Why Entrepreneurs Need to Take a Leap of Faith

Many entrepreneurs view their companies' business plans as the gospel, but John Mullins and Randy Komisar beg to differ. In their new book, Getting to Plan B, they tell us that the best firms will build themselves through trial and error, eventually finding the "Plan B" that can lead them to greatness. In the third installment of our conversation with Mullins, the London Business School professor describes the leaps of faith new ventures need to take in order to get off the ground.

BNET: You assert that one of the entrepreneur's most important roles is to determine the "leaps of faith" in his or her business plan. What are some famous leaps of faith that we take for granted now, because they came true?

Mullins: In these new ventures, there are assumptions that the entrepreneur hopes are true, but he really doesn't have any evidence. An example of that for Apple was the leap of faith that consumers would actually pay for some of the music they would put on their iPods. Napster was free and there were other illegal file-sharing sites, so it wasn't obvious. Steve Jobs thought that people would pay something for some portion of their music. The question was "How much will they pay for a song?"Fifty cents? A dollar? Two dollars? His leap of faith was that they would pay 99 cents a song. But the only way to test that was to launch the full iTunes store and see if anyone bought. They had a pretty nice first day: 1.4 million tunes downloaded.

BNET: Do you have any examples where the leaps of faith an entrepreneur made were totally wrong, but the company was still able to recover and prosper?

Mullins: There's a really interesting story we tell about a company in India called Pantaloon, which started as a manufacturer of men's pants. Over time the founder of the company was finding that retailers weren't doing a good job selling his company's pants. He said, "Gee, I'm going to integrate upstream and get into the retailing business." He studied western retailers like Wal-Mart and Marks and Spencer from the UK, and put together a strategy to build a couple of kinds of stores. The first of these he called the "big bazaar"; these were Wal-Mart-like general merchandise stores at a time when there were not stores like this in India. Virtually all retailing was through unorganized small mom-and-pop shops. His leap of faith was that you could take the Wal-Mart model and just transplant it and copy it in India. Nice neat rows of merchandise, carefully ordered, very strong supply chain on the back end, and so on. What he found was that all of the back end stuff about having direct relationships with suppliers and other logistical elements all translated really well. What surprised him was that his leap of faith on organizing stores didn't translate well. He said the stores were too well organized; customers would walk through the store and never stop...it was like a tourist attraction. Until he created a more bazaar-like environment by messing them up, he couldn't turn the corner. Today his company is the largest retailer in India.

BNET: Your book tells us that in order to check if they are progressing in the right areas, entrepreneurs should have a "dashboard." How does one make that actionable? What's on that dashboard?

Mullins: You find these used in big companies all the time. Good firms know "what gets measured, gets done." But the notion of the dashboard in those companies is to keep a company on track; if you deviate, you can quickly correct. Our notion of a dashboard is really turning that idea upside down. There's so much that you don't know about a new venture, whether you are starting it inside a new company or it's a raw startup. You have to learn by testing your leaps of faith. We suggest that people build a dashboard rather than losing blood, sweat, and tears blindly executing some business plan. This kind of dashboard will lay out the very limited number of leaps of faith that are critical in that moment of the company's development, and the hypotheses about these leaps. You have to go out and test and record the data you get back.

This is a guide for your journey, not just a tracking device. Instead of trying to keep a company on course, our goal is to figure out how we need to change course. Our working assumption is that Plan A isn't quite right. The dashboard shows us how it's not right, so we can begin to navigate toward a better Plan B.

Please check out our earlier conversations with Mullins on the one mistake most start-ups make and how successful products like Paypal and the Apple iPod evolved.