New ventures are searching for a business model, not executing one. Based on the article by Steve Blank.
The “lean start-up” methodology has gotten a lot of buzz in recent years. To explore this approach, we’ll draw on the work of Steve Blank, one of the leading thinkers of the lean start-up movement. Let's begin with the traditional approach to launching a business. It goes like this: Step 1: Write a business plan. Step 2: Assemble a team. Step 3: Introduce your product. Step 4: Start selling it as hard as you can.
There was a time when almost all ventures followed this approach. The problem is, somewhere in this sequence, the majority of startups fail. There are several reasons for that. For one, business plans typically include a five-year forecast for income, profits, and cash flow. But it just isn't realistic to try and figure out the unknowns of a business in advance. These five-year plans are useless when faced with uncertainty, and rarely survive the first contact with customers.
Typically, founders invest thousands of hours preparing their product for launch without getting any customer input until the product has been manufactured and the salespeople go out to sell it. At that point, many entrepreneurs learn the hard way that customers don't want or need most of the features of their product. Start-ups are not mini versions of large companies.
New ventures are searching for a business model, not executing one. This is a crucial distinction that the lean start-up approach makes. To search for a model, you have to experiment, going quickly from failure to failure until you find something that sticks.
Now let's look at the tools and principles lean start-ups use as they search for new models. First, lean start-up founders recognize that all they have on day one is a bunch of untested hypotheses. So instead of writing an elaborate business plan, they sketch out their hypotheses -- often on a one-page document called a business model canvas.
This document contains a block for each essential component of the new enterprise: key partners, activities, and resources; customer value propositions, relationships, channels, and segments; and cost structure and revenue streams.
Within each block, the founders list the critical hypotheses that the business needs to test. Second lean start-ups follow a practice called customer development. This is where you test those hypotheses. You can't listen to customers at your desk, though. You have to get out of the building and ask potential users, buyers, and partners for feedback on all elements of the model, including product features, pricing, and marketing.
To run tests with customers, the team quickly creates a minimum viable product: a pared-down version of the new offering that includes only the necessary features -- and nothing more -- to try out on customers.
If feedback shows that a hypothesis is wrong, the founders revise it or “pivot” to a whole new hypothesis. And if that hypothesis is wrong, they try again. They continue to test assumptions and listen to customers well into the ordering process and early use of the product, until the venture has a proven model. A third core principle of lean start-ups is agile product development, which works hand-in-hand with customer development. It applies practices that originated in the software industry.
Traditional product development involves a step-by-step sequence, with each step lasting several months, and the entire process at least a year. In contrast, the agile process involves many short, repeated cycles. Instead of drawing up complete specifications and building the product first, the venture goes out and gets customer feedback on the minimum viable product, reworks it, tests it again with customers, and then reworks it again. Blue River Technology provides a good illustration of how this works.
The founders originally had a vision of building robotic lawn mowers. But after talking to more than a hundred customers in 10 weeks, they discovered that their initial target -- golf courses -- didn't value their solution. Then they began to talk to another potential customer segments -- farmers -- and found a huge demand for a way to kill weeds without chemicals.
They pivoted and within 10 weeks they had built and tested a prototype for an automated weed picker. But as they kept testing and talking with farmers, they discovered that a real pain point for them was the time and expenses in thinning lettuce.
So they pivoted again, build a prototype for that, and showed it to the largest lettuce grower in the United States. Today, 5% of all lettuce produced in the U.S. has been grown using Blue River’s lettuce robot. Once the founders have a product that's ready to sell, the business moves into the execution phase.
The venture rapidly ramps up marketing, sales spending, and operations. But these stages are iterative, too: The team may fail several times before finding the right approach to customer-creation or company-building.
Unlike traditional ventures where functional departments are staffed by people with lots of experience, lean start-ups have agile teams staffed by people who learn quickly. They also measure performance differently. Though lean start-up methods don’t guarantee the success of new ventures, they do have implications for the economy.
Steve Blank believes that lean start-up methods will increase the success rate among new businesses overall. As established industries are disrupted by new technologies and globalization, many are rapidly shedding jobs. In the next few decades, job growth will have to come from new ventures.
The more of them that succeed, the better. Lean methods also help mitigate past constraints on the growth rate of start-ups. Consider these four barriers to start-up formation. A lean approach eases the first three constraints by helping new ventures create products that customers actually want -- and do so much more quickly than by traditional methods.
That makes starting a business far less risky… which weakens the fourth constraint. Meanwhile, new trends in business and technology are also breaking down barriers. Angel funds, start-up accelerators, and crowdsourcing sites have decentralized access to financing.
Open-source software and cloud services have salshed the cost of software development. And with easy access to offshore manufacturing, start-ups don't have to build factories. Consider Roominate, a start-up lunched by grad students who designed a wired-dollhouse kit to get girls interested in technology and engineering.
Once they had finished iterating on their design, they sent the specs to a contract manufacturer in China and got their first products back in three weeks. Roominate has already sold more than 200,000 kits, and Time magazine named its product one of the year's top 10 toys.
Lean start-up techniques are spreading beyond young tech ventures. Colleges and universities across the country are now offering courses in the lean start-up approach. More more MBA programs are abandoning business plan competitions and replacing them with business model competitions. Big corporations, too, are adopting these techniques to improve innovation processes. General Electric, Qualcomm, Experian, and Intuit are among those trying out the lean start-up approach.
One early initiative was refrigerator with French doors for GE Appliance’s Monogram line. In 2013 a small team was given three months to create a working product. The engineers bounce ideas off retail sales people and interior designers, and created a minimum viable product to test. But customers didn’t like it: The stainless steel was too dark. So the team changed the color. Then the lighting tested poorly. The team revised it and tested again. Seven months later, the team was on version 5, and customer started to like it.
They built 75 units of version 6 in early 2014, but kept revising until the product rolled out nationally later that year. It was just one of many products GE has designed through its FastWorks program, which applies lean start-up methods. The first 100 years of management education focused on building tools to improve the execution and efficiency of existing businesses.
Now we have the first set of tools to help us search for new business models as we launch start-up ventures. The lean approach replaces elaborate planning with experimentation, intuition with customer feedback gathered in the field, and a lengthy, linear product-design process with many quick iterations.
It also replaces the notion that failure is to be avoided at all costs with the idea that failure is an expectation. It's part of the process of constant learning and adaptation on the way to success. If you adopt this mindset and the other techniques of the lean start-up, your organization will be better able to innovate rapidly and to meet the disruptive forces that are so pervasive today.