Why did a thrifty startup change everything?

Launching a new project, be it a tech start-up, a small business, or a joint venture in the form of a large corporation, is always a project from the “pan or lost” category. In accordance with the long-term formula, you write a business plan, praise it to investors, put together a team, take the product to the market and start selling as intensively as possible. And most likely somewhere in this sequence of events you will find the inevitable failure. The odds are not in your favor: a new study by Shikhar Gosh of the Harvard Business School shows that 75% of all startups fail.

However, an important opposing force has recently emerged that could make the process of launching a company less risky. This methodology is called a “lean start-up”: when developing a project, research takes precedence over detailed planning, feedback from the consumer over intuition, and iterative development over the traditional “large preliminary design”. Despite the fact that this methodology is only a few years old, its concepts, such as “minimum viable product” and “twists” - pivots - quickly took root in the startup world, and business schools have already begun to adapt their curricula.

However, the movement of a lean startup has not yet become mainstream, and we have yet to feel its full impact. For the most part, it is approximately in the same state in which the movement of big data was five years ago - consisting mainly of terms that are not yet fully understood, and whose consequences companies are only beginning to understand. But with increasing prevalence, they radically change the generally accepted notions of entrepreneurship. New enterprises, of all kinds, are trying to increase their chances of success by following their “fail fast” principles and continuous learning. And despite the name of the methodology, in the long run, large companies that apply these principles can also receive dividends.
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In this article, I will offer a brief overview of lean startup methods and how they evolved. More importantly, I will explain how, in combination with other business trends, they can initiate a new entrepreneurial economy.

Scheme of your hypotheses

Canvas business model gives you the opportunity to look at all nine components of your business on one page. Each component of a business model contains a series of hypotheses that you need to test.

Key partners	Key work	Proposed Values	Customer relationship	Target consumer groups
Who are our key partners? Who are our key suppliers? What key resources do we get from our partners? What key works do our partners do?	What key jobs do our proposed values ​​require? Our sales channels? Customer Relationships? Sources of income?	What value do we give to our customers? Which problem of our consumers do we help solve? What set of products and services do we offer for each target group? What consumer needs do we meet? What should be the minimum viable product?	How do we form, retain and increase our customer base? What kind of relationships have we established with customers? How are they integrated with the rest of our business model? How expensive are they?	Who do we create value for? Who are our most valuable customers? Consumer portrait?
	Key resources		Channels
	What key resources are needed for our proposed values? Our sales channels? Customer Relationships? Sources of income?		What are the channels through which our target consumers want to communicate? How are other companies contacting them at the moment? Which channels work best? Which of the most profitable channels? How do we integrate them into the established order of work with the consumer?
Cost structure		Sources of income
What are the most important costs that must be taken into account in our business model? Which key resources are the most expensive? Which of the key works are the most expensive?		What values ​​will our consumers really pay for? What are they paying for at the moment? What does the revenue model look like? Which pricing policies apply?

* Canvas in Russian picture
* Original canvas from authors in English

Idea briefly

Over the past few years, a new methodology for launching companies called “lean startup” has begun to crowd out the old regime.

Instead of implementing business plans, operating in stealth mode and releasing fully functional prototypes, young enterprises test hypotheses, collect customer feedbacks in advance and often, and demonstrate the “minimum viable product” to potential customers. This new method dictates that the process of finding a business model (which is the main task that a startup faces) is completely different from the process of implementing this model (this is what recognized companies do).

Recently, business schools began to teach methodologies, which can also be found at events such as Startup Weekend. Over time, lean start-up methods can reduce the percentage of failures of new enterprises, and in combination with other trends spreading in the business world, launch a new, more entrepreneurial-oriented economy.

Perfect Business Plan Error

In accordance with the generally accepted opinion, the first thing that every entrepreneur should do is write a business plan - a statistical document describing the scope of opportunities, the problem that needs to be solved, and the solution that a new enterprise will give. It usually includes a five-year forecast of revenues, profits, and cash flows. A business plan is essentially a study written at a desk alone, even before the start of product creation, because it is possible to take into account most of all unknown business in advance, before you find the money and make the idea a reality.

As soon as an entrepreneur with a convincing business plan receives money from investors, he or she begins to develop a product in a similar limited style. Developers spend thousands of man-hours to prepare it for launch with little or no user intervention. Only after creating and launching a product does an enterprise receive feedback from the consumer - when the sales department tries to sell it. And often, after months or even years of development, entrepreneurs will find out that consumers do not need or they do not want most of the product characteristics, which is very difficult to accept.

After decades of observing how thousands of startups follow the same scenario, we figured out at least three things:

1. Business plans rarely experience the first meeting with the consumer. Boxer Mike Tyson once said this about the pre-match strategies of his opponents: “Everyone has a plan before he gets into the jaw.”
2. No one except venture capitalists and the Soviet Union need five-year plans that predict total uncertainty. These plans, as a rule, are fiction, and their realization in life is almost always a waste of time.
3. Startups are not a smaller version of large companies. They do not develop in accordance with the general plan of action. Those who ultimately succeed quickly move from one failure to another, while adapting, revising and improving their initial ideas, because they constantly learn something from their consumers.

One of the main differences is that while existing companies are implementing a business model, startups are looking for their own. This difference lies at the heart of a lean startup approach. It forms the term “lean” start-up: a temporary organization designed to find a repetitive and scalable business model.

Three key principles of a lean method

First, instead of spending months planning and research, entrepreneurs recognize that all they have today is a set of untested hypotheses, in essence, good guesses. Therefore, instead of writing complex business plans, entrepreneurs summarize their hypotheses in a framework called the canvas of the business model. Essentially, this is a schematic representation of how a company creates value for itself and its customers. (See the table "Scheme of Your Hypotheses.")

Second, to test their hypotheses, lean startups use the “go beyond the office” approach, called the client's development method. They go out and ask their potential users, customers and partners to give feedback on all elements of the business model, including product characteristics, pricing, distribution channels and affordable strategies to attract consumers. The emphasis is on sharpness and speed: New businesses quickly create minimal viable products and immediately collect feedback from consumers. Then, taking into account the comments of consumers to revise their assumptions, they begin the cycle anew, testing the modified version and making small adjustments (iterations), or more significant (pivotal) adjustments to those ideas that do not work. (See the “Listening to Consumers table.”)

Third, lean startups practice something called a flexible development methodology, which was first used in software development. A flexible development methodology works hand in hand with client development methods. Unlike conventional annual product development cycles, which imply knowledge of consumer problems and product needs, a flexible development methodology eliminates waste of time and resources by re-developing a product. This is the process by which startups create minimal viable products that they then test.



When Jorge Eraud and Lee Rudden founded Blue River Technology, they were students at my Stanford classes. Their vision was the creation of robotics for commercial needs. After a survey of more than 100 consumers in 10 weeks, they realized that their original target consumer, golf courses, did not appreciate their decisions. However, later they began to communicate with farmers and found that there is a high demand for an automated way to eliminate weeds without the use of chemicals. Meeting this demand has become their new goal, and within 10 weeks, Blue River has built and tested a prototype. Nine months later, the startup attracted more than $ 3 million in venture capital investments. After nine months, the team planned to begin mass production.

The fading popularity of stealth mode

Lean techniques change the language in which startups describe their work. During the dot-com boom period, start-ups often worked in the “stealth mode” (to avoid attracting attention from competitors), demonstrating prototypes to consumers only during well-orchestrated “beta” tests. The methodology of a lean startup forces you to abandon such concepts, as it states that in most industries, feedback to the consumer is more important than secrecy, and that constant feedback provides better results than the gradual disclosure of secrets.

These two fundamental rules are rooted in me during my work as an entrepreneur. (I participated in eight high-tech start-ups, sometimes as a founder, sometimes as an employee.) When I started teaching, about ten years ago, I proposed a client development formula described earlier. By 2003, I mentioned this process on a course at the Haas School of Business at the University of California at Berkeley.

In 2004, I invested in a startup founded by Eric Rees and Will Harvey; the condition of my investment was their attendance at my course. Eric quickly realized that the waterfall development model, traditional in the tech industry, the linear product development approach, should be replaced with iterative, flexible methods. He also noted the similarity of the startup disciplines gaining momentum with the Toyota Production System, which became known as “lean manufacturing.” Eric combined client development techniques and flexible “lean startup” techniques.

The methods were popularized through the publication of a series of books. In 2003, I wrote Four Steps to Illumination, where I first pointed out that startups are not a smaller version of larger companies, and also described in detail the development process of a client. In 2010, Alexander Ostervalder and Yves Pigne in their book Business Model Generation (Business Model Generator) gave entrepreneurs a reputable framework for the outline of the business model. In 2011, Eric published a review in The Lean Startup. And in 2012, Bob Dorf and I summarized everything we learned about lean methods in a walkthrough called The Startup Owner's Manual (Startup: Founder's Handbook).

The Lean Startup Technique is being taught at more than 25 universities and through the popular online course at Udacity.com. In addition, in almost every city in the world, you will find organizations, such as Startup Weekend, which at the same time introduce hundreds of future entrepreneurs to the lean methodology. During such meetings, in just a few hours, a full room of start-up teams can discuss half a dozen ideas on potential products. Although, for people who have never been to such events, it seems incredible, but at these meetings, some companies formed on Friday evening, began to bring real income by noon Sunday.

Table "Listen to consumers"

In the process of client development, startups are looking for a business model that will work. If the feedback of consumers says that some of the hypotheses is untenable, then it is either revised or “changed” to a new one. As soon as the model is confirmed, the startup begins implementation, the construction of a formal organization. Each stage of client development is iterative: a startup is likely to suffer several failures until it finds the right approach.

Search		Implementation
one	2	3	four
The founders translate the company's ideas into business model hypotheses, conduct tests on the perceived needs of consumers, and then create a “minimum viable product” in order to test the proposed solutions on consumers.	The startup continues to test all other hypotheses and is trying to find evidence of consumer interest through early orders or product use. If there is no interest, the startup may "switch" by changing one or more hypotheses.	The product is sufficiently modified for release on sale. Using proven hypotheses, a startup creates demand, rapidly increasing marketing and sales costs, and then expanding the business.	The evolution of business from the startup mode, with the client development team, which is looking for answers, to the functional units that implement the model.

Building Entrepreneurial Innovative Economy

While proponents argue that lean processes can make individual startups more successful, I am convinced that these statements are too grand. Success depends on too many factors, so that one methodology can ensure that every single startup is successful. But based on observations of hundreds of startups, programs that teach lean methods, and successful companies that use them, I can make a more important statement: all other things being equal, the use of lean methods reduces the percentage of failures than traditional approaches.

Lower failure rates can have profound economic consequences. Today, the consequences of destruction, globalization and stabilization are shaking the economy of each country. Successful industries quickly get rid of occupations, many of which never return. In the 21st century, employment growth will have to come from the side of new enterprises, so we are all interested in creating favorable conditions that will help them to succeed, expand and hire more employees. Never before has the creation of an innovative economy driven by the rapid growth of start-ups been more necessary.

In the past, in addition to failures, the growth in the number of start-ups was slowed by five factors:

1. High costs of attracting the first consumer and even higher costs in the case of an erroneous product.
2. Long cycles of technological developments.
3. A limited number of risky people willing to finance or work in a startup.
4. The structure of the venture capital investment sector, in which a small number of firms needed to invest significant amounts in a limited number of start-ups in order to receive significant dividends.
5. Concentrating knowledge on how to create startups, which was located in areas of the East and West coasts in the United States. (To a lesser extent, a problem for Europe or for other parts of the world, but even abroad there are geographical business hotspots.)

The lean approach reduces the impact of the first two constraints, helping new businesses launch a product that consumers really want, much faster and cheaper than traditional methods; as well as the third factor, making startups less risky. And it appeared at a time when other business and technological trends in a similar way break down barriers to the startup formation. The combination of all these forces makes changes in the entrepreneurial landscape.

Today, open source software, such as GitHub, and cloud services, such as Amazon Web Services, have reduced software development costs from millions of dollars to thousands. Hardware startups no longer need to build their own factories, since offshore manufacturers are very easily accessible. Indeed, it is becoming quite commonplace to see how young tech companies practicing the lean startup methodology offer software products that are delivered via the Internet or hardware collected in China one week after its creation. Check out Roominate, a startup created to increase confidence and interest in science, technology, engineering, and math among girls. As soon as the founders finished testing and re-checking the design of their set of dollhouse, they sent the technical requirements to the manufacturing contractor in China. Three weeks later, the first batch of product arrived.

Decentralization of access to finance is another important trend. Once venture investment (VI) was a closed club consisting of firms grouped around Silicon Valley, Boston and New York. In today's entrepreneurial ecosystem, new super angel funds, smaller than traditional multimillion-dollar VI funds, can provide investment at the initial stage of the company's development. Around the world, hundreds of business accelerators, such as Y Combinator and TechStars, have begun sowing investments. And crowdsourcing sites, such as Kickstarter, provide another, more democratic method of financing startups.
Immediate access to information is also a boon to today's new businesses. Before the Internet, the founders of new companies could receive advice only in person with experienced investors or entrepreneurs. Today, the biggest difficulty is sorting the vast amount of advice received. Lean concepts offer a framework that helps you distinguish good advice from bad.

Initially, lean startup methods were designed to create fast-growing tech-friendly enterprises. However, I am convinced that the principles are equally effective for creating a so-called small business with Main Street, which forms the basis of the economy. If the whole world of small business adhered to these principles, then I am sure that this would accelerate growth and increase efficiency, which in turn would have a direct and immediate impact on GDP and employment.

There are prerequisites that this can really happen. In 2011, the National Science Foundation of the United States began using lean techniques to extract profits from basic research in a program called Innovation Corps. At the moment, in all of the US, eleven universities are teaching hundreds of teams of senior researchers.
MBA programs are also adopting these techniques. Over the years, they have taught students to use start-up approaches suitable for large companies, such as accounting methods for tracking income and cash flow, and organizational theories regarding management. Although startups faced with completely different problems. Now business schools are aware that new enterprises need their own management tools.

As soon as business schools understood the difference between the implementation and the search for a business model, they began to refuse to use the business plan as templates in the course of business basics. And business plan writing contests, which have been a significant part of the MBA course for many decades, have been replaced by business model search contests. (Harvard Business School was the last to make such changes, namely in 2012) Stanford, Harvard, Berkeley and Columbia are the leading universities in the field of training for a lean start-up. To date, my Lean LaunchPad training course for teachers is attended by more than 250 college and university teachers a year.

Lean start-up techniques are suitable not only for young tech enterprises. Large companies such as GE and Intuit have already begun to use them.

What do lean startups do differently?

Founders of thrifty startups do not start the process with a business plan; They start by searching for a business model. Only after short test cycles and feedbacks will help to find a model that works, will they start the project.

Thrifty	Traditional
Strategy
Business model, hypothesized	Business plan, implementation driven
New product development process
Customer Development Leave the office and test hypotheses	Product Management Preparing a proposal for marketing, following a linear, step-by-step plan
Engineering
Flexible development methodology Iterative and step-by-step product creation	Flexible or Waterfall Development Methodology Creating a product by an iterative method or offering full specifications even before the start of creation
Organization
Customer Development and Flex Development teams Requirements for admission to work: learning ability, ingenuity, speed	Division into functional departments Requirements for employment: experience and diligence
Financial statements
Just what's needed Costs of customer engagement, value of consumer life expectancy, turnover, viral approach	Accounting Profit and loss account, balance sheet, cash flow statement
Failure
Expected Corrected by revising ideas and avoiding ideas that do not work.	Exceptional case Corrected by dismissing managers
Speed
High Work with "relevant" data	Leisurely Work with the "full" data package

New Strategy for 21st Century Corporations

It is becoming obvious that the methods of a lean startup are not only suitable for young tech enterprises.

Corporations have spent the last 20 years improving efficiency by reducing costs. However, it is no longer enough just to focus on improving existing business models. Almost every large company understands that it also needs to cope with ever-increasing external threats through continuous innovation. In order to ensure the survival and growth of corporations, it is necessary to constantly introduce new business models. Such tasks require completely new organizational structures and abilities.

Over the years, management experts such as Clayton Christensen, Rita McGrath, Vijay Govindarajan, Henry Chesbrough, Ian McMillan, Alexander Osterwalder and Eric von Hippel have been developing ideas on how large companies can improve their innovation processes. Despite this, we see that over the past three years, large companies, including General Electric, Qualcomm and Intuit, have begun to apply the lean startup methodology.

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The first hundred years of management studies were focused on building strategies and tools that set the order of implementation and describe the effectiveness of existing enterprises. Now, when starting a startup enterprise, we have a set of tools for finding new business models. It also happened at the right moment in order to help existing companies cope with the constant changes. In the 21st century, such influences make people from organizations of various types — start-ups, small businesses, corporations, and government — feel the pressure of rapid change. The approach of a lean startup will help them face it, change quickly, and transform production, as they will be ready for it.

The translation was made as part of the Tolstoy Summer Camp start-up summer school.