How To Start A Business: The Lean Start-Up Approach

From a Lecture Series by Professor Michael Roberto, D.B.A.

There is an interesting disparity between those who go about planning, then executing, versus those that test and prototype. What does that have to do with entrepreneurship and business strategy? Well, as Peter Skillman, once said, “Enlightened trial and error succeeds over the planning of lone genius.” And this is true in launching a new venture.

Image of people of people working on business plan

Out With the Old — In With the New

If we think about how we typically launched entrepreneurial ventures in the past the old way was to conduct extensive market research, to build a detailed business plan, perhaps more than 100 pages, and within that, to clearly build detailed, pro forma financial statements, forecasts of exactly the revenues and the expenses you expected in the outgoing years.

See Also: Why Did Disney Buy Pixar?

Is there a different way to launch a new venture? Well, in recent years there’s been a movement called the lean start-up. It’s a new way to launch a venture. It’s different than the old sort of planning and executing model. It’s more iterative. It’s less linear. And it involves more adaptation and learning so as to get the strategy right, not the first time, but as quickly as possible so you can succeed in the marketplace.

“Enlightened trial and error succeeds over the planning of lone genius.” Peter Skillman Click To Tweet

The Lean Start-Up Philosophy

Image of Eric Ries for the Lean Start-up Approach article
Eris Ries

Eric Ries is one of the pioneers of this lean start-up methodology, and he articulates it as follows. He says the lean start-up methodology has, as a premise, that every start-up is a grand experiment that attempts to answer a question. The question is not, can this product be built? Instead, the questions are, should this product be built, and can we build a sustainable business around this set of products and services?

This experiment, he says, is more than just theoretical inquiry. It’s a first product. If it’s successful, it allows the manager to get started with his or her campaign, in listing early adopters, adding employees to each further experiment or iteration, and eventually, starting to build a product. That’s the lean start-up philosophy.

Now notice, there’s an important distinction between the lean start-up approach and what happens to many entrepreneurs. Many entrepreneurs have a great technological solution. They have a product in mind. But a great technology or a great product concept does not a business make. You need a business model. You need to know what customers actually need this and what does the customer actually need out of that product? You can’t fall in love with your own idea. And so you have to adapt, and that adaptation can be difficult for many entrepreneurs.

Ries articulates this notion of an MVP, a minimum viable product. So you start by figuring out, what problem needs to be solved? What pain point is there that the customer is experiencing? Not what’s your idea for a great new technology, but what does the customer need based on the frustrations they’re experiencing with current products and services? And then, Ries is arguing that, we develop a minimum viable product, his MVP. What is that? He says the minimum viable product is that version of a new product or service which allows a team to collect the maximum amount of validated learning with the least effort. The notion here is begin to learn as soon as possible, and then, adapt. Entrepreneurs now talk about the pivot. You pivot or adapt, you shift your idea based on the learning that takes place.

Begin Learning As Soon As Possible

Now what’s crucial here is that you get to that learning as soon as possible, that you not belabor the planning process.

Now what’s crucial here is that you get to that learning as soon as possible, that you not belabor the planning process. You don’t spend years writing the 100-page business plan before you execute. In other words, getting an initial concept, prototype, product out into customers’ hands and collecting feedback, and not spending all your time building spreadsheets that project revenues and expenses for something, frankly, that it’s going to be very hard to estimate and to understand in advance. So let’s get it out there, and let’s collect real user feedback, and let’s build upon that. Let’s get our MVP into the customers’ hands as soon as possible.

Now, what are you trying to accomplish with this MVP? Ries argues you’re trying to test certain hypotheses. This scientific method that he’s advocating, what does that mean, to test hypotheses? Well, he says, there are certain kinds of propositions that you want to collect information about, certain hypotheses that you could articulate before you put that prototype in the hands of customers.  You have hypotheses about what the customer needs, what they define as quality, and what they’re willing to pay for. And now what do you do? You test those hypotheses. You begin to collect data to see, OK, this may be a great product, but can we command a price sufficient to cover our expenses? That’s a very different question. You may have a great technology, but no one’s willing to pay enough for you to be able to sell it at a profit.

Learn more: Launching a Lean Start-Up

Comfortable With Good Enough

Now getting this prototype into people’s hands means getting comfortable with good enough. What do I mean by that, good enough? Well, you can’t hold the prototype forever trying to perfect it.

You can’t hold the prototype forever trying to perfect it.

You have to be able to get it into people’s hands early, even if it’s imperfect. It’s got to be good enough, not perfect. How do you know what’s good enough? That’s a really difficult test for an entrepreneur. And many entrepreneurs, they don’t want to release their baby before it’s perfect.

What’s the fear for every couple who has a new baby for the first time? Having three children, I know the fear; you don’t want anyone to call your baby ugly. But what do great entrepreneurs do? They’re willing to allow others to call their baby ugly. In other words, they’re willing to put out a product that isn’t perfect, and they’re willing to let people say what’s not perfect about it and quickly adapt, not fall in love with their idea. And the problem with many entrepreneurs is they’re not listening.

Even if they put out that prototype, they’re hell bent on getting their idea to market. And they’ve worked on it so hard, they’re so passionate about their idea, they don’t want to listen to feedback. So it’s not enough to just get the prototype out there. You also have to be willing to listen and understand that it’s not perfect, and take the criticism, as harsh as it may be. It’s difficult to do.

It takes an entrepreneur who’s willing to not fall in love with their idea and who’s willing to take feedback. And not every entrepreneur is willing to do that.  David Kelley is the founder of the leading product design firm, IDEO. And he has a wonderful phrase that he’s instilled at his firm to drive the innovation process. And he talks about the notion of failing often to succeed sooner. And this is really crucial in the context of entrepreneurship. You have to be willing to put something out there that is “a failure,” that will, perhaps, be trashed by customers, that will receive a lot of negative feedback. You have to be OK with that, and you have to pick yourself up, take the feedback, and adapt.

The notion of failing often to succeed sooner — is crucial in the context of entrepreneurship. Click To Tweet

Successful Pivots

Here are some examples of successful pivots of companies that started out with one direction and one strategy and adapted based on customer feedback, that got their MVP out there in the market, and that saw what users wanted, how they reacted, what they liked and disliked, and generated improvements. Well, it’s interesting to look at three firms that really moved pretty significantly from their roots in the early stages of the strategy-creation and adaptation process.

Let’s take Yelp. Yelp started out as an automated system for e-mailing recommendation requests to friends. What has it become? It’s an online review system for restaurants and local businesses. Many people have a Yelp app on their phone, and if they’re in a city they’re not familiar with, they quickly turn to Yelp to find nearby restaurants or other local businesses, and they look to what others are saying about those businesses before they go give them their dollars.

Learn More: Matching Supply and Demand

How about Twitter? Twitter, of course, is a very successful social media platform today. But did they start out that way? They did not. They were a podcasting start-up in their initial incarnation, but they adapted. And how about a firm that we all know, and many people love, some maybe not, but Starbucks is a very successful company. But did they start out with the strategy that we see today? They did not. They started off selling coffee beans and espresso machines. They’ve become a cafe that sells brewed coffee and coffee drinks of various kinds. They evolved.

So there’s an interesting question. Are lean start-ups more possible today than in the past? In other words, could it be that it’s easier to build an MVP, to test and prototype today than it was years ago? Well, there’s an argument to be made that, in fact, it is easier, more feasible today. The cost of computer-processing power has come down dramatically. There’s open-source software available that you can get to help launch your business. Cloud computing has changed the entire nature of computing in many companies. And, access to capital and talent has fundamentally shifted.

When I went to Harvard Business School as an MBA student in the early 1990s, most graduates went off to investment banking or management consulting. Very few people went directly from business school to the start-up community. Today, you see many, many people going to business school and looking to directly launch a new venture. They don’t want to work for a large corporation. They want to be their own boss. They have a great idea, and they’d like to try it. So the ability of start-ups to recruit talent, well, there’s a lot of young talent that wants to work in a new company. So it’s more feasible in many ways to launch a lean start-up today than in the past.

From the Lecture Series: Critical Business Skills For Success
Taught by Professor Michael A. Roberto, D.B.A and four others
PHOTO By Margot Duane 2012 [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

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