This "White Paper" reviews the approach of the Lean Startup Method for de-risking the building blocks of a business model. The author observes that the Lean Startup Method lacks a comprehensive approach for Business Model Risk Management. To better manage risks in Lean Startup projects as well as innovative business models, the author suggests the use of two tools: the Risky Project Yacht and Business Model Risk Manager. http://goo.gl/ORLLVO

1. LEAN STARTUP 808: How to Systematically and
Comprehensively De-risk an Innovative Business Model
By Dr. Rod King (http://twitter.com/rodkuhnking)
Eric Ries's Lean Startup Method is increasingly being used by startups as well as established
businesses to rapidly develop innovative products and services that customers want. At the heart of
the Lean Startup Method is risk management for innovation projects. However, the Lean Startup
Method lacks a holistic process for systematically identifying, organizing, analyzing, and managing
business model risks. The traditional focus of the Lean Startup Method is minimization or elimination
of "Customer Risk" and consequently, the question: “Will (enough) customers buy the
product/service?”
Eric Ries’s book, “The Lean Startup Method,” does not offer a structured process for comprehensively
de-risking the building blocks of a business model. The paradigm of the Lean Startup Method
assumes that the riskiest activity in the life of a startup is achieving Product-Market Fit. However,
Product-Market Fit is an outcome or the state of an innovative business model that has been
sufficiently de-risked. Also, the Lean Startup Method does not answer the question: What building
blocks should be de-risked after achieving Product-Market Fit?
When de-risking the building blocks of a business model, we should not confuse cause (process) and
effect (outcome). Otherwise, our efforts at de-risking a proposed innovative business model will be full
of waste and Lean Startup platitudes such as Get out of the building; Test the riskiest assumption;
Build an MVP; Iterate; Pivot. Both Problem-Solution Fit and Product-Market Fit are outcomes, albeit at
different levels. Problem-Solution Fit addresses the risk and question, “Is the customer problem
worth solving?” In other words, “Is the product idea worth pursuing especially in relation to the
intensity of existing user pain/desirability, customer need/demand/job-to-get-done, or technical
feasibility?” After addressing and making irrelevant the problem-solution risk at the idea phase, the
Lean Startup team can start exploring product-market risk and question, “Is it financially viable to
develop a pilot or full-scale product for the selected niche or customer segment?”
In her article, "Lean Startup 101: The Essential Ideas," Sarah Milstein identifies three areas where
startups face “a very high degree of uncertainty or risk.” The areas or risks are as follows:
• Technical (product) risk: Can the product/service be built?
• Customer (market) risk: Will customers buy the product/service?
• Business Model (revenue) risk: Can the enterprise make money from the product/service?
The building blocks of product, market, and revenue constitute the most important risks of a proposed
innovative business model. However, Milstein does not highlight the interdependency between
product, market, and revenue risks. Milstein fails to talk about the necessary condition of achieving
Problem-Solution Fit as well as Product-Market Fit. Without Product-Market Fit, an enterprise cannot
scale and be profitable. Also, it is important to note that Milstein uses the term “Business Model Risk”

2. rather than “Revenue Model Risk.” However, Milstein’s use of the term “business model risk” is
misleading since her associated question of “Can we create a way for this thing to make us money?”
apparently deals with revenue.
Profit rather than revenue is the metric that covers all the building blocks – demand and supply sides -
of a business model. A comprehensive approach to de-risking a business model should focus on
eliminating “Profitability Risk” which can be broken down into “Revenue Streams Risk” and “Cost
Structure Risk.” These two sub-risks make or break companies irrespective of size. Profit is
undeniably the oxygen of a business whether small, big, or gigantic.
So far, the above discussion has focused on internal business model risks. However, a discussion
on business model risks would not be complete without discussing external business model risks,
that is, “Environment (Competitive Strategy) Risks.” Although Lean Startups tend to focus on activities
at the enterprise level, environmental forces perhaps pose the greatest threat to the viability of a Lean
Startup project. Constructionists assume that existing environmental forces and in particular, industry
structure and profitability shape profitability at the enterprise level. In contrast, reconstructionists such
as Blue Ocean Strategists assume that disruptive or Blue Ocean Strategy can reshape industry
structure and consequently, industry forces and the environment. Real-world examples can be quoted
to support the perspectives of constructionists as well as reconstructionists. Nevertheless, the
profitability risk in a proposed reconstructive (“Blue Ocean”) business model would be greater than
those in a proposed constructive (“Red Ocean”) business model.
Lean Startups that ignore environmental risk in its various forms do so at their own peril. Competitive
strategy risk – whether in a Red or Blue Ocean - cannot be divorced from the risk of achieving
product-market fit. As Mark Payne of Fahrenheit notes, “[W]ithout a viable business strategy built right
into an idea at the outset, great ideas that benefit consumers would never reach those consumers.”
In the Lean Startup world, Steve Blank offers the most comprehensive approach for de-risking a
proposed innovative business model. Steve Blank refers to his method as the Customer Development
Stack. The main unit of analysis of the Customer Development Stack is a business model which is
based on Alexander Osterwalder’s visualization on the Business Model Canvas. Blank’s process of
de-risking a business model involves a Lean Startup team initially populating the 9 building blocks on
the template of the Business Model Canvas with so-called “Guesses” or “Hypotheses.” Thereafter, the
Lean Startup team gets outside of the building to talk to customers as well as stakeholders with a
view to validating, rejecting, or modifying documented hypotheses on the Business Model Canvas.
While the benefits of getting out of the building and talking to customers/stakeholders about each
building block of a business model cannot be denied, the approach of Customer Development Stack
does not distinguish between external and internal de-risking of a business model. Blank’s initial focus
was on internal de-risking of a business model. Recently, however, Blank has been using his tool of
the Petal Diagram to focus on externally de-risking a business model. The missing piece in Blank’s
approach to de-risking a business model is Deliberate Competitive Strategy. Blank’s approach of the
Customer Development Stack can be described as strongly following the approach of Emergent
Strategy. But as Clayton Christensen notes successful disruptive innovations involve a combination of
Emergent and Deliberate Strategies.

3. So, what’s the ideal approach for systematically and comprehensively de-risking an innovative
business model? In other words, what is the future of Business Model Risk Management especially in
the world of Lean Startups?
Ash Maurya’s tool of the Lean Stack approaches business model risk management from an iterative
problem-solving perspective. However, his core tool of the Lean Canvas omits business model
building blocks such as Inputs/Partners, Internal Resources, and Processes/Activities. Consequently,
the Lean Canvas does not comprehensively de-risk the building blocks of a business model. Based
on my review of approaches to Business Model Risk Management, Steve Blank’s Customer
Development Stack offers the most comprehensive approach for de-risking the building blocks of a
business model. However, there are some “missing pieces” in Steve Blank’s approach. Like in Sarah
Milstein’s approach, interdependent risks between building blocks of a business model are not
highlighted in the Lean Stack or Customer Development Stack.
It is important to note that Steve Blank’s Customer Development Stack focuses on describing
business model “risks” as “guesses” or “hypotheses.” Although such a difference may appear
semantic, the implications are huge in both theory and practice. Using the term “risk” to describe each
building block of a business model justifies applying to the business model and its building blocks the
body of knowledge of risk management. The Lean Startup Method, Lean Stack, and Customer
Development Stack could focus on Business Model Risk Management as the core of the approach of
continuous innovation. At the moment, the Lean Startup movement espouses the “Scientific Method”
which is hazy and poorly applied when de-risking the building blocks of an innovative business model.
In conclusion, I’m providing two tools to facilitate Business Model Risk Management. The first tool is
the “Risky Project Yacht.”
Risky Project Yacht
The Risky Project Yacht provides a visually summary of business model risks. Also inherent in the
presentation of risks on the yacht is a chain of 3 categories of risks: Enterprise Risks; Customer
Growth Risks, and Value Capture Risks. Each category consists of smaller chains of risks. In other
words, the diagram of the Risky Project Yacht illustrates a fractal chain of risks, that is, a chain of a
chain of risks. Like in Goldratt’s Theory of Constraints, the weakest link in a chain of risks should first
be identified and de-risked. Thereafter, the next weakest link may be addressed. This process
continues until all links or building blocks have been de-risked. It’s important to note that business
model de-risking is not episodic; business model de-risking is a continuous process. Consequently, in
the context of Business Model Innovation or Business Model Risk Management, it is prudent to talk
about the process of “continuous de-risking.”

5. Business Model Risk Manager – Part 1: Enterprise Risk
BUSINESS MODEL GAMES & RISKS LEAN STARTUP
IDEAS/TOOLS
EXPERIMENT-QUESTIONS
ENTERPRISE
GAME
Technical
Feasibility
Can the Lean
Startup Team
Economically
and Rapidly
Build the
Product/Service?
Can the Lean
Startup Team
Continuously
Improve the
Product/Service?
Inputs/Partners Risk “Vision-Strategy-Product”
Pyramid
Is our vision aligned
with that of partners?
Internal Resources Risk “The Startup Way”
Pyramid
Does the team have
the capability to build
the product/service?
Does the team have
the capability to rapidly
discover and solve
customer problems?
Processes/Activities Risk Short vs. Long Learning
Cycles;
How long is the project
runway: How many
pivots can we make
before we run out of
cash?
Pull vs. Push-led Innovation;
Genchi Gembutsu (Go and
see yourself); 5 Whys;
Small-batch Experiments;
Continuous Deployment;
Kanban Board Workflow;
Build-Measure-Learn
Feedback Loop;
Rapid Prototyping;
Innovation Accounting
(Cohort/Split Analysis;
Actionable Metrics); Pivots;
Validated Learning;
Pivot-or-Persevere Meetings

6. Business Model Risk Manager – Part 2: Customer Growth, Value Capture, and
Environment (External) Risks
BUSINESS MODEL PLAYS & RISKS LEAN STARTUP
IDEAS/TOOLS
EXPERIMENT-QUESTIONS
CUSTOMER
GROWTH GAME
Desirability
Can
Product-Market
Fit be Rapidly
Achieved?
Product/Service Risk Minimum Viable
Product (MVP)
Can the product/
service be rapidly and
economically built?
Channels/Relationships
Risk
3 Engines of Growth
(Sticky; Viral; Paid)
Can we effectively
and efficiently reach
users/customers?
Customer Segment Risk Get Out Of the
Building
Do customers have
high pain/problem/
need/desire/aspiration?
Will (enough) customers
buy the product/
service?
VALUE
CAPTURE GAME
Viability
Can
Awesome
Customer
Experience
(ACE) be
Created?
Cost (Structure)/
Pain Risk
Startup Runway Will the enterprise run out
out of cash/money?
Revenue (Streams)/
Delight Risk
Actionable Metrics Can the enterprise
make money?
Profit (Margin)/
Happiness Risk
Customer Value vs.
Waste
Can the enterprise
profit from the
product/service?
EXTERNAL (Competitive Strategy/
Commoditization/Value Prop.) GAME
Can Existing Competitors be Made
Irrelevant?
Analogs
Antilogs
Petal Diagram
Adaptive Org.
Is the business model
competitive and/or
resilient?

7. The second tool, which I’m presenting, is the Business Model Risk Manager. This “Risk Manager” is
simply a table that relates categories of business model risks to specific ideas and tools in the Lean
Startup Method.
Given that existing Lean Startup ideas and tools are not organized according to building blocks of a
business model, the Risk Manager provides a visual framework that facilitates the selection of tools
for de-risking specific building blocks of a business model. The result should be rapid discovery and
scaling of a profitable business model for Lean Startups.
Many Lean Startups today are struggling with how to translate into reality the ideas and principles of
Eric Ries’s “The Lean Startup.” The essence of the Lean Startup book – de-risking the interdependent
building blocks of a business model – is lost among many Lean Startup practitioners especially
novices. If I were to write a fieldbook today based on Eric Ries’s book, “The Lean Startup,” its sub-title
would be “How Today’s Entrepreneurs De-risk Business Models to Create Radically Successful
Businesses.”
I bet it’s a risk worth taking. What do you think?
Rod King
Inventor of the Visionary Dashboard Methodology
October 21, 2014
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