The Lean Start-Up

Stephen DeAngelis

August 12, 2010

I suspect that the dot.com bubble (and the collapse that it eventually suffered) will continue to provide grist for business school curricula for decades. Many of the start-ups that began during that time were known for raising significant amounts of capital and then spending it lavishly until it ran out. Investors (and entrepreneurs) learned many lessons from the tech crash — not the least of which is that good business plans matter as much in the information age as they did in the industrial age. Investment dollars are difficult to find, especially during the current recession. Steve Lohr reports that “Eric Ries and Steven Blank think they have a better way to build a start-up, one that takes less time and money to try new ideas and find paying customers” [“The Rise of the Fleet-Footed Start-Up,” New York Times, 23 April 2010]. Lohr continues:

“They are leading proponents of the ‘lean start-up’ — a fresh approach to creating companies that has attracted much attention in the last year or so among Silicon Valley entrepreneurs, technologists and investors. The concept is gaining a following beyond the Valley as well. ‘If it works, it will reduce failure rates for entrepreneurial ventures and boost innovation,’ says Thomas R. Eisenmann, a professor at the Harvard Business School. ‘That’s a big deal for the economy.’ The term ‘lean start-up’ was coined by Mr. Ries, 31, an engineer, entrepreneur and blogger. His inspiration, he says, was the lean manufacturing process, fine-tuned in Japanese factories decades ago and focused on eliminating any work or investment that doesn’t produce value for customers. ‘This is lean manufacturing for start-ups,’ explains Mr. Blank, 56, a serial entrepreneur. Since 1978, he has been a founder or early employee in eight start-ups, both winners and losers. To cite a couple, Rocket Science Games, a once-promising video game maker, founded in 1993, cratered amid losses a few years later, while Epiphany, a business software company, founded in 1997, was acquired by a larger corporation for $329 million in 2005 — ‘one my grandchildren will be grateful for,’ Mr. Blank notes. Today, he advises start-up companies and teaches at Stanford and the University of California Berkeley.”

The term “lean” provides one with a pretty good idea of the basic philosophy behind their concept. It could probably also have been called the “Spartan start-up” process — because it is a no frills approach. The approach, however, doesn’t work for all types of start-ups. Lohr explains:

“Technology animates the lean start-up process. Free open-source programming tools and easily distributed Web-based software drive down the cost of developing new products and services. The early companies embracing the principles live largely on the Web, which makes it possible to measure and track customer behavior constantly and to invite suggestions and criticism. Internet companies have steadily taken advantage of the falling costs of getting up and running — often spending just hundreds of thousands of dollars instead of the millions that were required several years ago. But the lean start-up formula adds management practices tailored to exploit the Web environment. The concepts apply both to designing products and to developing a market, and emphasize an early and constant focus on customers. To be sure, the methods often build on the work of others. In product development, for example, Mr. Ries is an enthusiast of so-called agile programming methods, which emphasize rapid development, small teams and constant improvement. But, he adds: ‘The agile practices have to be adapted, shifting the focus somewhat from generating stuff to learning about what customers will want. Most technology start-ups fail not because the technology doesn’t work, but because they are making something that there is not a real market for.'”

If you are interested in hearing about Ries’ ideas from the horse’s mouth, watch the following video. At over 27 minutes, the video is not short. While at that link, you will also see that there is a half-hour part 2 of the interview as well.

 

 

Lohr continues:

“The lean playbook advises quick development of a ‘minimum viable product,’ designed with the smallest set of features that will please some group of customers. Then, the start-up should continually experiment by tweaking its offering, seeing how the market responds and changing the product accordingly. Facebook, the giant social network, grew that way, starting with simple messaging services and then adding other features. The goal, explains Mr. Blank, is to accelerate the pace of learning. ‘A start-up is a temporary organization designed to discover a profitable, scalable business model,’ he says.”

Ries drew on his past to develop many of his lean start-up ideas. Lohr reports that Ries was “a senior engineer at There.com, a 3-D virtual world, from 2001 to 2003.” That company raised an impressive $40 million developing its intellectual property (which Lohr calls an “impressive technology”), but it was so myopic in its focus “that the company lost its ability to change.” Inflexible start-ups that lose (or never had) the ability to adapt are much more likely to fail than their more flexible competitors. Lohr continues:

“To switch course, Mr. Ries joined a founder of There.com, Will Harvey, and in 2004 they started a company called IMVU, a social network in which users chat online and create personalized avatars. By design, it raised no outside money in the early going. … IMVU began as a bootstrap operation, a forerunner of the lean start-up model. Its early revenue goals were just a few hundred dollars a month. (Users buy clothing and other virtual goods for their avatars.) Today, while There.com has folded, IMVU claims one million active users — and is profitable, says Mr. Harvey, the chairman.”

As one can imagine, the lean start-up approach is especially attractive for younger entrepreneurs who have little capital to risk and no inexperience in securing capital. Lohr concludes:

“Many young Internet businesses have embraced the lean start-up principles of beginning small and getting products into the marketplace quickly in pursuit of paying customers. … The rise of smaller, fleet-footed companies in the lean start-up mold is also bringing changes in venture financing. These companies are typically funded with $500,000 or so from professional angel investors instead of traditional venture capital firms, which are geared toward investing millions at a time. The venture capital investment may well come later, when the companies need money for expansion. But, according to some Silicon Valley veterans, this means a shrinking role for venture capitalists in seeking and backing promising young entrepreneurs. That vital task in the food chain of capitalism, they add, is increasingly being taken over by major angel investors like Ron Conway, Dave McClure and Mike Maples Jr. ‘Venture capital has to reinvent itself for this world,’ says Mitchell Kapor, an angel investor who has made 25 investments in lean start-up companies in the last two years.”

If you haven’t got time to spend an hour listening to Ries expound on his ideas, you can browse through his slide show at your leisure. I found it interesting that Ries drew upon the work of military strategist John Boyd (and his famous OODA loop) to explain why lean start-ups need to be agile and flexible. In closing, let me share some of Ries’ thoughts about “myths” he claims have surfaced about his approach [“Top 5 myths about the lean startup,” Reuters, 27 April 2010]. Ries writes:

“Most phenomenal startup teams create businesses that ultimately fail. Why? They built something that nobody wanted. That sounds like a beginner’s mistake, but in the conditions of extreme uncertainty under which entrepreneurs operate, it’s challenging to innovate and find a market, to take risks and mitigate risk. Almost two years ago, I left my operating role as the co-founder of a startup, out of an interest to help the entrepreneurship industry develop a more effective, data-driven way of building companies. During that time, I’ve worked with hundreds of entrepreneurs around the world and created a methodology for innovation now known as The Lean Startup. The Lean Startup has evolved into a movement that is having a significant impact on how companies are built, funded and scaled. As with any new idea, with popularity comes misinterpretation.”

Ries goes to discuss “the top five myths about The Lean Startup” and he provides what he sees as “the truth behind each misconception.”

Myth 1: Lean means cheap. Lean startups try to spend as little money as possible. The reality is the Lean Startup method is not about cost, it is about speed. Lean startups waste less money, because they use a disciplined approach to testing new products and ideas. Lean, when used in the context of lean startup, refers to a process of building companies and products based on lean manufacturing principles, but applied to innovation. That process involves rapid hypothesis testing, learning about customers, and a disciplined approach to product development.”

Ries is on point stressing the importance of speed (hence, his reference to John Boyd), but he called his concept “lean” rather than “rapid” for a reason. Lean correctly indicates that the elimination of waste is also a major focus of the concept. I’m sure Ries has heard the old adage “haste makes waste.” There is a fine balance between speed and deliberateness that every start-up must maintain. Waste, however, is an undesirable trait in any company.

Myth 2: The Lean Startup methodology is only for Web 2.0, Internet and consumer software companies. Actually, the Lean Startup methodology applies to all companies that face uncertainty about what customers will want. This is true regardless of industry or even scale of company: many established companies depend on their ability to create disruptive innovation. Those general managers are entrepreneurs, too. And they can benefit from increased speed and discipline.”

As Lohr explained in the article cited above, “Technology animates the lean start-up process. Free open-source programming tools and easily distributed Web-based software drive down the cost of developing new products and services. The early companies embracing the principles live largely on the Web.” Not every organization or start-up can take advantage of these web-based tools. I would offer one other caveat — customers don’t always know what they want. As I wrote in a previous blog, “Harvard Business School professor, Clayton Christensen, noted in his book The Innovator’s Dilemma that one of the things that many businesses do wrong is to listen to their customers. By that he means that manufacturers give the customer what he or she says they want without really understanding what they are trying to accomplish.” I don’t believe that Ries and Christensen are necessarily at odds over this point. I believe that Ries is encouraging start-ups to listen better when customers speak.

Myth 3: Lean Startups are bootstrapped startups. There’s nothing wrong with raising venture capital. Many lean startups are ambitious and are able to deploy large amounts of capital. What differentiates them is their disciplined approach to determining when to spend money: after the fundamental elements of the business model have been empirically validated. Because lean startups focus on validating their riskiest assumptions first, they sometimes charge money for their product from day one – but not always.”

Ries’ point is well-taken. The “lean” in his concept refers to how resources are used not where those resources come from or the overall amount of resources acquired.

Myth 4: Lean Startups are very small companies. This focus on size also obscures another truth: that many entrepreneurs live inside of much larger organizations. As I’ve written elsewhere, I believe the proper definition of a startup is: a human institution creating a new product or service under conditions of extreme uncertainty. In other words, any organization striving to create disruptive innovation is a startup, whether they know it or not. Established companies have as much to gain from lean startup techniques as the mythical ‘two guys in a garage’ (and, as I’ve witnessed in my consulting practice, sometimes even more).”

I suspect that many people would argue with Ries’ broad definition of what constitutes a start-up. Innovative people working within an established multinational company really don’t qualify in my book. That’s really not the point Ries is making, however. What Ries is arguing is that principles involved in the lean start-up model are applicable in many situations that involve expending resources to bring a new product to market. With that, I agree.

Myth 5: Lean Startups replace vision with data or customer feedback. Truth: Lean startups are driven by a compelling vision, and they are rigorous about testing each element of this vision against reality. They use customer development, split-testing, and in-depth analytics as vehicles for learning about how to make their vision successful. Along the way, they pivot away from the elements of the vision that are delusional and double down on the elements that show promise.”

Ries is correct that innovation involves a number of parts — vision being only one part. As I’ve written in the past, put into a mathematical formula, innovation = new x valuable x realized. If any of those parts is missing (i.e., if any of those traits = 0) then you can rest assured whatever you’re discussing is not an innovation. Vision equates to “new” and actual customers equate to “realized.” You need both vision and customers; which means you need to make something that customers want. I believe that is the point Ries is trying to make. Ries concludes:

“The old model of entrepreneurship was dominated by an over-emphasis on the magical powers of startup founders. Usually, the stories we hear about successful startups describe a brilliant visionary, fighting valiantly against the odds to create a new reality. As employees gradually fall under his or her spell, they execute his or her master plan, which leads, in the end, to world domination. Anyone who has spent time around real startup successes knows this story is usually wildly untrue. Founders benefit from historical revisionism and survivor’s bias: we rarely hear the stories of the thousands of visionaries who failed utterly. The Lean Startup moves our industry past this mythological entrepreneurship story and towards a methodology that is more scientifically grounded and accessible. People who are truly committed to a vision of changing the world in a significant way can’t afford the luxury of staying in that cozy, comfortable place of building in stealth mode without outside feedback. If you really believe your vision needs to become a reality, you owe it to yourself to test that vision with every tool available.”

As an entrepreneur myself, I concur with Ries that true innovators can only achieve a sense of satisfaction when their ideas become reality. Dreamers may be satisfied with having conceived an idea, but innovators aren’t happy until they see it incubated and hatched.