People who have long been expecting the release of iPhone 5 may be disappointed to hear from today’s “Let’s talk iPhone” event that there won’t be one. Apple is instead releasing the iPhone 4S, which, from physical appearance, is exactly the same as the iPhone 4.

Nevertheless, the iPhone 4S has a few noteworthy features – be it the dual-core A5 chip, which makes the phone run twice as fast, or the 8 megapixel camera that comes with an f/2.4 aperture. This camera improvement is impressive given that most DSLR kit lens don’t even offer the same aperture. The most talked about feature, however, is the “Siri” artificial intelligence voice control, or what Apple describes as your “humble personal assistant”

 Siri will recognize voice commands such as  “what is the weather today?”, “reply to Susan”, “text my wife”, or “set up meeting with John tomorrow evening”. It will then manage these tasks for you without you having to even touch your phone. Sounds pretty cool?

In theory, one can find many uses for Siri. How convenient would it be if you could get directions, make appointments on your calendar, or text someone in just a few seconds? As people are spending more and more time on the road these days, the ability to instruct your phone to do these things without having to even look at it can be very useful. It can also reduce the many accidents that come from texting while driving.

But in practice, we have yet to see whether Siri can really live up to its promise. How effective will it be in recognizing voice commands? Will it work with accents that aren’t American or British? Will it recognize specific pronouns and foreign names? Can it really, as Apple claims, “get better” as it learns your voice?

Another challenge that Apple has to keep in mind is the fact that Siri isn’t all that new. Android’s Vlingo voice recognition app has been around for sometime, and Windows phones also have a similar speech recognition feature. Both of these systems have been praised by many users. This time around, Apple has already disappointed many customers with the lack of an iPhone 5 upgrade. With Siri being the only key innovative feature, Apple’s got a lot to prove that iPhone 4S is worth the upgrade.

Is the iPhone 4S worth buying for you? Guess we’ll find out on October 14^th.

March 2011: A team of industry veterans from LinkedIn, PhotoBucket, and La La. $41 million in Series A venture capital funding. Top tier firms including Sequoia Capital and Bain Capital. Massive PR exposure. A declined $200 million offer from Google before the product even launched.

May 2011: Confused customers. A product pulled from the market. Co-founders and executives leaving in droves. A failed PR campaign.

So what happened? The new location-based social network for photo sharing, Color, promised the world that it would “transform the way people communicate with each other.” Admittedly, the team made a lot of mistakes during product development and launch, but all the basic elements of a “good” investment were there: an experienced team, an interesting idea, a large and fast growing market, advanced technological capabilities, and nearly every resource needed to succeed. Yet investors are looking at significant financial losses and reputational damages because they discovered at a late stage that a critical assumption in the business model was flawed.

Do people really want to share photos with strangers?

A sarcastic review recently posted in the iPhone App Store illustrates how many seem to feel about the concept of publicly sharing photos: “Speaking of strangers, all you lecherous anti-social creepers need to run down to your local swimming pool, beach, playground, or shopping mall – the free Color app is the perfect 21st century electronic voyeur.“ While many entrepreneurs believe the strategy of a) developing a “good enough” product b) getting it out into the market to gather feedback and c) improving through an iterative process is the most effective way to successfully launch a product, I believe that a proactive approach to testing and addressing critical business model assumptions, such as the aforementioned assumption facing Color, is much more effective and both time and cost efficient.

The current corporate and venture capital staged funding processes seem to be fundamentally flawed. It is not that entrepreneurs and investors are asking the wrong questions, it is that they are not focusing enough on the order in which they ask the right questions. While investors may not always have the ability to dictate terms due to competitive, speed to market, or co-investor pressures, I believe that redefining the staged funding process to focus more on efficiently mitigating risks in order of importance can be beneficial to all stakeholders involved.

Last year, in a Harvard Business Review article entitled Beating the Odds When You Launch a New Venture, Innosight Managing Partner Matthew J. Eyring described the concept of addressing “Deal Killer” risks as early as possible and “Path Dependent” risks as soon as they are encountered. Building off of this idea, I propose to investors a new approach to staged funding: Test Based Staged Investing.   

Test Based Staged Investing (TBSI) still involves identifying attractive opportunities such as Color, but instead of the typical process of staged investing (see Exhibit 1 for comparison), TBSI explicitly and methodically tests the most critical “Deal Killer” risks in the earliest funding stages and addresses “Path Dependent” risks as they arise.

Exhibit 1: Comparison of Typical Venture Activities

In the case of Color, both investors and entrepreneurs could have saved significant time and money by breaking down the business model into its fundamental elements, identifying and prioritizing the critical assumptions that support the model, and developing tests to validate those assumptions.

For example, Color might have identified “People want to share photos with strangers” as a “Deal Killer” after mapping out their business model and subsequently tested it by creating a low cost website describing the concept, driving traffic to it via PR efforts, and measuring interest through social media metrics, sentiment tracking, and the number of individuals signed up to be notified at launch.

Don’t think that would not work? A recent startup named Hipster just did it. However, assumption testing does not always need to be “innovative”. The most important test most startups will encounter involves creating a prototype or proof of concept to address the critical assumption of “We can actually build it.” Whether addressing the former or latter, TBSI groups and funds the most important tests in the first round, measures and evaluates the results of these tests, and invests in further rounds of testing if critical business model assumptions hold to be true or if the model is flexible enough to adapt.

Following the Test Based Staged Investing process can benefit all stakeholders in a business venture and minimize the risk of an embarrassing late stage failure. Both entrepreneurs and investors better understand a venture’s business model, develop more focused and effective plans to test the model, and limit their financial losses, reputational damages, and opportunity costs. Even when ventures fail at an early stage due to an unavoidable “Deal Killer”, entrepreneurs and investors can institutionalize this knowledge and avoid future investments that rely on the same fundamental assumptions. By following the principles of TBSI, investors can more easily realize when it is time to “cut losses” or double down on an investment, which frees up capital for new or promising ventures and likely boosts returns.

While Color raised enough money to recently “pivot” its product into a Facebook integrated solution, I still believe the fundamental assumption that individuals want to share photos with strangers is flawed. If this turns out to be true, it may be just a matter of time until the company is eventually “killed”. However, if its stakeholders can learn from their mistake and follow the principles of Test Based Staged Investing for future ventures, I have a feeling we will be seeing them again very soon.