Everyone knows the first thing you should do when starting a business is to write a business plan. Or is it? According to one school of thought, business plans are a waste of time because they are based on untested hypotheses. The lean startup movement has turned conventional business thinking on its head in an attempt to make the whole process of starting a company less risky.
Eric Ries remembers vividly the day he realised his company was going to fail. Two years after starting a dot.com business, desperate for capital and unable to raise more from investors, he and his co-founder ended up arguing in the street in the rain before parting in anger and going their separate ways.
That was in 2001, but just a few years later, the Silicon Valley entrepreneur was facing a similar predicament when his second tech startup failed to take off. This time, he and his partners did achieve success – but only after abandoning their original strategy and wasting months of hard work.
The experience however taught him some valuable lessons about how to eliminate unnecessary effort and create value for customers. Inspired by the principles of lean manufacturing, he went on to explore ways to turn ideas into products and services with the minimum of fuss.
In his book, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, he urges entrepreneurs to build a ‘minimum viable product’ (MVP) and present it to customers as early as possible to gain feedback. His method centres on the three-step process of build, measure, learn.
Ries explains: “The Lean Startup method builds capital-efficient companies because it allows startups to recognize that it’s time to pivot – or change direction – sooner, creating less waste of time and money.”
Ries’s book has spawned a worldwide following and the principles have been adopted, not just by start-ups but also by large corporates and the public sector.
Steve Blank, an author and business guru whose theories influenced Ries, believes lean start-up principles are in tune with the times, as organisations of all types – start-ups, small businesses, corporations, and government – are feeling the pressure of rapid change. “The lean startup approach will help them meet it head-on, innovate rapidly, and transform business as we know it,” says Blank.
However not everyone is as enthusiastic. In his blog, The Fat Startup: Learn the Lessons of My Failed Lean Startup, John Finneran criticises the concept of minimum viable product. “You must build the minimum desirable product, and if you don’t have a good understanding of what’s desirable before you start, then, don’t…. The purpose of your first release (and every other release) is to give your customer immediate value. You are not launching a series of science experiments for you to learn what you should already know,” he says.
Tim Kastelle, an innovation expert with UQ Business School, says: “There is a danger if you put a minimum viable product in front of wrong group of people. The idea is to test material with early adopters as in general they are interested in things that are not fully formed. It is also difficult if you are established company – Google gets a lot of grief because it is still experimental in its approach and people don’t expect that, they expect its products to work right out of the box.”
However Kastelle believes that, used correctly, the lean startup is a ‘terrific model’. “Often when you come up with something inventive one of the biggest mistakes is to apply an existing business model. This way you are forced to think about how it should work and what model would be best. Also, with any startup there is obviously risk involved. You can reduce the risk by following best practice and right now this is definitely best practice.”
The lean startup model has been gaining influence across Australia. Christopher Tia founded the Lean Startup group in Brisbane in 2011 and says there is now much greater awareness of the concept amongst entrepreneurs. “Many are keen to get a better understanding of what it is and how it could be applied to their particular idea,” he says. “Having also had conversations with people at the big end of town, I think the message is starting to filter through at the corporate end of the spectrum. Whether and how long it takes to become common practice though is something we will just have to wait and see.”
Lean startup principles are also being applied at iLab, the Brisbane technology incubator. Leigh Angus of iLab encourages entrepreneurs to talk to the market, test their hypothesis, identify feature requirements and at the same time get buy-in from early adopters which can be used as customer reference points at a later stage.
“The advantages are obvious, that this is lower risk than building something and then going out to test it, hoping that you’ve got it right. There are also lower capital costs,” says Leigh. She believes potential drawbacks are that some technical people find the process of talking to the market ‘confronting’ while some founders worry that their idea is more vulnerable to being stolen.
Leigh adds: “I believe that the benefit of talking with others and adding to the idea through feedback means a more robust product or service in the long run and outweighs the risk of it being copied by others.
“Not surprisingly, the more people the founders talk to, the more the networks open, the more opportunities materialise, the more relevant features are added, the more commitment they put to the product, the greater the chance of it being realised, aligned and therefore, successful.”
LEAN STARTUP TERMS
Minimum viable product (MVP) – a basic version of a product which allows an entrepreneur to test their business hypothesis with the minimum effort.
Split testing – where different versions are tested at the same time.
Business model canvas – a tool which helps entrepreneurs to build their business model and which replaces a conventional business plan.
Agile development – where products evolve through incremental improvements and collaboration.