Lean startup: reasons without risk?

With the launch of their first product, young companies enter a decisive phase. After months or even years of de­vel­op­ing and improving pro­to­types, es­tab­lish­ing sales channels, securing financing and taking various marketing efforts, the moment of truth arrives. Will the product be a success? Will it inspire customers and make money? Or, is there simply no market for the product? Is it under-developed and missing the market demand? If the product fails at its launch, this usually means the end of the startup.

For some years now, many founders have been big pro­po­nents of the lean startup method­ol­o­gy. Promising to minimize the un­pre­dictabil­i­ty of the market launch, the lean startup approach helps to make young companies more flexible, in­no­v­a­tive, and ul­ti­mate­ly more suc­cess­ful.

The term “lean startup” was coined by en­tre­pre­neur Eric Ries, who had a dis­as­trous ex­pe­ri­ence with his Silicon Valley startup “There Inc”. After years of secret research and de­vel­op­ment, the product – a virtual online world – failed terribly upon its market release, as a result of poor judgment by those who developed it and a mis­read­ing of the needs and wishes of its potential users. 

Following this ex­pe­ri­ence, Ries developed the lean startup model, which he first discussed on his blog in 2008. In 2011, he published his book “The Lean Startup” in which he described the idea and all of the basic building blocks to the approach. The book proved to be highly popular and sold very suc­cess­ful­ly.

“Lean startup” is a buzzword that has been cir­cu­lat­ing within the startup scene for some years now, yet rel­a­tive­ly few people have truly come to grips with what the concept means. A lean startup does not nec­es­sar­i­ly have to maintain a minimum budget or rely upon self-financing, nor is it suitable only for small or young companies; it is suitable for all kinds of companies, not just digital ones. So – what does “lean startup” mean?

To enable con­tin­u­ous change to a product – and in many cases to the business itself – there must be a lean and flexible corporate structure. As a result, the lean startup approach is not limited to just product de­vel­op­ment, but affects all areas of the company.

The pragmatic lean startup approach offers many ad­van­tages – one of the most important is the col­lec­tion and analysis of data, which helps to reduce un­cer­tain­ty.

• The product is not developed on the basis of as­sump­tions, but on the basis of analysis
• This analysis makes it more likely to meet customer needs
• Un­sus­tain­able ideas are weeded out early in the de­vel­op­ment process
• Failure becomes less likely
• Changes to the product may reveal pre­vi­ous­ly unseen gaps in the market
• Users are directly involved in product de­vel­op­ment via feedback, building their brand loyalty
• Resources are not used for the de­vel­op­ment of un­nec­es­sary features

The quality of the MVP is decisive for the success of a lean startup as it is the basis for further in­ves­ti­ga­tions and tests. The prototype is limited to the core function on which the business is based. This makes it possible to tell im­me­di­ate­ly whether there is a market for it. Ad­di­tion­al functions should not be im­ple­ment­ed at this stage. As the product’s features are limited at the time of its market launch, it’s all the more important that it should work flaw­less­ly and that all at­trib­ut­es must be im­ple­ment­ed perfectly. Before releasing the first version, consider the following questions:

• What is the product’s core function and what is its added value for uses?
• Which features are not relevant at the beginning and can be excluded?
• What resources are required to implement the MVP?
• What methods can the company use to obtain the most amount of relevant data regarding customer sat­is­fac­tion with the product?

The early MVP it­er­a­tions – i.e. the product versions with minimally adapted features – will extend or change the scope or ori­en­ta­tion of the prototype step-by-step.

At the beginning, the business model concept exists only as a hy­poth­e­sis and set of as­sump­tions. In order to check their validity, surveys on customer sat­is­fac­tion, user behavior, and the long-term efficacy of the concept are required. It is not important whether the initial hy­pothe­ses and as­sump­tions were related to the product, the corporate structure, financing, or any other aspect of the startup. This process of gaining knowledge based on data is called validated learning.

On the basis of the validated learning, the business model can be adapted, changed, or even discarded and reimag­ined – the latter is known as a pivot. The founders of Twitter, for example, initially wanted to focus on podcasts. Only as a result of a pivot did they change their product to cater for short messages with a limited number of char­ac­ters. The sub­se­quence success of the company is well known.

The tra­di­tion­al business plan that company founders draw up con­cern­ing their corporate strategy, market analysis, and financing potential is too static for lean startups. The business model canvas has es­tab­lished itself as a more flexible variant. It consists of nine areas each per­tain­ing to key factors for the company model. Each area is fulfilled in­di­vid­u­al­ly before being combined with the others in a modular fashion. The key fields are:

• Value offered: What uses or benefits does the customer get?
• Customer de­mo­graph­ic: Who are your customers? For which groups of people is the product in­ter­est­ing?
• Sales and com­mu­ni­ca­tion channels: How does news of the product reach the customer? How do they get it?
• Customer relations: What is needed to build and care for customer re­la­tion­ships
• Revenue source: What kind of income can be expected? How is this achieved?
• Key resources: What in­fra­struc­ture and resources are required to deliver the product?
• Key ac­tiv­i­ties: What processes are necessary to continue to offer the product long-term?
• Key partners: What external suppliers and/or service providers does the company need to use?
• Cost structure: What does the financial planning look like? What are the cost factors?

In his book, Eric Ries laid out the ideas, char­ac­ter­is­tics, and method­ol­o­gy of lean startups in five guiding prin­ci­ples:

Startups are not bound to a specific time or location: anyone can set up a startup and become an en­tre­pre­neur, whether from their garage or from within a large company.

Founders must be aware that it is in their hands to lead the company re­spon­si­bly and to make good strategic decisions. The new lean startup approach also needs a new business model.

The most important aim for a startup is not to develop a new product or to make a profit – first you must find a sus­tain­able business model. Relevant data procured through ob­ser­va­tions and extensive testing is therefore essential. 

For progress to be mea­sur­able, it must be visible. Defined mile­stones and a careful pri­or­i­ti­za­tion of tasks therefore helps the startup to maintain an overview and record successes.

The rep­e­ti­tion of these three lessons is important not only for product de­vel­op­ment, but is es­pe­cial­ly helpful for op­ti­miz­ing the business model. Validated learning processes ensure that the business is headed in the right direction.

What concrete ad­van­tages does the lean startup model offer compared to the tra­di­tion­al approach? What are the dif­fer­ences between the two, and ul­ti­mate­ly which is more sus­tain­able?

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