are five CAP steps that together
form a CAP cycle:
Completion of the fifth step
achieves a milestone and becomes the
starting point for the first step in
the next cycle. These "learning"
cycles continue through the life of
Step 1 –
Explore/Define the Opportunity
Outline a quick, qualitative
snapshot of the opportunity that
includes: customer need; target
market; product description; price;
competition; channel; etc.
Outline a "back-of-the-envelope"
quantitative model that captures the
key drivers of revenue and cost
including, for example: number of
customers; unit sales; price; COGS;
development costs and marketing
Using the qualitative and
quantitative profiles explore how
the opportunity might be expanded
Step 2 - Identify Assumptions
Using the qualitative description
and the "back of the envelope"
financial model, the team can
quickly develop an initial set of
assumptions. An assumption is a
That is why putting an initial
financial model together is
valuable. It is, in effect, a
summary of all the quantitative
facts and assumptions in the
Step 3 - Determine Critical
Not all assumptions are equally
dangerous. The focus is on the
show-stoppers, the critical
assumptions. These are the risky
assumptions that must be managed
To determine whether an assumption
is critical the first step is to
assess its uncertainty range (i.e.,
the realistic high and low value).
This is done for all assumptions
that the team considers potentially
Step 4 – Develop Action Plan (Tests
It's not enough just to measure the
financial impact of an assumption.
The need is to test critical
assumptions quickly and
Elimination of all uncertainty is
not the goal of an assumption action
plan. The challenge is to design
test programs that reduces
uncertainty the most (measured by NPV range reduction) per dollar of
test cost, in the least amount of
time. By developing several test
options the team is more likely to
come up with a cost-effective
Before the test is run teams should
think through a contingency plan.
How will the concept be adapted if
an assumption proves wrong?
Step 5 – Review Results and Refine
Following the test(s) the concept or
strategy is refreshed and updated,
replacing earlier assumptions with
the new learning collected from the
recent test program.
During the reassessment, the venture
team and management focus on what
was learned and make a decision
whether to invest in the next
development step, change direction,
or stop and re-allocate resources to
The learning approach that CAP
represents requires changing how
growth strategies and projects are
developed. Teams should be judged by
a set of learning parameters: astute
identification of critical
assumptions, cost effective action plans, and creative
response to what was learned from
examining the assumptions. In this way,
attitudes toward taking and managing
risk are changed and the culture is
transformed towards growth.
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