The conventional approach to launching a new startup has a rigid structure. The founders are expected to write an elaborate business plan before interacting with any customers, pitch it to score some investors, build a massive team upfront to execute the plan, let the team spend months if not years to come up with a product, and after all these steps finally start selling as hard as they can. But as history showed us, 9 out of every 10 startups are doomed to fail. So putting this much effort, money, and time into a startup upfront sounds less than reasonable.
Early 2010’s new approach to how companies should be formed emerged. This new approach is called “the lean startup,” and it aims to minimize risks while improving the chance of success. The lean startup methodology achieves that but ditching the traditional “big design up front” development over a process where experimentation, customer feedback, and iterative design is integral. This methodology introduces crucial concepts like “minimum viable product” and “pivoting.”
The Fallacy of the Perfect Business Plan
A traditional business plan is a static document that details every aspect of the business before execution: the market size, the problem description, and the proposed solution. Typically it tries to predict five years into the future for monetary concerns like income, profit, and cash flow. It is an elaborate assumption that a few people came by sitting and researching. Steve Blank describes three fundamental problems of such an approach:
- Business plans usually fall short of predicting what the customers will want.
- Coming up with a business plan is just a tool to calm the anxiety the venture capitalists are facing. But otherwise, it is a waste of time since it is almost impossible to forecast 5-year plans for complete unknowns.
- Startups are not miniature versions of corporations. The master plan does not work for a startup. Only a series of failures and retrials do.
The main difference between a company and a startup lies in the fact that a company is in execution mode for a business plan, versus a startup is in the process of finding a repeatable and scalable business model. Based on this, the lean startup approach defines three principles:
- Founders acknowledge the fact that all they have is just good guesses. Therefore they ditch the idea of spending months researching and planning for an intricate business plan. Instead, they summarize their hypothesis in a concise document called a business model canvas, which is a diagram that shows how a company creates value.
- Lean startups rely on customer development to test these hypotheses in an iterable fashion. They talk with customers, collect feedback on the plan, and quickly come up with a minimum viable product. Then they show this product back to the customers, gather more input, and either improve on the existing plan if there is interest or simply pivot by changing the hypothesis if there is none. And repeat. This cycle continues throughout the life of a lean startup.
- To support this cycle of coming up with quick minimum viable products, the development teams of lean startups use a methodology called agile development. Agile development defines an approach where development cycles are relatively short (a matter of weeks rather than months or years) and adjust to the feedback provided by the customer development.
Stealth Mode’s Declining Popularity
Before the early 2010s, there was a different paradigm followed by most startups. They were being extra cautious about protecting their intellectual property and only sharing product development with a minimal set of beta users, if at all. This so-called stealth mode approach became obsolete when the lean startup approach made it clear that customer feedback matter more than secrecy around the intellectual property for a startup to succeed.
Creating an Entrepreneurial, Innovation-based Economy
The lean startup approach is not a magic bullet that would make any startup that follows it successfully. Though, it does drop the failure rate overall which has a healthy effect on the economy. In the 21st century, most of the established industries are shrinking in terms of employment. Therefore we are in need to create more job opportunities through new ventures more than ever, which the lean startup approach helps.
Traditionally multiple factors lead to a startups failure or slow growth:
- The high cost of getting initial customers or getting the product wrong altogether,
- Months or years-long development cycles,
- The people’s tendency to shy away from startups given the risky nature,
- The venture capitals’ need to invest a large sum of money into a handful of startups because of the high initial costs,
- And the concentration of know-how, talent, and capital at geo hot spots like Silicon Valley.
The lean startup approach helps elevate the first three pain points by describing a methodology that reduces the initial cost in terms of capital, effort, and time and making the overall startup business less risky. This reduces cost also enables venture capitals to spread their investments to a large number of startups since the cost of entry is now smaller.
The concentration of know-how and talent problem is quickly getting solved thanks to modern software tools like GitLab, or cloud services like Heroku. Even hardware startups are having an easier time since it is now a lot easier to outsource production to Asia compared to before where they’d have needed upfront investment for coming up with their production facilities.
The capital is also being spread along with the globe more evenly nowadays thanks to hundreds of global accelerators like 500 Startups, or Y Combinator, and even crowdsourcing sites like Kickstarter or IndieGoGo.
A New Strategy for the 21st Century Corporation
As a final note, it is essential to say that the lean startup approach is also relevant to large corporations that are continually facing external threats in the form of new innovative competition. To stay relevant, corporations also need to remain agile and keep inventing new business models, hence their need for a lean-approach.