Chapter 18
The lean startup
The lean startup is a new way of conceiving and developing a business venture. If the traditional approach was to define a business plan, seek funding and then execute the plan, the lean startup works the opposite way – it emphasises early experimentation and rapid customer feedback, and it uses minimal amounts of capital until a business idea is proven. Lean startup thinking has become the dominant way of thinking about entrepreneurship, especially in the technology sector, over the last decade.
When to use it
- To help you launch a new business successfully.
- As a way to think systematically about the early stages of new business development.
- To challenge the traditional top-down approach to business planning in your firm.
Origins
The term ‘lean startup’ was first used in the best-selling 2008 book of that name by entrepreneur Eric Ries. While the book described Ries’ personal business philosophy and his own experiences working for failed and successful startups, it was based on ideas from a couple of different sources.
One was the notion of bringing the customer into the development process so that you get rapid feedback on your ideas. This approach is also used in design thinking (see Chapter 16). Ries picked up this way of thinking from his mentor Steve Blank, a serial entrepreneur and adjunct professor at Stanford University. Blank, in turn, acknowledges that this approach builds on a number of earlier frameworks, such as Discovery-Driven Planning by Rita McGrath and Ian MacMillan.
The other idea Eric Ries built on was the ‘lean manufacturing’ movement and, in particular, the Toyota production system that emerged in Japan in the post-war years. In simple terms, lean manufacturing is demand-driven, meaning that the component parts making up a product are pulled through the supply chain on a just-in-time basis. Ries adapted this concept to the startup world, arguing that entrepreneurs are more successful when they start small and build their operations only as demand starts to take off.
What it is
Lean startup offers an overall perspective on how successful new business ventures emerge. In the past, many new businesses were launched on the basis of a carefully prepared plan with large amounts of upfront investment. Such businesses sometimes succeeded in a big way (Amazon, for example), but often they failed because of incorrect assumptions in the plan, or because the market had moved on before the product or service was ready to launch. Increasingly, entrepreneurs have moved to a more iterative model, trying out their ideas in a low-risk way, getting customer feedback and then adapting their business model to the emerging needs in the market.
The lean startup model became successful in part because it captured the essence of what most entrepreneurs were doing anyway, and in part because it provided a set of tools to turn this intuitively sensible approach into an operating model. These tools have become so influential that they are increasingly being applied within established businesses as well.
The lean startup approach can be characterised in terms of three basic principles:
- Entrepreneurs generally do not have a plan. They have a high-level vision – some sort of image of the product they want to create or the problem they want to solve – and they have some vague hypotheses about how to turn this vision into reality.
- Testing these hypotheses involves ‘getting out of the building’, which means spending time with potential customers and understanding their real concerns. This work is best done through multiple iterations – for example, creating a simple prototype (or ‘minimum viable product’) that users can test and provide feedback on, so that any problems can be resolved while the costs are low.
- Being prepared to adapt to customer feedback is a strength, not a weakness. While a few famous innovators such as Steve Jobs have succeeded by doggedly pursuing their own vision regardless of feedback, the smart approach is usually to learn from feedback and to be prepared to ‘pivot’ the business towards Plan B if Plan A is not working.
How to use it
The lean startup philosophy can be readily translated into a set of practical tools. Indeed, one of the reasons it has become so popular is that it helps entrepreneurs to apply scientific concepts to the complex and uncertain world of new business development. The following five-step plan is a summary of how to apply it:
- Develop a vision: The entrepreneur should have a clear overall view of what she wants to create, typically in terms of an unmet need in the market-place or a problem or frustration that needs resolving.
- Translate this vision into specific hypotheses: For example, if the overall vision is to provide a gourmet-quality food-delivery service to city professionals, this could be broken down into hypotheses about customer demand (people will pay a 50 per cent premium over standard home-delivery services for gourmet-quality food), or operations (by serving a city market, we can prepare and deliver a gourmet-quality meal in less than two hours), or other aspects of the business model.
- Start to test your hypotheses (with a view to gradually resolving the uncertainties in your plan): The key concept here is the ‘minimum viable product’, which is an offering that is developed just enough that the hypothesis can be tested. A well-known example is Rent the Runway, a designer-clothing rental service created by two Harvard Business School graduates. They borrowed a range of dresses and asked students to try them on and rent them out. Then they asked people to rent them without trying them on. Then they asked people to rent them based only on a website picture. By working through this sequence of experiments, they gradually reduced the biggest areas of uncertainty in their business idea.
- Learn and adapt: When a hypothesis is supported, you move on to the next hypothesis and you gradually build up the business. But when a hypothesis is not supported, you have to take stock. Sometimes you can rerun the test in a slightly differently way and push on; at other times, you have to be prepared to ‘pivot’ to a different product, a different segment, or a different business model altogether. Many highly successful businesses started out in a very different place: Twitter started out as a podcasting business, while YouTube began life as a video dating service.
- Scale-up: Once you have resolved all the major areas of uncertainty in your venture, you have achieved what Eric Ries calls ‘product market fit’ and you are ready to scale-up the business. Up to this point, you have spent the bare minimum of money to test out your ideas, but now is the time (if you so choose) to raise money from external investors. This is also the time to build the right team of people to manage the different parts of the business.
Top practical tip
The lean startup is a useful model at two levels. Some people use it in an almost metaphorical sense, as a way of saying that they are starting small, adapting along the way and avoiding external sources of funding. Others use it in a very analytical way, as a disciplined approach to resolving critical uncertainties in the market. This is where it is most useful. The more clearly you define upfront the hypothesis you are testing, the more certain you can be about how you interpret the feedback you receive from customers. And usually it is better to work through a sequence of small experiments, rather than making multiple changes at the same time. This approach applies equally well in established companies that are trying out new business ideas.
Top pitfall
The lean startup is sometimes presented as the ‘best way’ to develop a new business idea, but as with all models it has its limitations. It works best in business-to-consumer new ventures where you can try things out in a small, low-risk way. It does not work so well in business-to-business settings where you are making an ‘all or nothing’ sale of a large piece of equipment or service. It is also not the right model in markets where speed of roll-out is key. Amazon’s motto in the early days was ‘get big fast’; if it had adopted the lean-startup approach to venture development, it could easily have been overtaken by a more aggressive competitor.
The biggest pitfall, in other words, is to try to apply lean-startup thinking in places where it doesn’t fit.
Further reading
Blank, S. (2013) ‘Why the lean startup changes everything’, Harvard Business Review, 91(5): 63–72.
Blank, S. and Dorf, B. (2012) The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company. Silicon Valley, CA: K&S Ranch.
Eisenmann, T., Ries, E. and Dillard, S. (2013) ‘Hypothesis-driven entrepreneurship: The lean startup’, Harvard Business School Case Collection, 9: 812–895.
Ries, E. (2011) The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. New York, NY: Crown Publishing Group.