The Lean Startup is a business approach that is synonymous with the work of Eric Ries (who has also published a book called The Lean Startup) and Stanford professor Steve Blank. It describes a new approach for start-ups and prescribes behaviours they should adapt to increase the likelihood that they will succeed. While the concept is best suited in a technology or Internet context, it has a wider application for all start-ups.
So what are the key tenets of the approach?
In many respects the concept starts with a redefinition of what a start-up is. For Steve Blank– a start-up is essentially ‘an organization formed to search for a repeatable and scalable business model.’
This theme is echoed by Ries who describes how a start-up has to focus on discovering a viable business model while operating in a climate of ‘extreme uncertainty’. Framing a start-up in this way helps shift the focus to a more scientific approach where activities undertaken are viewed as tests that quickly help you validate assumptions (or otherwise).
Searching for a viable business model
Given that you are in research mode, it is important to embrace some simple processes to ensure the search for a scalable business model is an efficient one. In many ways, these are lessons in hyper – efficiency, where time and money is precious and the basis for informed decision making is primarily on the back of building what they call a Minimum Viable Product (MVP). An MVP is a basic version of the product that can be sent to some customers (ideally early adopters) who will give you feedback which will help you decide what to do next.
The following example as described by Ries neatly illustrates the concept:
Rather than building the service and trying it out on customers, create a sign-up page that merely promises to deliver this groundbreaking capability. Then present it to some prospective clients. Compare their enrollment rate with that of a control group shown the usual sign-up page. The results will give the team the confidence either to proceed or toss the idea into the circular file. No one would actually get the new feature yet, of course, because it hasn’t been built. Wired, May 2012
In effect Ries is suggesting that you look for ‘evidence of demand’ before building the complete product, and an easy way to test for this is to observe real user behaviour on say, a web page. Every click on a button signals intent, regardless of whether or not the product in the back end is there or not, and this data helps you assess likely demand.
Additional Lean Startup Concepts
The following represents a brief description of some of the main concepts associated with the Lean Startup approach.
1. Test Frequently and Learn Quickly
As the above example of the MVP approach demonstrated, they advise that you don’t build an elaborate product before you have undertaken numerous tests along the way (They are big advocates of A/B testing).
2. Observe and Measure Real Customer Behaviour
Eschew focus groups and watch how real customers behave. Getting the MVP into the hands of real customers early on and quickly learning from what they do underpins their entire methodology.
3. Focus Exclusively on Capturing Actionable Metrics
Avoid vanity metrics i.e. metrics that create a favourable impression about performance when they are illusory. For example: what good is 1 million page impressions if none of them convert? Instead entrepreneurs need to focus on actionable metrics i.e. real metrics which can inform decisions.
4. Be Comfortable Pivoting based on Key Learnings
The recommend you pivot or stop what you are doing if the initial plan is not working (and your findings support the view that changing tack is more likely to be successful than continuing with the original plan). This view is of course very much consistent with the views of business planning guru John Mullins as described in his book Getting to Plan B.
5. Embrace New Accounting Methods
Generally Accepted Accounting Principles (GAAP) has underpinned financial accounting for many years. However, Ries argues that Lean Startups need to embrace ‘innovation accounting’ before they get to the point where traditional accounting kicks in. With this method he suggests that progress is best tracked by observing things like user activity, engagement, retention and virality. In other words, if user numbers are increasing, and they are being retained such that Life Time Value (LTV) is growing significantly, this is a better indicator of ‘progress’ than traditional accounting methods.
6. Stay Lean
The word ‘lean’ refers to speed and agility and not ‘cost savings’ as some readers misinterpret (although that said, they are against waste ‘of all guises’). Again Ries is recommending that start-ups take advantage of the discovery mode to quickly learn what is not working so they can make changes immediately.
Like all ‘new concepts’ the approach has its fair share of critics also. Some people cite the lack of successful exponents as problematic, and others focus on Ries’ relatively underwhelming career before writing the book. Others focus on the dangers of bringing an inferior product to market (MVP). Meanwhile, Ben Horowitz has argued the case for the fat start-up:
“Much of what has been written and said about lean start-up’s makes good sense. However, that advice is often incomplete, and some of the things left unsaid are the least intuitive…There are only two priorities for a start-up: Winning the market and not running out of cash. Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do. …Thin is in, but sometimes you gotta eat.”
For me, I feel that regardless of the concept, people will always find flaws and have strong counter arguments to certain elements of the approach. Awareness of these arguments helps entrepreneurs make more informed decisions regarding whether or not they embrace alternative approaches. They are merely opinions after all.
If you are an Internet or technology based startup the lessons will be ones that are likely to resonate. The Lean Startup approach is certainly one which will help you instill early on the need for decisions to be based on scientific facts (as much as possible) and that given the extremely difficult conditions start-ups operate in, that an ability to learn quickly and change tack are lessons you would do well to bear in mind. I for one have been converted to their way of thinking.
The Lean Start-up by Eric Ries
The Four Steps to the Epiphany by Steve Blank
Crossing the Chasm by Geoffrey Moore