Software will be ready
2.    Hardware will be ready
3.    We’ll have the management team on board
4.    We’ll have the financing closed by the end of June 2008.

Those are 4 huge assumptions / risks. Expectations were being set.  Were they accurate?  I asked him for his confidence level in his estimate.  His response: "65 - 70% confident."  I asked him for a 95% level of confidence now that he was thinking through his assumptions.  He  added 6 months to his estimate with a new projected launch date of September 2009.  That's a huge change!  Think about if he had not really thought through his estimate, raised his first round of financing, and subsequently ran out of cash after missing his originally forecast launch date.  Good time to be raising more funds?  Don't think so.  You don't want to have a great idea but run out of cash due to estimating problems and end up here.

Please post in the comments your experiences on how confidence-based estimating works for you.

I'll do one more post on estimating with some final thoughts.  Stay tuned...

Estimates Are Usually Wrong. Fix The Problem With Just 2 Easy Questions.

In this post, I want to share with you a technique I call confidence-based estimating (CBE). I’ve been using this CBE technique for about 15 years when building software, building companies, managing large teams, building and renovating houses, managing complex projects, and dealing with complex life-threatening medical issues.

Background

I’m amazed how time and again I meet with people (during VC pitch presentations, review meetings on software development schedules, product development updates, financial projection reviews, etc.) and someone gives an estimate, and invariably they are wrong.  Very often, WAY wrong.

Think about it.  How many estimates/forecasts have you provided or heard that turned out to be accurate?  Think about the estimates/forecasts you have given or heard concerning:

• Sales forecasts
• Capital requirements
• Costs to develop a new product
• Product launch dates
• Software completion dates
• Product shipping dates

And, count on your hands how many times those estimates were accurate.   Most likely you only needed one hand. What’s going on?

Estimates = Expectations

So much is riding on the accuracy of estimates!  Estimates set people’s expectations. Those people may be customers, investors, employees, or others.  Managing expectations is critically important. It’s always great to meet or exceed expectations but when it comes to most estimates, more frequently than not, people’s expectations are not met because estimates are missed.

How Confident Are You?

So, how do you apply this deceptively simple confidence-based estimating (CBE) technique?

When someone gives you an estimate (an amount of money, a date, a number of days/weeks/months) come back with a killer follow-on question:

What’s your level of confidence in your estimate?

So, on a scale of 0 – 100%, how confident are you that your estimate is correct?  By the way,100% means you’re willing to "bet your paycheck."

If the answer does not come back around 95%+ (trust me, it usually won’t), use this follow-on question:

If I asked you for a 95% level of confidence, what would you say is the correct amount of money / date / number of days/weeks/months?

As they start to think their answer through don’t be surprised when the new number / date / amount of money goes WAY up.  I’ve seen initial estimates come in with people saying, “That will take 9 months.”  You ask for the confidence level.  They come back with 65%. You ask for 95% confidence.  They come back with 12 – 18 months (by the way, read that as ’18 months’).  So, they went up 30 points of confidence and their estimate doubled!  That’s okay, because now people are actually thinking it through.  If they can’t get to a 95% level of confidence, that’s okay too.  Get as high as possible and realize the risks you are taking with lower confidence levels.

In my next post, I’ll take you through the 2nd killer question to ask.

Stayed tuned…

Stop Coding, Start Marketing! Getting Your Positioning Right.

After encouragement from many people, and in particular from Josh Kopelman (whom I have the utmost of respect for and who writes an awesome blog), I am finally blogging.  In my blog, I will express my “point of view” on starting and growing companies, technology, venture capital investing, and other areas of interest.

Lately, I have been exploring my potential personal transition from being a tech company entrepreneur to being a venture capitalist. Over the last few months I’ve had the wonderful experience of camping out at First Round Capital as well as meeting and working with many young companies. In my encounters I always try to add value by giving feedback and ideas on their go-to-market strategies, business plans, and differentiators while helping them critically think through their business strategy.

Over these last few months I have found that many companies I meet with really lack a clear, crisp positioning that exudes an extremely compelling value proposition (eCVP).   So, I thought I would start off my blogging adventures by talking about something that is critical to “get right” from the beginning (although it can certainly evolve), is pretty easy to do, but most companies seem to have trouble actually doing it (or doing it correctly).

For the many entrepreneurs I meet with and who will hopefully read my blog posts, I ask you to please stop thinking about code and start thinking about marketing.  Positioning is a great place to start.

So, how do you come up with great positioning?

Here is a very simple formula adopted from Crossing the Chasm, a must-read book written in 1991 (and revised in 1999) by Geoffrey Moore.  Here is an adaptation of a formula Geoffrey discusses in his book:

• For (target customer)
• Who (statement of need or opportunity)
• The (product / service name) is a (product / service category)
• That (statement of key benefit - that is, extremely compelling reason to buy or use)
• Unlike (primary competitive alternatives, including "doing nothing")
• Our product / service (statement of primary differentiation).

It looks simple, and it is.  But going through the steps of "filling in the blanks" is a very powerful, focusing process.  WARNING:  Going through this with a few people in a room (or at Starbucks) often takes an entire morning or afternoon of debating, brainstorming, and sharpening words to "get it right."

Let me talk about each one of these items and give you some tricks and traps that I have learned over the years.

Target Customer

• Answer the question:
  • Who is your target customer?

• Think about:
  • Are there multiple types of customers?  If so, you may need multiple iterations of this formula / positioning for each customer segment.
  • Think about dividing your customers into customer segments, and/or breaking them down by psychographic or demographic.

Statement of Need

• Answer the question:
  • What is your customer’s  “statement of need” or opportunity (what do they want)?
• Think about:
  • Be careful here!  Think about what they want, not what you think they need.
  • "Wants" are much stronger than "needs."
  • Try to be as simple and direct as possible.
  • Ask yourself the question "How do we KNOW what they want or need?  Is this what they want or need or what we THINK they want or need?"   How many potential customers have you talked to / interviewed / polled to try to verify what you think they want or need? Have really good answers here.  Trust me, VC's will really probe on this issue! :-)  On a side note, VCs will also ask (and you should also be asking yourself) "What will they pay, and how are you sure?"
  • Look at it from the customer’s view, NOT yours.  You need to stand in your customers' shoes.
  • People and businesses will spend money on what they really want, but not necessarily what they need.
  • Be careful of thinking that you are smarter than your customers.  I've heard more than one engineer say things along the lines of "I know what they need and what's best for them, who cares what they want!"

Product Service or Name

• Answer the question:
  • What is the product / service name, and what category does the product / service fit into?
• Think about:
  • This one is pretty easy.
  • If you are starting a Web 2.0 company you could use one of several free company name generators such at this one or this one ;-).

Key Benefits

• Answer the question:
  • What are the key benefits -- the extremely compelling reasons to buy or use the product / service?
• Think about:
  • Put these in a priority order with your best at the top.
  • This is where you want to kick into coming up with your eCVP (extremely compelling value proposition).
  • Think about if / how these benefits are extremely relevant to your target customer.
  • What problem are you solving?
  • How are you making things "better / faster / cheaper?"
  • Make sure these are being stated as benefits, and not "features" (more on this later).
  • Make sure that the benefits are aligned with what’s relevant to the target customer.
  • Make sure to tie back to the wants and needs you came up with earlier.
  • If you have more than one customer type, you could have multiple sets of answers aligned with each customer type.

Competitive Alternatives

• Answer the question:
  • What are the primary competitive alternatives, including "doing nothing?"
• Think about:
  • As you probably already know, never say "I have no competition."  It's just not true.
  • Really think hard about all of the different types of competitors you have.
  • One of the biggest competitors I find most people forget about is the incredible inertia for your target customer to DO NOTHING!  How are you going to overcome the their inertia to do nothing?

Primary Differentiators

• Answer the question:
  • What are the primary extremely compelling differentiators that make this unique? 
• Think
  • Try to think "outside the box" and use strategies like ideation and Blue Ocean.
  • Think about -- does your target customer perceive your differentiators as relevant to them?  I have seen a lot of “alignment” problems  where the entrepreneur lists differentiators that really are not relevant  to their target customer.
  • Think about how your differentiators are defensible.
  • Make sure your differentiators are being listed as benefits, and not features.  For more reading on coming up with benefits instead of features see here and here.

So, plug your answers into the formula first listed above, smooth over the text, and you should hopefully come away with a very tight, coherent, well-focused, targeted, differentiated, extremely compelling value proposition.

As a side benefit you should end up with a great "elevator pitch."

In a future blog post, I’ll share a very quick, cheap and easy way to test your positioning in the real world to see how your positioning appeals to your market (the world will be happy to tell you if your baby is cute or ugly!).  Stay tuned...