Is Lean Startup Worth It?

I hear that a lot from people my age. From people from Gen-X who have had successful careers in large organizations, but now want to try something on their own. They assume that because they understand deeply how big companies work, that they will be successful with their own startup. After all, they say, “business is business”.

We used to think that startups were just smaller versions of large companies. However, Lean Startup says otherwise. The central premise of Lean Startup is that startups are not just smaller versions of large companies. Just as children are not just smaller versions of adults. That children are fundamentally different from adults seems obvious to us now, but that hasn’t always been the case.

In 2009, Steve Blank, a serial entrepreneur was contemplating about a lifetime of working with startups, and he came to a realization:

So what is it that makes some startups successful and leaves others selling off their furniture? Simply this: startups are not small versions of large companies.  Yet the processes that [failed] early-stage companies were using were identical to that of large corporations. In hindsight it appeared clear that startups that survive the first few tough years do not follow the traditional product-centric launch model … In particular, the winners invent and live by a process of customer learning and discovery. It’s a process that doesn’t exist in large companies with existing customers and markets.  But it is life and death for a new venture.

I call this process “Customer Development,” a sibling to “Product Development,” and each and every startup that succeeds recapitulates it, knowingly or not.

Steve Blank, Feb 23, 2009

Startup Mini-Me’s and the “Product Development” Model

The traditional model follows the model that larger companies use for their own product development and innovation process. Create a plan, develop the product, test, and launch.

The Traditional Product Development Model for Startups

Many startups, even today, are easily recognizable as corporate Mini-Me’s – smaller versions of their larger counterparts. Even if it is just one person in their garage, they mentally segment the work they do into ‘Product Development’, ‘Marketing’, ‘Sales’, ‘IT’, ‘Operations’ departments. And why not? Newly-minted entrepreneurs find that it is gratifyingly easy to create Mini-Me versions of the larger companies that they have previously worked in.

I’ve written about my own experience of how to start a business in this way. TL;DR – Don’t do what I did.

It’s Easier than Ever to Start a Small ‘Big’ Company

Need a Sales department?…then subscribe to a single-seat Salesforce license. Need Marketing? …then build a website on Wix or WordPress. Add a Facebook page and a Twitter handle, and a few ‘boosts’ later, you have a Marketing department. Similarly with IT, Product Development, and Operations. They can all be had more easily and cheaply than ever before. A domain from Godaddy, an email account from MS Exchange 365, development on Heroku, cloud-based infrastructure from Azure or AWS. All of a sudden you are marshaling the power of multi-million-pound datacenters and huge development teams.

For tiny fractions of what actual employees would cost, you can staff your departments with armies of workers. Need office staff for your company? Amazon Turk, Fiverr, Toptal, and a host of freelance and gig workers are instantly at your fingertips. Want to avoid the hassle completely? Fractional outsourcing of entire functions to huge companies like Amazon or UPS and your logistics problems are solved instantly,

For a couple of hundred pounds a month you can easily reproduce the trappings of your previous corporate life without leaving your conservatory. Heck, most days you don’t even need to get dressed.

Oh, and something else too. Money. Lots and lots of money. If starting a company has never been cheaper, there had also never been a time when money was more freely available. The financial meltdown of 2008 created a period of low, even negative interest rates. A huge concentration of capital was left looking for somewhere to go. Who needs a profitable business or even a paying customer when there is an investor born every minute?

The Better Way. Lean Startups and “Customer Development”

An organization that is following a ‘Customer Development’ approach is one that is optimized to uncover a problem worth solving, for a group of people willing to pay for it. They are trying to find a customer, not build a product. Steve Blank defines a startup as “…a temporary organization designed to search for a repeatable and scalable business model”. A robust customer acquisition engine is the heart of any successful business model. The process that Lean Startup uses to discover and build such an engine is a process of experimentation and validated learning. It’s a series of incremental discovery, combined with discontinuous pivots.

A startup is a temporary organization designed to search for a repeatable and scalable business model

Marketing is Everything

Identifying and reaching a customer is much more important than developing a product or service. If the problem the customer has is one side of the coin, and your product is the other, then the customer is the coin itself. ‘Real’ startups as such only really have one ‘department’ or function – and that is Marketing. “Marketing is the generous act of helping someone solve a problem. Their problem. Marketing helps others become who they seek to become” ~ Seth Godin.

All this is marketing:

  • Customer discovery
  • Problem identification
  • Solution development
  • Inbound & outbound attraction
  • Sales and funnel conversion
  • Market growth and product scaling

If you have unconsciously built your startup around a traditional, Mini-Me paradigm, you will have created a structure that inhibits customer discovery. Unless your product isn’t very innovative, large-company thinking will subtly yet emphatically prevent you from finding and building a truly successful business model.

Can You Get Help To Start a Business Using Lean Startup?

Yes. I created the Startup Circle to help people just like us to start a business without falling victim to the Mini-Me paradox as I once did. We use LeanStack technologies to take companies through the Ideation and Incubation phases of innovation by providing the process, the tools, the collaboration, and the mentorship to help you succeed at starting a business, or at least, to not lose your shirt in the process.

Apply to join our initial cohort and make the first step to start a business – the right way!

How to Start a Business

This is about my experience sixteen years ago before I discovered Lean Startup. It’s about how not to start a business … and about how Lean Startup would have saved me a lot of money.

The first time I was made redundant was at the end of 2003.  I was 35, working as a Product Manager at Thomson Financial.  After sending out a few hundred resumes and getting nowhere, I decided to found my first tech startup.

At Thomson I had been working on the Broker Research publishing platform.  Analysts at brokerage firms like Goldman Sachs, or at independent research firms, would submit their research reports to us. Our software would tag the research by company and industry and publish it through our data terminals. Fund managers and other investors could then search and read the research on companies they were interested in investing in.  Our competitors – Bloomberg, Factset, and Reuters – did exactly the same thing for their own data terminals.  This required the analyst to tag and upload their research to multiple places as different fund managers subscribed to different services.

The product I was working on at the time of my dismissal would have allowed the analyst to publish once – Thomson would receive the document, and convert the tags in order to simultaneously submit to the other three platforms.  At the time I was let go, however, this version had not been released (and now was never going to be).  So I thought there was an opportunity.  I had all the knowledge and insider information to create this much needed (or so I thought) feature. 

Building the Product

Over the next 18 months, I spent over $200,000 of my own money, designing and building a desktop application.  At one point I had a team of 6 working for me with a monthly run-rate of over $16,000.  Though I say it myself, the finished product was actually amazingly good.  We then just had to sell it.  We tried everything we could think of – including partnerships, free and freemium models, and direct sales, but nothing worked.  

My first major partnership was with Bloomberg.  Back then, XML was the new great thing, and Bloomberg was developing a new XML feed for their platform.  I invited the two Bloomberg product managers from NY and London to lunch (a barbecue in my back yard in Boston).  I would both help their business analysts design the XML feed, and then I would include support for it in my product.  In return, they would promote my product to their research contributors.  I ended up giving them a month or so of free consulting to get the feed working, and probably three or four weeks of development time (i.e $12-16,000) on creating and testing the feed.  We got a few trials out of this, but we only managed to convert a few paying customers, paying just a couple of hundred dollars a month.

My second partnership was with Factset.  They did not have a submission platform of their own so I worked with them to develop a feed to their system from my application.  In return, they agreed to promote the application to their researchers.  We got many more firms using our platform, but the relationship with Factset precluded our ability to charge.  As soon as we moved to a paid model, Factset pulled their support.

As the commercial model collapsed around us, in order to save costs I moved our servers from a commercial datacenter into my basement, but even then it was too much. I finally closed the company in June 2008, after burning through almost half a million dollars with expenses and living costs.

What Went Wrong?

In hindsight, I did every wrong. This isn’t an exhaustive list of what went wrong, but it is probably enough to give you a flavour of how not to start a business of your own.

  • I spent too much money to build the perfect solution, and I did that way before I knew I could sell it to anyone.
  • Because I had a large investment portfolio from my time as a stock market analyst, I was able to keep spending long past the point where it made sense to do so.
  • The partnerships I formed were not partnerships.  Large companies only help themselves. There was no financial basis for any of them, and no path to profit for me. I was taken advantage of as a result. I was excited to be associated with them, but the lower-level staff I was dealing with did not have the power to really help.
  • The customer research I did was only around functionality.  At no point did I really ask what, if anything, customers would actually pay. I made a series of self-delusional assumptions that cost me dearly.
  • The alternatives to my product (publishing to all the platforms separately) took a little bit of additional time, but they were free.  I just wasn’t adding enough value to overcome that – not because my software wasn’t good, but because the problem wasn’t worth solving.

The moral of the story is ‘Don’t do what I did’. 

Is There a Better Way to Start a Business?

I believe that there is, and it is called ‘Lean Startup’.

What is Lean Startup?

Lean Startup is a different approach to starting a business.  Using a mini business plan known as a Lean Canvas, the company is built incrementally, one customer at a time. Small experiments – radical innovations – are continuously performed until both a problem worth solving, and a customer segment that is willing to pay, are identified. Only then do you build out the product, and only when you have established a predictable growth, do you scale it.

Lean Startup comes from Steve Blank, a graduate of the University of Hard Knocks and Bitter Experience. The popularization of his thinking was achieved by Eric Ries in the 2011 book ‘Lean Startup’. It has since been developed out as a formal methodology – most significantly by Ash Maurya of LeanStack. As a startup methodology, it is characterized by continuous innovation, a focus on the customer acquisition funnel, and a preference for customers and problems over products and solutions.

Looking at my failed business from 2003 through a Lean Startup lens I can now see quite clearly where I went wrong:

  1. As a Product Manager, I had a huge case of Innovator’s Bias.  I had fallen in love with my solution. This is expected of you as a Product Manager in a large, infinitely-resourced multi-national, but it is fatal in a startup. I knew exactly what I wanted to build, so I built it, regardless of whether anyone would pay for it.
  2. In the face of low conversion rates, I fell for the myth that if I just added this one more feature, then customers would have to come.  I was looking for the magic key or hook.  Needless to say, my ‘partners’ were happy to play into this, requesting additional features that didn’t cost them a penny. Under Lean Startup, if your customers aren’t willing to pay, you either find another problem to solve, or you find another set of customers who are willing to pay. There should be no free rides.
  3. I built my product at scale before I even got my first customer, with backup redundancy, in an expensive datacenter. With a Lean Startup process, you start small, with a small set of early adopters. Only later do you consider scaling, and only then as revenue justifies doing so. The product that satisfies your first few customers may need to be completely rethought to reach the wider market, so scaling too early can be disastrous.

Does Lean Startup Work to Start a Business?

Yes.

That is to say that Lean Startup works…but only if you actually follow the process. Like Lean Manufacturing, and also like Agile software development, it is both simple and yet surprisingly hard to put into practice. Lean Startup is founded on a simple concept – test assumptions with a ‘Minimal Viable Product’ (MVP) until you find a product that people are willing to pay for. In addition, there are a couple of simple principles and tools that anyone can learn. Lean canvases, A/B experimentation, pivoting, conversion metrics and others. However, its real difficulty lies in the discipline that is needed in order to execute it properly. We rarely have the patience.

As humans and entrepreneurs, we love building stuff. When we’re not building stuff, we’ve been taught to find great comfort in planning and researching. Formal business plans are still very much encouraged in the startup world, despite there being an almost universal understanding that as a catalogue of dreams, wishes, assumptions, and fantasies, they are rarely worth the paper they are written on, let alone the hours that have gone into them.

Not building stuff before you REALLY have evidence that there are customers for it, and not believing the fantasies you spin in your business plan turns out to be pretty hard stuff. Entrepreneurs are optimistic first and foremost. If you build it, they will come…except mostly, they won’t.

So what about business advisors and Accelerators? Most business advisors are trained to help you with traditional ‘business planning’ activities which are fundamentally flawed as they are not based on customer realities. Traditional Accelerators no longer really work as well as they did – the traditional funnel is broken. Ash Maurya’s In Search of Unicorns explains in more detail why this is the case. Getting funding too early is also fatal as it helps you avoid actually getting customers.

Creating a massively scalable business is really, really hard. it is much harder than many people realize. ‘Overnight successes’ have often taken five or ten years of hard work and frustration. Studying past successes like Facebook, Amazon, WeChat, Airbnb, or Tesla, is at best misleading, and at worse deceptive. You can’t grow a business today like you could in the past – this is a different world from even six months ago.

Can You Get Help To Start a Business Using Lean Startup?

Yes. I created the Startup Circle to help people just like us to start a business without falling victim to sloppy and wishful thinking as I did. We use LeanStack technologies to take companies through the Ideation and Incubation phases of innovation by providing the process, the tools, the collaboration, and the mentorship to help you succeed at starting a business, or at least, to not lose your shirt in the process.

Apply to join our initial cohort and make the first step to start a business – the right way!