Starting a new company, always had its own difficulties and risks. Whether you want to launch a small business, a tech startup or even a new project for a big firm, there are always the risk of failure. In normal conditions and based on old formulas, when you want to build a company there are a few things that you usually do: writing a business plan, talking with sponsors, building a team, launching a product and selling it are the main. But in today’s emerging world, a lot has changed and there are risk of big failures. In this article we will talk about lean start-up, a new methodology for developing products and companies. Stay tuned!
Recently, a powerful countervailing force has evolved, one that could make the task of initiating a business less challenging. It is a methodology called the “lean start-up,” and it promotes experiments over extensive planning, customer reviews over gut feelings, and incremental design over traditional development of “big design up front” While this methodology is only a few years old, its concepts – such as “minimum viable product” and “pivoting” – have rapidly taken shape in the start-up ecosystem, and business schools already have started to adapt their curriculum materials to teach them.
But the lean start-up revolution hasn’t gone completely mainstream, and we still have to experience its full impact. In many forms it’s approximately where the big data movement was 5 years ago — composed primarily of a not yet commonly accepted buzzword where its implications businesses are just starting to understand. But as their practices spread, the general consensus about entrepreneurship is turned on its head. New companies of all sorts are seeking to increase their likelihood of succeeding by adopting their concepts of failing rapid and persistent learning. And despite the title of the methodology, the huge companies that adopt it may achieve several of its largest payoffs over the long term.
I will present a brief description of lean start-up methods and how they have transformed in this article. Most importantly, I’ll explain how they could ignite an unique entrepreneurial economy, in conjunction with other market trends.
The Myth of the Perfect Business Plan
The first step every founder must take, according to conventional wisdom, is to develop a business plan — a static document that defines the size of an idea, the major issue to be solved, and the solution the new business can provide. It usually involves a five-year projection of revenue, profits and cash flow. A business plan is basically a research activity written in solitary confinement at a desk before a businessman even started building a product. The presumption is that you should work out much of the uncertainties of a company in advance before you collect funds and finally implement the project.
Once a businessman with a plausible business plan gets capital from companies, he or she starts working on product in a likewise isolated fashion. Developers invest hundreds of man-hours in getting it ready for launch, with little or no input from the customers. Only after the product has been built and launched does the project get significant customer feedback — once the sales team is trying to sell it. And very often, entrepreneurs learn the lesson after months or years of development, that clients don’t need or want much of the product features.
We have managed to learn at least 3 things now, upon years of witnessing dozens of start-ups implement this conventional formula:
- Business plans seldom survive on first customer contact. As boxer Mike Tyson said of the prefighting strategies of his opponents: “Everyone has a strategy till they get hit in the mouth.”
- No one needs 5 year plans to predict complete unknowns other than VCs and the late Soviet Union. Generally speaking these strategies are fiction and fantasizing them up can often be a waste of money and time.
- Start-ups are not mini versions of larger firms. They aren’t unfolding according to master plans. Those that eventually succeed go rapidly from failure to failure, all while trying to adapt, making changes, and enhancing their initial ideas as they are continually learning from the clients.
One of the key distinctions is that although existing businesses are executing a business model, startups are looking for one. At the core of the lean startup methodology is this difference. It forms the lean concept of a start-up: a provisional organization built to look for a business model that can be repeated and scaled.
There are three key core values in the lean start-up approach:
- First, entrepreneurs accept that, instead of taking part in months of planning and study, all that they’ve got on day one is a set of untested theories — basically, good speculations. So, rather than writing a complicated business plan, founders are summarizing their theories in a framework called a canvas business model. This is basically a diagram of how an enterprise generates value for the start-up and its clients.
- Second, lean startups use a “going out of the building” technique to evaluate their ideas, named customer development. They go out and ask for feedback on all business model elements, such as product features, pricing, distribution networks, and inexpensive customer acquisition methods from potential customers, buyers and partners. The focus is on agility and speed: new ventures quickly assemble MVPs and get feedback from customers immediately. Then, by using feedback of customers to reassess their presumptions, they restart the cycle, test redesigned offers and make even more minor changes (iterations) or more constructive ones (pivots) to concepts that don’t work.
- Third, lean startups are practicing stuff dubbed agile development originating in the software sector. Agile development works in conjunction with developing customers. Unlike standard year-long product development cycles which simply assume understanding of the problems and product expectation of consumers, agile development minimizes wasted time and resources by recursively and incrementally developing the product. It’s the process whereby startups develop the MVPs they’re testing.
When Blue River Technology was founded by Jorge Heraud and Lee Redden, they were students in my Stanford classroom. They’ve had a dream of developing commercial robotic lawn mowers. They did learn their initial customer target – golf courses – after speaking to more than 100 clients in 10 weeks, they didn’t value their solution. But then they started talking to farmers and found enormous demand for an automatic way of removing weeds without the need to use chemical substances. Filling it had become their new focus on the product and Blue River had developed and tested a prototype within 10 weeks. Nine months later the startup had acquired more than $3 million in funding for the venture. Only nine months later the team expected a final product to be ready.
The Declining popularity of stealth mode
Lean methods change the language startups are using to define their work. Mostly during dot-com boom, start-ups almost always operated in “stealth mode” (to prevent alerting potential rivals to market opportunities), only during highly orchestrated “beta” tests revealing prototypes to clients. The lean start-up approach helps make those concepts useless because it holds that customer feedback is more important than secrecy in most sectors and that regular feedback produces better outcomes than cadenced revelations.
These two fundamental precepts in my career as a businessman solidified for me. (I was engaged with 8 high-tech startups, either as a founding member or as an early employee.) When I moved to teach around ten years ago, I came up with the customer development formula described above. By 2003 I was detailing this process in a course at the University of California at Berkeley’s Haas School of Business.
In 2004, I decided to invest in a start-up established by Eric Ries and Will Harvey and kept insisting that they take my course, as a condition of my investment. Eric has instantly noticed that waterfall development, the traditional linear approach to product development in the tech industry, must be substituted by recursive agile techniques. He also saw similar characteristics between this evolving set of startup subjects and the “lean start-up” Toyota Production System. Eric named the mixture of customer development and agile practices the “lean start-up.”
An array of famous books popularized the tools. In 2003, I did write The Four Steps to the Epiphany, first conveying that start-ups weren’t really mini versions of big businesses and laying out in depth the procedure of customer development. In 2010, Alexander Osterwalder and Yves Pigneur in Business Model Generation provided entrepreneurs the basic structure for business model canvases. Eric also released an outline in The Lean Start-up in 2011. And in 2012, in a step-by – step handbook named The Startup Owner’s Manual, Bob Dorf and I summed up what we had learnt about lean practices.
The lean start-up approach is currently being practiced at more than 25 universities and in a famous online course at Udacity.com. In comparison, in nearly every city of the world, you can see organizations like Startup Weekend bringing the lean approach to hundreds of potential entrepreneurs at a time. A significant number of start-up teams will run through half a dozen potential product ideas in a matter of a few hours at such meetings. While it sounds crazy to people who haven’t been to one, at some of these events several companies are set up on a Friday night and are making real sales on a Sunday afternoon.
Developing an Entrepreneurial, Innovation-Based Economy
Although some adherents believe that the lean approach will make independent start-ups more competitive, I think the argument is too lofty. Success is dependent on too many variables for a single approach to conclude that a single start-up is a winner. But on the grounds of what I have seen in hundreds of start-ups, workshops that teach lean techniques, and existing organizations that follow lean principles, I would make a more significant assertion: using lean methods along a range of start-ups would result in less errors than using conventional methods.
Lower start-up failure rates may have significant economic implications. Nowadays, the powers of change, globalization and legislation are cushioning the economies of every nation. Developed markets are increasingly losing employment, most of which will rarely recover. Jobs growth in the 21st century would have to come from new projects, so we each have a vested interest in cultivating an atmosphere that makes them prosper, develop and recruit more staff. The development of an innovation ecosystem fueled by the exponential growth of start-ups was never been more crucial.
In the past, in addition to the failure rate, the rise in the number of start-ups was limited by five factors:
- The high cost of attracting the first client and much higher costs of making the product wrong.
- Long periods in tech development cycles.
- The small number of individuals who have an enthusiasm for the challenges involved in starting or operating at a start-up.
- The nature of the venture capital sector, in which a limited group of companies often required to spend substantial amounts in a range of start-ups, to see big returns.
- The accumulation of real expertise on how to create start-ups, much of which was located in the areas of the East and West Coasts of the United States. (This is less of a concern in Europe as well as other areas of the globe, but there are regional entrepreneurship hotspots in the world as well.)
The lean strategy eliminates the first two limitations by helping innovative companies deliver goods that consumers really like, much quicker and cheaper than conventional approaches, and the third by attempting to make start-ups less vulnerable. And it has arisen at a period when other developments in industry and technology are also breaking down obstacles to start-up growth. The convergence of all these factors changes the entrepreneurship world.
Today, open source applications, such as GitHub, and cloud providers, such as Amazon Web Services, have cut software design costs from millions of dollars to thousands. Hardware start-ups no longer need to develop their own facilities, since offshore producers are now readily available. Even so, it has become very popular to see young tech startups using lean start-up philosophy to sell digital products that are merely “bits” distributed over the web or hardware designed in China in weeks of being established. Consider Roominate, a start-up built to encourage girls’ faith and curiosity in science, engineering, technology and mathematics. If the founders had done experimenting and iterating on the configuration of their wired dollhouse package, they submitted the specifications to the contractor in China. The first products came three weeks later.
Lean start-up methods are not exclusively about new tech firms. Big firms, such as GE or Intuit, have also started to incorporate them.
Another significant development is the decentralization of financing. Venture capital used to be a small group with structured companies grouped around Silicon Valley, New York, and Boston. In today’s startup world, modern mini angel funds, smaller than the typical $100 million VC fund, will make early-stage investing. Hundreds of accelerators, such as Y Combinator and TechStars, have started to formalize seed funding worldwide. And crowdsourcing platforms like Kickstarter offer another, more open way to fund start-ups.
Instant distribution of knowledge is also a boost to creative projects today. Before the internet, young business founders were offered suggestions only as much as they could have coffee with established investors or entrepreneurs. The greatest obstacle today is to work through the sheer amount of start-up recommendations they receive. Lean principles offer a context that allows you to discern between good and evil.
Lean start-up strategies were originally developed to build fast-growing business projects. But I agree that these principles are equally true for the development of small companies on Main Street that make up the majority of the economy. If the whole world of small businesses were to accept them, I highly believe that it would improve productivity and performance and have a significant and immediate effect on GDP and job opportunities.
There are indications that this might eventually happen. In 2011 The National Science Foundation in U.S. started using lean approaches to commercialize fundamental science experiments through a initiative dubbed the Innovation Corps. Eleven colleges are currently introducing techniques to hundreds of senior research teams throughout the United States.
These methods are adopted by MBA programs too. They have trained students for years to adapt large-company methods — like accounting techniques for measuring sales and cash flows, and management frameworks of organization — to start-ups. Yet start-ups are having entirely different challenges. Now business schools are finding they should have their own management tools for new projects.
When business schools accept the difference between the practice of management and the quest for a business model, they reject the business plan as the basis for entrepreneurial preparation. And the business strategy contests that through over a decade have been a popular part of the MBA culture have been substituted by business model tournaments. (Harvard Business School is the first to make the move in 2012.) Harvard, Stanford, Berkeley and Columbia are taking the lead and adopting the lean startup curriculum. My Lean LaunchPad trainer course currently teaches more than 250 college and university educators a year.
A Fresh Business Model for the 21st Century
It is becoming evident now that lean start-up activities are not exclusively for new tech companies.
In the last 20 years companies have invested to rise their productivity by bringing down prices. Yet it is no longer enough merely to concentrate on developing the current business models. Nearly any major business recognizes that by constantly innovating, it still has to cope with the ever-increasing external challenges. The companies need to keep creating new business models to insure their longevity and growth. This problem involves radically new organizational processes and competencies.
Over the years, management specialists like Henry Chesbrough, Rita McGrath, Vijay Govindarajan, Clayton Christensen, Ian MacMillan, Alexander Osterwalder and Eric von Hippel have been advancing the theory about how big organizations should develop their innovation procedures. However, we’ve witnessed major corporations, namely General Electric, Qualcomm, and Intuit, continue to adopt the lean startup approach over the last three years.
For example, GE’s Energy Storage unit is using the method to change the way it innovates. The division’s managing director, Prescott Logan, acknowledged in 2010 that a new battery created by the unit has the potential to transform industry. Logan introduced lean methods instead of planning to create a warehouse, ramp up production and deliver the new concept (ultimately called Durathon) as a conventional product expansion. He began looking for a business idea and got interested in customer development. He and his colleagues worked face-to – face to discuss entirely emerging opportunities and technologies with hundreds of multinational prospects.
This were not sales calls: Staff members left behind their PowerPoint reports and listened to the battery status quo problems and complaints from consumers. They searched extensively to discover how consumers purchased industrial batteries, how much they used them, and the circumstances in which they worked. They made a huge change in their customer focus with that input. They removed one of their main focus groups, data centers, and they found a new one — utilities.
Moreover, they restricted the large “telecom” consumer group to mobile phone networks with unstable power grids in developed countries. GE ultimately spent $100 million to construct a world-class battery production plant in Schenectady, New York, which it unveiled in 2012. The market for the new battery is so high that GE now runs a backlog of orders, as per media reports. The first hundred years of management education centered on developing techniques and resources that formalized operation and productivity for current companies.
Today, when we launch entrepreneurship companies, we get the first set of tools to look for new business models. It also appears to have arrived right in time to help existing businesses deal with the relentless disruptive factors. Those factors would make people feel the strain of radical change in any kind of company in the 21st century — start-ups, small enterprises, companies, and government. The lean start-up strategy will help us face it head-on, make fast changes and change industry as we know it.