About 75% of all startups fail, and most small businesses run into the same kinds of problems, like financing, cash flow and competition. At the heart of it, these things are symptoms of a single problem: market need. If your target market needs your product, they’ll buy it.
The largest reason new companies fail is that there was no market need for the products they were offering, but the lean startup movement aims to eliminate this issue entirely.
The lean startup counters this business-killing problem by conserving resources and refining products based on customer feedback before a full market launch. Companies that follow this development process don’t deal with the conditions of extreme uncertainty that plague the majority of failed San Francisco tech companies. Instead, they set themselves up in a position that’s most likely to win through a process of build-measure-learn.
Origins of the Lean Startup
The idea of the lean startup, which is really just taking a scientific approach to trial and error, was introduced by Eric Ries in the book "The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses".
Reis discovered the method as the co-founder of the social network IMVU, which was a colossal failure at the initial launch. As he told Inc. in 2011, the brand could only convince a “pathetically small” number of people to shell out $29.95 for his product, so “out of desperation” he began using consumer focus groups and case studies to fine-tune it.
Ultimately, Ries had to throw out thousands of lines of code made during the initial software development, but his willingness to let go allowed his company to keep evolving with the feedback of its early adopters. Five years after IMVU was founded, the company soared to a reported $50 million to $100 million valuation.
What Is a Lean Startup?
The lean startup is a development process used by entrepreneurs, new businesses, large companies and Fortune 500s that advocates for developing products that consumers already want and need rather than rolling the dice and hoping a product finds a market after it’s already been produced on a mass scale. This differs from the traditional business model where a product is launched and then you hope it finds a market. There’s a lot less rolling of the dice if you know your product is already likely to succeed, but it goes further than that.
The lean startup is cemented in the idea of cutting your losses, which isn’t easy. Even creator Eric Ries struggled with the idea of dumping months of work before pivoting to a new approach. Unfortunately, the lean startup methodology basically states that you need to leave your ego at the door if you want to innovate. You must abandon old ideas if that’s what your consumers dictate.
The lean startup approach fosters sustainable businesses and innovators through ultimate flexibility. Its principles don’t focus on the success of a particular idea but rather the success of the overall company. In other words, it sets you up to fail as quickly and cheaply as possible rather than clinging to ideas that just aren’t working and bankrupting your entire startup. You fail fast and then refocus your product development in a way that you already know will be more successful.
Lean Startups vs. Traditional Startups
Venture capitalists may clutch their pearls at the idea of a startup without a clearly defined five-year business plan, but the lean startup model requires ultimate flexibility.
Per the lean startup principles, a five-year business plan filled with unknowns and hopeful projections is a waste of effort and resources. Instead of a business plan, lean startups use a business model that is based on their initial hypothesis and adjusted if consumers don’t give favorable feedback.
Lean startups also don’t use the same financial reporting metrics as traditional businesses. Where a traditional business focuses on the hard financial facts, like balance sheets and cash flow, a lean startup will focus on the cost of customer acquisition, the lifetime value of a customer, customer turnover rate and the product's potential.
Remember: This is all about growing with your customers, so the customers are viewed as the currency rather than, say, whatever cash venture capital firms just injected into your business (though that’s nice too).
Lean Startup Example
The best way to better understand lean startup methodology is to look at how a lean startup might work. For example, a prescription delivery service geared toward busy millennial professionals may find out during its beta testing phase that millennials aren’t really interested.
Instead, the service tested better among retired individuals who live in the suburbs where public transit is unreliable. After beta testing, the company may change its target market to retirees over the age of 65 and include a greater selection of medications that are popular among that age group.
This example of a lean startup succeeds because it allows the market to dictate the product, not the other way around.
Lean Startups Use Validated Learning to Succeed
The hallmark of lean startups is the ability to examine consumer interest and figure out ways to refine your product and make it better suited for the current market (or shift your market to suit your product). This can be done through a process called validated learning. The validated learning method of product development goes as follows:
- Identify a problem that needs to be solved.
- Develop a product that solves this problem.
- Create a prototype (also known as a minimum viable product, or MVP).
- Survey potential customers about the prototype. (Does it actually solve said problem?)
- Fine-tune the product, change the target market or change the product entirely based on consumer feedback.
- Repeat as necessary.
This method ends up saving money because you’re not manufacturing a whole line of products that might not work for consumers. Instead, you’re using just enough resources to reach small focus groups. It’s like a restaurant’s soft opening. You fine-tune until you’re sure you have something with which your target market will be happy.
Lean Startups Rely on Proof of Concept
Lean startups are founded on the idea of proof of concept, which is basically the end result of all your testing that proves your idea is likely to succeed. Often, entrepreneurs get confused about how this differs from a minimum viable product, but they’re not at all the same thing. An MVP is the most basic form of a completed product that you’ll use to determine how target customers will respond to a larger launch. If the MVP is the wheels, the proof of concept is the destination.
In order to achieve a proof of concept, you need to ask questions. We already know that the idea of a lean startup focuses on identifying a problem and then identifying the solution to that problem. Most frequently, a lean startup will ask, “Why would someone need this?” The answer must identify the solution and solve it, or it doesn’t count as proof of concept.
For example, Twitter initially displayed tweets in chronological order, but a lot of tweets were getting lost in the fray. To better serve its users, it needed to develop a new feature that answered an important question: How can we make sure our users won’t miss the tweets they want to see the most? The answer was removing chronology and basing the news feed on a user-driven algorithm.
Unfortunately, the proof of concept did not come back positive. It confused and angered users who wanted to see all of the tweets from people they follow as they happened. Twitter built an MVP of a new feature — a button that allowed users to switch in and out of chronology. When the proof of concept came back positive, it was rolled out to all users.
Lean Startups Use Actionable Metrics vs. Vanity Metrics
Traditional businesses may be swayed by vanity metrics. These are metrics that look impressive on the outside but may not be all that impressive when you dive into the meaning behind them.
For example, the number of downloads of an app or hits on a webpage are vanity metrics. If they’re great, they’re an impressive stat that can help a company land venture capital funding, but it won’t really contribute to a company’s underlying goal because it doesn’t tell you from where your customers are coming, if they actually like your product or how the experience can be improved.
Instead, companies following lean startup methodology focus on actionable metrics that can give insight about how a product can be improved.
For example, a lean tech startup may A/B test a new feature before rolling it out on its entire platform. We’re seeing this on a large scale with Instagram as Facebook tests hiding like counts under photos. A lean startup will take the feedback from an A/B test and mold its path forward, even if that means ditching a new feature that performed poorly.
Popular Lean Startups
The lean startup is found in companies of all sizes, and it’s a scalable model. One of the most successful examples is General Electric. The company used this method across a number of product launches, such as developing new batteries for cell phone companies in areas with unreliable electricity and in its gas turbine business. GE shifted its sales approach in its turbine business and went from selling upgrades after the fact to selling future upgrades up front, which added $2 billion worth of sales in 2016.
Intuit, who is best known for its tax preparation software QuickBooks, is also a faithful follower of the lean startup. Along the way, it has tested different approaches to customer support other than simply through the phone, which eventually resulted in the addition of a “find an expert” section. It also used the methodology to develop and launch a new version of QuickBooks for the self-employed.
Amazon, whose main focus used to be selling used books, is the biggest retailer in the world, but it used a lean startup approach to get there. When the entire world was getting digitized, the company realized that there was no book equivalent to an iPod and developed the Kindle.
Similarly, Amazon looked at the Silicon Valley tech startup boom and realized that companies needed to buy more and more server space, so it started offering cloud computing services. According to Forbes, CEO Jeff Bezos even said, “Your margin is my opportunity," a sentiment that is pretty much at the heart of lean startups.
Cons of the Lean Startup
Lean startups are not a one-size-fits-all solution. Research has shown that startups using a scientific-like method of trial and error generally perform better than those that do not. Still, the lean startup approach can’t completely ensure success; it can only ensure the best possibility of success. The approach still has some shortcomings.
Lean startups may fail in their emphasis of reaching potential customers as soon as possible with an MVP. This can cause startups to lose sight of their long-term goals in favor of focusing on what consumers immediately want. This doesn’t always build longevity.
Next is the fact that a lean startup does not use a traditional business plan. On one end of your business model is your product, and on the other end is your success, but the middle — how you actually scale your business past the MVP in a way that's financially feasible — doesn’t have any sort of outlined plan. This is a risk, but fortunately, you can use lean method startup methodology along with traditional business practices to fill in the gaps.
Nothing about the lean startup model is an "either/or" situation, which makes it a great strategy for a company that feels more comfortable with traditional methods but wants to ensure the success of a particular product launch.
To achieve startup success, it is likely in your best interest to adopt lean thinking and focus on customer development. Letting go of your premonitions and engaging in a little scientific experimentation could lead you to the epiphany that will make you a successful startup.
- Crunchbase: IMVU
- Inc.: Creating the Lean Startup
- Investopedia: Lean Startup
- WhatIs.com: Validated Learning
- Boldare: Lean Startup Series: Vanity Metrics vs. Actionable Metrics
- Forbes: How Amazon Stays More Agile Than Most Startups
- Fortune: 5 Big Companies Practicing "The Startup Way"
- The Next Web: Twitter Is Finally Giving Our Chronological Timelines Back
- Harvard Business Review: Why the Lean Startup Changes Everything
- Harvard Business Review: What the Lean Startup Method Gets Right and Wrong
- The Lean Startup: Principles
- Forbes: Lean Startup Is Dead -- Long Live Lean Startup
- Lean Labs: Proof of Concept vs. Minimum Viable Product (And When to Use Each)
- Lean Enterprise Institute: What is Lean?
- Harvard Business Review: How GE Applies Lean Startup Practices