End of the Road for Lean Startup?
Last month, Steve Blank, the founder of the Lean Startup movement published an enticing new Medium post called ‘Is the Lean Startup Dead?’. Given that most of my career has been spent implementing Lean Startup techniques to build new companies, it got my click. The short read calls out the interesting (inverse) relationship between risk capital market conditions and the utilization of lean startup methods.
Just last month, I wrote a piece for my Entrepreneur column with my thoughts on the looming recession and how it relates to what is happening in tech and VC. I thought it’d be appropriate to do a quick Medium post to connect these two thoughts together and share my opinion.
It’s a (Tech Equity) Sellers Market Out There
Fun facts from last quarter:
- US Venture Capital investments topped $23B, inching closer to the record $30B quarter one month before the dot-com bubble popped.
- Internationally, we had the largest single VC investment ever just last quarter with a $14B investment into Ant Financial.
- There’s almost $1.8T in dry powder in PE.
- We’ve even got $1B+ valued scooter companies.
Things are getting interesting in the risk capital space, and we are seeing it change the way founders are thinking about building (and growing) their startups.
Connecting the Dots: Market Conditions & Lean Startup
Steve then connects the dots between the overall market vibe in tech and the adoption of Lean Startup concepts. Arguably, when it’s not easy to raise equity, you’re forced to reduce capital waste in the process of bringing a new concept to market. This drove much of the Lean Startup movement at the start of our last recessionary period. When you don’t have cash, you’ve got to find ways to be very capital efficient.
Today, there’s a LOT of risk capital floating around out there. This can drive a mindset that it is no longer necessary to apply Lean Startup techniques. In my recent trips to SF (and even LA), I’ve been laughed at when I say that we are still incredibly bullish on Lean Startup techniques.
Many argue that with Lean Startup, you hamstring your ability to do truly disruptive or revolutionary new companies. There is also the argument that you settle with a less impressive product and release subpar products with a Lean Startup approach. My favorite one is that many argue that Lean Startup is actually too ‘slow’. I disagree with all of these statements (in most cases) if you are properly applying the methods, but more on this later.
So, cash is-a-plenty and competition is fierce, why apply Lean Startup techniques to building new companies?
Hold the Horses: The Data Tells a Different Story
What stage would one get the most value out of applying Lean Startup methods if they did, in fact, improve capital efficiency? The pre-seed or seed stage. This is the stage where we see lean startup techniques as the most effective as risk profiles tend to be the highest, capital is the lowest, and time is the most critical.
Interestingly, seed-stage deals (volume and $), are down significantly (and consistently) every quarter since 2015 according the Q2 KPMG Venture Pulse report.
So, don’t shovel the cash out the door too quickly just because market conditions are good. It’s actually gotten harder (not easier) to raise capital at the earlier stages.
Market Reality vs Market Feel
It feels like we’re in a really great time to use someone else's money to build new startups. However, that’s just not the case. The vast majority of the venture activity happening now and the records you are seeing set above are not in the early stages. They’re in growth and far later stages of the startup lifecycle. These large aggregate numbers are inflating perceptions of market conditions in tech and (in my opinion) leading to some hubris in the earlier stages.
Zooming way out, many would argue that private capital markets are filling the void for a lackadaisical period of IPO’s and public market funding in the later stages of company growth. That’s driving up aggregate in VC as private investors are gobbling up what used to be funded by public offerings.
We need to be careful not to let aggregate data in VC drive bad decisionmaking in our startups.
Lean Startup: The Misperceptions
Everyone knows what MVP stands for (outside of baseball) now and because of that, many are self-proclaimed Lean Startup experts. I can’t even tell you how many people I bump into that think they know Lean Startup that just doesn’t jive with my definition or application of it. I wrote a piece covering this last January after the haters started to emerge.
A big misperception in this current case is that Lean Startup just saves money. However, Lean Startup is all about the reduction of waste in the process of bringing a new startup to market. That is wasted time, resources, and money.
Where capital is abundant and competition is fierce and fast, you need to move fast. If you use Lean Startup the right way, you can stay ahead. Building a masterpiece in a silo (even in great market conditions) is a recipe for disaster. At Coplex, we’re bringing new tech company concepts from napkin to revenue in 90-days. Those building startups in a silo in search of perfection simply won’t be able to keep up.
Our Stance at Coplex
At Coplex, we’re committed to the more capital-efficient method of applying Lean Startup techniques for all of our new ventures — regardless of market conditions. With the increase in available risk capital, there are opportunities to increase the cadence of the build-measure-learn loops, test more assumptions with each batch/experiment, and to test more risky assumptions. We’ll remain cautious of implementing wasteful methods to chase larger short-term upsides.
I do think there are some modifications and iterations of Lean Startup on the horizon — as Ries suggests in his latest book The Startup Way. We’ve been expanding the framework significantly at Coplex from our own learnings, as well. We’ll keep an open mind, but I don’t think it’s the end for this way of thinking quite yet.
