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Quote #06

The hockey stick graph is Silicon Valley's third biggest export

Eric Ries

What does it mean?

Startup business plans typically show a “hockey stick” graph – a relatively flat period followed by hyper-growth. This reflects expectations that after raising funds and launching an incredible product, startups will miraculously experience a “hypergrowth”. Business case assumptions on which these graphs rely on tend to be highly speculative. These can involve large market size assumptions and attractive monetisation projections, though none of these is actually validated with the market. Without experimentation and feedback from the value, startups fall into the trap of building a product that customers do not want. “No market need” is actually still the top reason for startup failure (accounting for 42% of all failures). This is why the “hockey stick” graphs Ries describes are often just fantasy for investors.

Why do we believe it’s important?

Ries’ quote reflects the danger companies – startup as well as established – face by making assumptions and big plans without end-user validation and constant iteration. This can result in many years and significant sunk costs. Large companies, in particular, tend to apply an “Analyse, Plan, Do” approach as they seek for certainty - they traditionally spend a long time analysing and planning instead of delivering something quick and seeking early feedback.

To avoid this trap, we develop plans based on “Build, Measure, Learn” cycles that rely on real facts, instead of hopes and beliefs. This involves defining “leap-of-faith” assumptions – key assumptions on the value delivered to customers and growth that can be proved – and conducting experimentations that inform “prove, pivot or stop” investment decisions. With this approach, plans are continuously adjusted according to real-world evidence. We believe that this is critical to successful business innovations and digital transformation, as they allow for quick value validation and effective investment decision and execution.

How do we put it into practice?

We seek to do just enough planning and forecasting to inform effective action. We develop business cases that satisfy corporate requirements, but always seek to validate and evolve the assumptions based on real-world evidence. We do this through quick prototyping, customer feedback and iteration.

For a global online education company, we transformed the customer experience by establishing new capabilities for customer communications during incidents. After identifying customer pain points across the journey, we identified an innovative way forward. This involved sending real-time alerts on the company’s web products impacted by incidents. By quickly prototyping the design, we were able to conduct a few rounds of customer feedback. These informed design enhancements and iterations and allowed us to quickly validate the approach and show the benefits for customers. Ultimately, we prevented a $50m revenue loss with customer experience enhancement.

Further Reading: CB Insights, The Top 20 Reasons Startups Fail, 2018

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