Are you launching a new startup business? Is it a small business, tech startup or a program within a large corporation? Starting a new enterprise can be a hit-or-miss proposition.
A traditional startup approach requires an entrepreneur to write a business plan, assemble a team, pitch to investors, create a product, market it to consumers and start making sales. Along the way, the business person can probably suffer a serious setback leading to the startup failure. Indeed. 75% of all startups fail and don’t even get to celebrate their first anniversary.
The good news is that a lean startup is an approach that has emerged that makes the entire process of launching a business less risky.
The methodology prioritizes experimentation over elaborate planning, iterative design over the big design upfront development and customer feedback over intuition.
Actually, the minimum viable product and pivoting are the lean startup’s concepts and have taken root in the startup world.
So then here is more information about the lean startup method that has revolutionized the startup world.
The Misconception About a Business Plan
An entrepreneur must create a business plan before launching a startup. This is a document that has details such as:
- The problem that the business intends to solve
- The size of the opportunity
- The solution
- The forecasted cash flow, income and profits
A business plan is written several months before building a product because it is assumed that an entrepreneur can predict uncertainties in advance prior to raising funds and executing the idea.
Next, the entrepreneur pitches to potential business angels using this convincing business plan and begins developing the product. Without customers’ input, the startup hires developers who spend months getting the product ready to be launched in the target market.
The venture launched its product and starts gathering customer feedback about the product. This is done when the sales team is selling the product online or through other channels.
Sadly, the consumers might reject the product because they either don’t need it or doesn’t have the necessary features they want. As a result, the product may fail to gain traction even after months or years of development.
The following are the lessons derived from the traditional startup approach.
- The majority of business plans don’t survive the first contact with consumers.
- The business plans are usually fiction and it only ventures capitalists that demand a five-year plan that predict the unknowns. They are unrealistic and time-consuming.
- There is a master plan and so entrepreneurs shouldn’t view startups as smaller versions of mature companies. Successful companies continuously improve their initial ideas and learn from their failures and customers’ feedback.
According to the lean startup approach, a startup is a temporary organization searching for a scalable and repeatable business model.
Key Principles of Lean Method
1. Untested Hypotheses (Good Guesses)
Small businesses using the traditional startup approach spend months of planning and research. However, entrepreneurs that opt for lean startup understands that they have a series of untested hypotheses.
While traditional startups write an intricate business plan, lean startup founders write a business model canvas or summarize their hypotheses in a framework. This diagram or sketch shows how the business intends to create value for its customers and for itself.
Here are the components of a business model:
Key Partners: Includes key suppliers, key partners, key resources acquired from key partners, and key activities performed by key partners.
Key Activities: Your value propositions key activities, distribution channels, revenue streams, customer relationships.
Value Propositions: The value you deliver to your customers, the problem you’re solving, the number of products and services you can offer to the target segments, customer needs to be satisfied, and the minimum viable product.
Customer Relationships: How to acquire, retain and grow customers, already established customer relationships, their integration with the overall business model, and the cost.
Customer Segments: The target audience you’re creating the value for, the list of the most important customers and customer archetypes.
Key Resources: The key resources that the value propositions needs, distribution channels, revenue streams, and customer relationships.
Channels: The channels that your customer segments want you to reach them through, what your competitors are using, the best channel, the most cost-efficient channel, and the integration of the channels with customer routines.
Cost Structure: The costs in this business model, the most expensive key resources and key activities.
Revenue Streams: the value that your customers are willing to pay, what they are currently paying, the revenue model and pricing tactics.
2. Customer Development
A lean startup tests its hypotheses using customer development or a get out of the building approach. This involves going out to potential buyers, users and partners to gather feedback on different elements of the business model. This includes product pricing, features, affordable customer acquisition strategies and distribution channels.
The main focus of the lean startup method is speed and nimbleness. So a young small business assembles minimum viable products and immediately starts to gather customer feedback.
Next, the company starts to revise its assumptions using the customers’ input. It may redesign the product again, test the new design, iterate (make small adjustments), pivot (make substantive changes) until it achieves what the customer is looking for.
Listening to its customers helps a startup to develop a workable business model. For instance, when the customer’s feedback may reveal that the business is using wrong hypotheses, it may opt to revise them or pivot. However, it will start to execute, and build a formal organization once the business model is proven.
Further, each phase of customer development is iterative and a startup can fail several times before finally getting it right or finding the right approach.
Customer discovery ↔ customer validation → customer creation → company building
3. Agile Development
The agile development concept was borrowed from the software industry. Both customer development and agile development are implemented simultaneously. Agile development is implemented in a startup to help it eliminate time and resources wastage by developing the product incrementally and iteratively.
Actually, agile development helps the business to create the minimum viable product through experiments and tests. Products are built using short, repeated cycles because the MVP aims to gather feedbacks which the company uses to revise this basic product.
On the contrary, each stage in the traditional product development occurs in a linear order and tends to last for months.
What is Right and Wrong with the Lean Startup Method?
Valuable Aspects of Lean Startup Model
Business Model Canvas: According to the lean startup method pioneered by Eric Ries, the key to startup success lies with their action. In other words, small business founders should try to understand their business assumptions using a business model canvas and fill its nine components mentioned above pertaining to its customer segments and value propositions.
Minimal Viable Product: Founders build a basic product called a minimal viable product testing its hypotheses. If they receive a green light from consumers they proceed to build a company but they pivot or change direction when their MVP is rejected. Therefore, the lean startup method helps startups to either modify the product or change the target market based on customer feedback regarding the MVPs. It helps them to continue exploring both the product and market up to when it attains the product-market fit and achieves a substantial demand for their products.
Experimentation: It allows startups to rigorously experiment with their business ideas, generate hypotheses and systematically test them.
Harmful Aspects of Lean Startup Model
Incremental Improvements: Lean startup method advocates for getting out of the office and getting customers’ feedback to help improve the minimal viable product. However, it’s not the duty of the customers to know what they want but it’s the startup’s job to identify the need or the gap and try to fill it. Businesses that focus on what today’s customer wants exposes the business to incremental improvements rather than focusing on the future. Further, customers will first dislike novelty and so pursuing external validation from the initial customers can be even harder.
Lack of Insight: The canvas asks vital questions that help founders to know their customers. However, these questions only help them to know how the startup looks like at the end state but doesn’t provide a roadmap to get there. Further its detailed nature obscures the real insight making your ideal special. However, they can get such insight using scientific methods. Observing the world first and generating ideas based on observations can help entrepreneurs generate startup ideas that can lead to products and services that can change the world.
The Essential Ideas of Lean Startup Method
Basically, the lean startup method helps all kinds of organizations to create and sustain innovation. It helps them get answers to why they should build a new product or service and how to minimize the potential failure when developing their offerings.
Because of its ability to reduce unnecessary failure and helping businesses to focus their resources on promising ideas, brand-new companies, nonprofit organizations, educational institutions, government agencies and Fortune 500 companies use the lean startup method.
Therefore lean startup is not a tech alone concept although it originated in the tech sector. It is profitably used in developing products such as diesel turbines, lawnmowers, digital products, services and processes and more.
On the other hand, there is a lot of confusion about this concept and how businesses can apply it. Here are some essential ideas about the lean startup method.
Why is this method called lean startup yet it can be applied in established organizations?
Eric Ries defines a startup as a “human institution designed to create a new product or service under conditions of extreme uncertainty.” So startups are characterized by unknown elements but not the sector, size or age of the company.
So lean startups work on a risky new product irrespective of the growth stage of the company. Here are some areas where startups face a higher degree of uncertainty.
Product Risk/Technical Risk: This leads to a question such as can the company build this thing at all? At the onset of this health crisis, many pharmaceutical companies were asking whether they could find the cure or vaccine for Covdi-19. There was a huge risk that they would fail to find it and if they did, there would certainly be a huge demand. For sure, the demand for the Covid-19 vaccine is very high and so therefore there is no market risk.
Market Risk/Customer Risk: This introduces the question, will there be people to buy or use our product if we build it? Or should we build this product? For many years, customers have not been interested in buying groceries online, so some of the companies that tried to develop this concept such as Webvan failed and investors lost a lot of money.
Business Model Risk: The question is how can we create a way for this product or service to make us money? For instance, when Google launched its website, it didn’t have an idea about selling search-related ads but today the search engine giant makes a lot of money from this business model.
Is It Possible to Experience Both Product Risk and Customer Risk Simultaneously?
Yes. However, some companies have managed to eliminate the customer risk ahead of product risk by going live with an MVP. This helps them find customers and improve features based on customers’ feedback. Otherwise, taking months and years to develop a final product and later realizing that nobody wants to buy it can be a huge customer risk.
Therefore, the lean startup method helps businesses to avoid unnecessary failure and wastage of resources while building products or services that nobody buys.
Is Lean Startup a Method for Companies with a Small Budget?
The term lean is construed to mean bootstrapped companies. However, how can an entrepreneur build a business surrounded by tons of unknowns with a shoestring budget?
In fact, some of the world’s giants have been using the lean startup approach. Take for example the lean manufacturing revolution of Toyota. To the automaker, lean refers to the narrow focus of giving customers value while eliminating everything else. Car owners and drivers are looking for a product that is correctly assembled.
For startups, there are not sure what their customers want and so their value to them is still unknown. Therefore their biggest priority is to find out what customers want and are ready to pay. So, lean is not about cheapness but about focus.
What does Minimum Viable Product (MVP) Entail?
As mentioned above learning what customers want and are ready to pay can help startups to succeed. Minimum viable product (MVP) is a tool that lean startups use to do that. It’s an experiment that helps companies validate or invalidate the hypothesis about a new product or service.
An MVP is a stripped-down version or basic product which is different from a prototype that is used to test a product itself or answer technical and design questions.
The reason why the minimum concept is vital is that it helps the team to test the hypothesis using basic features. An MVP eliminates anything else that waste money, time or clouds the results.
The viable concept allows the product to produce test results that the business can learn from. In other words, the product has to work up to a certain level. Based on this feedback you can then go ahead and develop the actual product or service.
What is customer development and where does that fit in?
Steve Blank coined this term that simply means talking to people. It involves interviewing customers to find out their needs and how they interact with your product. You may realize that your target customers have little or no interest in your basic idea or that you had a wrong key assumption about what the customer wants.
Getting this information at this stage is less risky or less costly because you haven’t spent a lot of money or time developing the wrong product. Customer feedback about a specific problem helps you to validate or invalidate your solution using a version of your product with basic features.
What is a Pivot?
It simply means to change a strategy based on the feedback you have received from the target audience. YouTube began as a video-dating site but this concept didn’t take off. So the company pivoted by shifting its focus to video sharing which is a promising idea.
On the other hand, a company can pivot by changing the focus to a different segment or market than the one that was previously guessed.
Can the Lean Startup Method Create an Entrepreneurial, Innovation-based Economy?
Many lean startup method adherents claim that following this process can make a start-up successful. However, success is founded on many factors but not a single methodology.
Still, thousands of startups that have used the lean method as well as established companies that practice it have experienced fewer failures compared to those that implement traditional methods.
Actually, a lower startup failure is important to the economy because they foster an environment that encourages growth and the creation of jobs.
Previously, the number of startups was lower than today because of the following constraints.
- The high cost of acquiring the first customer and getting the product wrong.
- Lengthy technology development cycles.
- Fewer startup founders and employees were willing to start or work at a startup.
- Fewer venture capital firms were willing to fund startups or invest substantial amounts in a startup.
- Experts in building startups were only concentrated in certain geographic entrepreneurial hot spots.
However, the introduction of the lean startup approach eliminated the first two constraints because its business model helps startups to create products that their customers want, at a shorter period and with a small budget.
Further, it eliminated the third by making startup businesses less risky. Other technologies and business trends have emerged that have removed the barriers to startup information. As result, these forces have completely transformed the entrepreneurial landscape.
In view of that large companies have joined the young tech ventures in implementing lean startup practices. The number of venture capitalists, accelerators and crowdsourcing sites has risen thus decentralizing the access to funding.
So the lean startup techniques that were originated designed for the tech ventures are now being used to create small businesses that form the bulk of the economy. So if such companies embrace the lean startup method in huge numbers then there will be increased efficiency and growth which will positively impact the GDP and employment.
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