1 Simple Rule: Identify a Broad Opportunity Set from Which to Choose the “Best” One

Look in expected places to notice incremental changes and opportunities.

It seems obvious to advise you to look for opportunities where you expect to see them, but realize that these opportunities will likely be incremental. They can offer minor adjustments to your current offerings. They are incremental because your knowledge and experience direct you to domains consistent with the past. Therefore, they offer a continuation of your current product/service/technology trajectory.

Switch to bottom-up attention allocation to identify discontinuous changes and opportunities.

To identify opportunities in unexpected places, you may need to disengage your experience and knowledge to allow environmental signals to capture your attention. These signals may indicate opportunities that are unexpected and perhaps more radical or disruptive to your current trajectory. This reliance on environmental stimuli to capture your attention represents a bottom-up process of allocating attention.

When using a bottom-up approach, be aware that you may focus on the irrelevant.

With a bottom-up approach, your attention is drawn to prominent environmental stimuli. Prominent does not necessarily mean relevant or profitable. Therefore, you must be careful that a bottom-up process does not distract you with prominent but irrelevant environmental signals.

Use guided bottom-up processes of attention.

Rather than focus solely on top-down or bottom-up attention-allocation processes, you can oscillate between the two. That way, you can identify potentially radical opportunities consistent with your knowledge, allowing for rapid evaluation and the capabilities necessary for exploitation.

2 Simple Rule: Think Like a Scientist to Generate Novel Business Models or Opportunities

Form hypotheses to validate assumptions (critical or cheap).

Whether from your knowledge and experience, a hunch, or environmental signals, the scientific approach involves forming and testing a hypothesis. A hypothesis reflects an assumption that underlies an opportunity. It is probably best to test the most critical assumption first. The most critical assumption is the one an opportunity hinges upon—that is, if this assumption is found to be false, the viability of the whole potential opportunity is undermined. While you may want your hypothesis to be supported, it’s better to know that an opportunity has a fatal flaw early in the process rather than later. Later, more time and money will be invested in the opportunity. At best, this means that opportunity termination is more expensive than it needs to be. At worst, these sunk costs may encourage you to persist with this losing course of action. An alternative to hypothesizing and testing the most critical assumption first is perhaps formulating and testing the cheapest assumption. If the testing cheapest assumption disconfirms the hypothesis, then you have been able to learn (to terminate the opportunity) at the lowest cost.

Design tests to disconfirm hypotheses.

It is somewhat natural to fall in love with your idea, seek information that supports it, and ignore or discount information that does not. However, such a process can lead you astray, causing you to persist with an opportunity that lacks sufficient promise. A scientist does the opposite. They test their hypotheses by searching for information to disconfirm their hypotheses. You need to seek information that would invalidate the hypothesized assumption underlying the focal opportunity. Only after searching for disconfirming evidence and not finding any can you claim that this hypothesis is supported. Then, it would be best if you moved on to formulate and test the next hypothesis.

Embrace your doubts to drive inquiry.

People often overlook the limitations of their thinking. This ignorance can lead you to commit to a course of action that generates feedback indicating that you should not have pursued this course of action in the first place. Rather than ignore limitations, you can embrace them as doubt. While doubt obstructs action, it can also fuel inquiry, such as forming and testing hypotheses. Testing hypotheses can reduce doubt and thus reduce the obstacles to entrepreneurial action. However, testing hypotheses may confirm doubts, giving you greater confidence in changing from your current approach (e.g., the current potential opportunity, business model, and/or strategy).

Be aware of errors with hypothesis findings.

Even the scientific approach to the entrepreneurial process can lead to errors (not surprising given the high uncertainty). A test can lead to a Type 1 error. A Type 1 error is a false positive, which means that you conclude from the evidence that your hypothesis is supported (e.g., the signals represent an attractive opportunity) when, in reality, the hypothesis should have been rejected. A test can also lead to a Type 2 error. A Type 2 error is a false negative, which means you reject your hypothesis because the evidence suggests it is false, but that conclusion is wrong (i.e., the hypothesis is right). Of course, it is hard to know whether you have an error. However, it is useful to remember that tests can reveal information that leads you to the wrong conclusion. It may be useful to sometimes reevaluate and retest a hypothesis or a related hypothesis.

3 Simple Rule: With Resource Constraints, Embrace the Lean Startup Approach

Construct a business model.

A business model explains how a venture (newly created or established) will exploit an opportunity and make money from it. Multiple experiments generate information about the business model. These multiple experiments might reveal that the business model needs to be refined or changed somehow (also see the second-to-last point on pivoting or terminating).

Engage in validated learning.

Validated learning involves seeking and analyzing the assumptions underlying an opportunity (or business model) and finding evidence supporting or rejecting these assumptions. You can generate information for validated learning by forming and testing hypotheses about the fundamental assumptions underlying a potential opportunity and searching for evidence that disconfirms these hypotheses. Information can come from experiments in your mind in which such hypotheses are formulated and tested to reveal information for learning.

Build minimum viable products.

A minimum viable product is a version of a product that is rudimentary but sufficient to communicate the product concept to others (e.g., potential stakeholders). By communicating the product concept, the minimum viable product can stimulate discussion and feedback, enabling you to learn and improve the ideas behind the product. It may lead to a new and improved minimum viable product.

Overcome psychological constraints to pivot or terminate an underperforming opportunity.

A pivot is a substantial change in direction from your previous approach. Termination is when a potential opportunity is killed because signals indicate poor performance; resources can then be redeployed to potential opportunities that show greater promise. You will likely find it difficult to pivot or terminate your original idea (because you have a personal commitment to it). Think about your original idea as a basis to learn, so if you pivot or terminate it, it still creates value as a critical source of learning for moving forward.

Develop a portfolio of opportunities.

A portfolio of opportunities allows you to experiment with different opportunities that act like probes in an uncertain environment. They reveal information that could not otherwise be gained. Use this information to terminate potential opportunities that do not show promise, and redeploy resources to those that do show promise. Experimenting and probing in this way give you the right to pursue a potential opportunity but not the obligation; you can terminate it with little cost. Ensure the opportunities in your portfolio are not similar or highly related because multiple experiments in the same space provide overlapping information and do not “reveal” as much information about the environment as more diverse experiments.

4 Simple Rule: Create, Use, and Adapt a Community of Inquiry to Evaluate and Co-construct an Opportunity

Don’t wait for the solo aha moment.

Creation can come in different forms and may involve others in the opportunity-development process. You may want to engage others in brainstorming, ideation, and idea refinement. The diversity others bring can provide critical perspectives for generating creative outcomes. Rather than waiting for a brilliant idea to strike you, interact with others in the ways detailed below.

Create and use a community of inquiry to co-construct an opportunity.

A community of inquiry is a collection of groups that could be (or are) your stakeholders. A community of inquiry can provide information and support for a potential opportunity as it is developed and refined. You can select a community of inquiry around your potential opportunity to help construct it—that is, to build and refine the potential opportunity. This community of inquiry that co-constructs a potential opportunity may also be critical in exploiting the opportunity. Choose members of your community of inquiry who can help construct your opportunity, will benefit from a refined opportunity, and can facilitate opportunity exploitation.

Develop a two-way flow of information.

Entrepreneurs are told to continually pitch their ventures. However, sometimes, you should pause after a pitch and listen. Actively listening to feedback—even negative feedback—from your community of inquiry can reveal necessary information and strengthen potential stakeholders’ commitment to your emerging opportunity and venture.

Focus on social learning and refining opportunities.

Rather than relying on your past experiences and knowledge, you can tap into others’ knowledge to enhance the venturing process. To maximize social learning, be open to others’ input (early and often), including negative feedback. Indeed, you can learn the most from social interactions that reveal information that disconfirms hypotheses about the validity of a potential opportunity’s underlying assumptions. Use this information to make further adjustments to your opportunity (including a pivot or termination). You may find that pivoting in a new direction or terminating the opportunity requires you to go against your natural inclinations to persist.

Be prepared to change the composition of your community of inquiry.

As an opportunity is refined or otherwise changed, the community of inquiry surrounding it may also need to be changed given the nature of the new opportunity and the community needed to advance it. For example, as an opportunity takes a concrete form (from co-construction), the experts and others engaged in the ideation process become less important, and it becomes more critical to add potential suppliers and distributors to the community of inquiry. Match the composition of your community of inquiry to the stage of the opportunity-development process you are in.

5 Simple Rule: If Your Opportunity Does Not Work Out, Pivot

Be prepared to change the direction of your venture.

A pivot is a substantial change in direction from a previous approach. While such changes can demand substantial resources from you and your venture, they are often necessary to find the best market for a technology or product. Making these changes is nothing extraordinary; indeed, most ventures pivot at different stages of their development (more often early than late). Don’t be afraid of these changes; they often lead to a better outcome for you and your venture.

Build on your experience to do better.

If you decide to pivot, one key question is where to go next. Your experience can help you find the right new market or technology. Your prior experience provides knowledge about markets, customers, and technologies that may point you in a new direction and help you identify a new opportunity. Perhaps even more importantly, based on your experience, you can also identify experts who can help you validate ideas for new markets and technologies, and you can use your networks to acquire first customers for your venture’s new offerings. If you have pivoted before, all the better—this type of experience can help you gain support from your cofounders and employees and thus gain momentum for your venture’s new trajectory.

Overcome psychological constraints to pivot or terminate an underperforming opportunity.

Sometimes, we are locked into a course of action even if our environment signals a need for change. You will likely find it difficult to pivot or terminate your original idea (because you have a personal commitment to it). Think about your original idea as a basis to learn, so if you pivot or terminate it, it still creates value for you as a critical source of learning for moving forward.

Consider different types of pivots.

Not all pivots are alike, and executing a pivot can be a lengthy process at times. When searching for opportunities to pivot, you might consider adding new elements (products, technologies) to your business. However, you may also (perhaps in addition) decide to terminate some of your venture’s prior activities, focusing on the remaining elements instead. Decide which way to proceed based on the information you acquire from experts and potential (and perhaps existing) customers. Both ways can take your venture in a new direction, making it better prepared for the challenges in the marketplace.