The lean startup theory was the brainchild of serial entrepreneur Eric Ries. Having seen three promising firms fall by the wayside in the early 2000s, Ries spotted one single common denominator that he believed led to the failures. In this article we take a look at how Ries’s methodology has since gone on to change the way business people and professors around the world take on the startup challenge. Pay close attention, you aspiring entrepreneurs, because there is much to learn here.
Google started with a couple of friends tinkering around in a garage, as did Apple. Facebook started with some drunken students messing about in a dormitory at Harvard University.
Not so long ago, Snapchat only had a small number of developers that could be counted in the low double digits. In 2014, Whatsapp reportedly only had 55 employees.
All these trailblazers took their inspiration from Bill Gates and Paul Allen, who started Microsoft with no capital at all back in the 1970s. These are not apocryphal stories. They actually happened.
So what do these anecdotes tell us?
Well, to use the managerese, they are examples of lean startups (although they did not know it at the time) and minimum viable products (in other words, taking an embryonic product to market and then engaging in an iterative process to evolve said product once it has been proven that there is a marketplace for it).
The trendy pointy-heads out there in Silicon Valley prefer to call this low-finance approach ‘bootstrapping’. The companies listed above all went through this phase and built huge user bases before moneyed venture capitalists swooped in to provide game-changing capital, critical mass and the opportunity to become ‘unicorns’ (companies with £1bn-plus valuations).
So how useful is the ‘lean startup’ case study to the entrepreneurs of tomorrow?
What is the methodology behind it?
Where did the theory come from?
And most importantly, does it work?
After all, the popularity of a particular business practice or buzzword very rarely correlates with real-world effectiveness. For every unicorn, there are, after all, hundreds of thousands (if not millions) of failed companies. Let us look back. The lean startup theory was the brainchild of serial entrepreneur Eric Ries.
Having seen three promising firms fall by the wayside in the early 2000s, Ries spotted one single common denominator. He believed that all three of his failed ventures did so because: “I was working forward from the technology instead of working backward from the business results you’re trying to achieve.”
Based on this Eureka moment, Ries set about developing a new methodology for those launching a business. One that focused on getting products and services to market quickly, through what he called “hypothesis-driven experimentation, iterative product releases and validated learning”.
Essentially, Ries felt that many fledgling companies spent far too much time and money on developing a single product before launch – in many cases, only to see it fail. Under his philosophy, startups instead work on several smaller development cycles – launching nascent MVPs, measuring their success and using feedback from early adopter customers to tailor the product to the audience already using it. Then this cycle is repeated again and again.
Ries was motivated to document the lean startup methodology after realising that many fledgling companies spent far too much time and money on developing a single product before launch – in many cases, only to see it fail.
Despite only coining the term as recently as 2008, Ries has proved the theory through practical examples. His principles are now taught in business schools around the world, including Harvard, where the next Bill Gates or Mark Zuckerberg is just as likely to drop out as finish the degree. Nevertheless, despite the somewhat unhelpful establishment credentials, many agile executives such as those at Dropbox and Inuit credit the lean startup theory with helping to get their businesses off the ground.
With that in mind, it is time to examine the methodology.
Method in the madness
To paint a clear picture of the concept, we must look at its five core principles:
1 – Entrepreneurs are everywhere.
This principle is simple. Basically, anyone can be an entrepreneur. You don’t need an office in Silicon Valley or a chill-out room filled with beanbags. All it takes is the ability to think big, start small and scale fast.
2 – Entrepreneurship is management.
If you are an entrepreneur who wants to scale fast, then sitting in the corner throwing out million dollar ideas is just not enough. Remember, you are starting small – that means with just you. Therefore, entrepreneurs must have the required skills to understand and implement a clear business model.
3 – Validated learning.
The purpose of a startup is not to provide products or services, serve customers or even make money. It is to learn how to build a sustainable business. Validated learning, then, is the process of running experiments with your product to test its worth and determine the feasibility of your vision. Through validated learning, entrepreneurs can identify and address the key risks before making adjustments to improve offerings.
4 – Innovation accounting.
To improve outcomes and ensure full accountability, the lean approach puts a lot of focus on how we measure progress, set milestones and prioritise work. Without these clear and measurable metrics, progress is likely to be slow or non-existent. Documentation and processes are a necessary evil, hence the rise of myriad highly successful enterprise software companies (many of which themselves began as lean startups).
5 – Build-measure-learn.
This is the key principle. To reiterate, the fundamental goal of a startup is to turn ideas into a viable business. The most effective way to do this is to create an MVP, measure how customers respond and then learn whether to pivot or persevere with your offering. This feedback-loop should be at the heart of every business function, if you are to create a virtuous cycle of iteration leading to customer approval and eventually revenue.
Lean – from theory to reality
But does all this academic theory really translate to the real world? Well, clearly it does, as the triumph of companies such as Dropbox and Airbnb goes to show. As already mentioned, Facebook too followed many of the lean startup rules. It launched early, measured success, learned and improved upon its offering quickly and frequently. And its founder is still accountable and at the heart of the company.
By finding the customer first and building second, the method removes one of the biggest pitfalls of the modern entrepreneur: market need.
According to VC database CB Insights, a lack of market need is the number one reason why firms fail. The lean approach circumnavigates this problem, though, by going straight to market – establishing an audience before throwing time and resources at a product that is not wanted. This method allows entrepreneurs to carry out research and development on the fly on a small budget, once again reducing the time and cost of bringing a product to market.
In addition, the lean approach encourages entrepreneurs to pivot. This agility is invaluable. Any emerging business prodigy worth his or her salt will tell you that the ability to know when to change direction is one of the greatest skills you will ever possess.
While most business models acknowledge that there may come a time when the need to pivot is required, the lean approach actively encourages it. That is, if your current tact is not working, change it. As entrepreneurs are nowhere near as invested – in terms of time, money and resource – when launching a project, pivoting becomes much easier and far less risky.
Those are the positives.
But what about the negatives?
They are certainly there. For example, while fast-tracking a product to market has many benefits, there is one rather obvious downside too: damage to reputation. Should you launch an inferior product, can you really trust consumers to return based on the promise of an improved offering – once your brand credibility has already taken a hit? Even if you can, for how long can you expect your customer base to grow with you when they have needs that must be met now – not tomorrow?
There is another issue as well. Very often, the market does not really know what it needs. Henry Ford, no business slouch himself, famously said: “If I had asked people what they wanted, they would have said faster horses”. This sums up why establishing the wants of the market is not always a good starting point for a business venture. Did people know they wanted an iPhone before they saw it in all its shiny glory? No, they did not.
What is more, there is a long list of hugely successful companies that came to market in absence of any real need for their offerings. Our old friends Google and Facebook, to name but just two.
Should you launch an inferior product, can you really trust consumers to return based on the promise of an improved offering – once your brand credibility has already taken a hit?
The big question – so should you be working lean?
The answer comes down to the type of business you run and the amount of resource you have behind you. For many entrepreneurs, the lean approach is perfect.
You have got the idea, now run with it: work up an MVP, get it out there and improve it on the hop. For others – namely those bringing to market long-term solutions to big problems – the lean approach is simply not viable. Some offerings can be worked up very quickly, others simply cannot. Doing so is only going to undermine your business in these cases.
The fact is the traditional approach to product development and ‘go to market’ strategy has been around for some time for the simple reason that it works. Although, that is not to say any new approach should be dismissed out of hand.
The lean approach has proven successful for a host of businesses across an array of industries. But, of course, it is not going to work for everyone. One of the major criticisms that the lean approach faces is that it treats all businesses the same – a one-size-fits-all approach – and that is worth keeping in mind. If you are the type of entrepreneur that likes to work fast then it could be for you.
If, on the other hand, you feel your product needs fleshing out before it reaches its target audience, then it is perhaps worth exploring other more traditional avenues. Bootstrapping (let’s face it, this expression sounds much more fun than ‘lean startup’), is producing some of the most disruptive technology companies on the planet.
Once the MVP is proven, they scale at an astonishing rate. Indeed, firms like Uber and Airbnb are changing the way we live our lives; going from lean startup to corporate behemoth in the blink of an eye.
Perhaps you too can create another unicorn. But if not, do not be too concerned. Your worst failure often leads to your defining success. That maxim is as true in traditional business models as it is with lean startups. Enjoy the ride.