The Key Points: The Lean Startup
By: Lorenzo Bergamini
INTRODUCTION
Startups operate in an environment of extreme uncertainty, limited funds, and a low probability of success. They are rushing to reach financial autonomy, often referred to as “ramen profitability” (a term introduced by Paul Graham of Y Combinator) and used to indicate startups that make just enough money to pay for the founders’ living expenses. For these reasons, startups have to find a sustainable and scalable business model in the shortest amount of time, while reducing as much as possible the amount of waste generated. The solution proposed by Eric Ries is “The Lean Startup“ (Ries, 2011), a framework that he introduced in 2008 in his iconic book “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses.”
This article will shortly introduce how the lean startup method works, and the tools that can be used to improve the success rate of startups.
THE LEAP OF FAITH
The lack of fund and the extreme uncertainty of the environment in which they operate puts startups is a very delicate position. They must develop a detailed plan to survive and grow but at the same time they do not have enough market data to confidently make decisions and they cannot foresee how customers will react to their new product (especially in highly innovative environments).
To solve this problem, startups should develop an initial strategy based on a set of “leapof-faith” assumptions, a set of hypotheses about the market and the customers on which the strategy is based. If these assumptions are correct, the strategy has a chance of success; if they are not, the strategy is based on a wrong understanding of the word and it must be changed.
TESTING ASSUMPTIONS
The limited amount of funds of startups means that they have to find a way to test their hypothesis using as few resources as possible. Ries introduces in his book the concept of an MVP (Minimum Viable Product), an early version of the product that offers only the main features needed to test the hypotheses on which the strategy is based. This first version must be as basic as possible and sometimes is not even a complete working product. Different types of MVPs are described by Ries in his book, and many others have been proposed during the years. Table 1 briefly summarizes the main types of MVP.
The decision to release an MVP is the exact opposite of companies that develop the entire product before launching it. In the first case, when the entrepreneur is wrong, only a limited amount of time and money has been wasted, and the startup can change the strategy and use the remaining funds to test the new hypothesis. In the second case, the startup could face a situation in which it does not have enough funds to recover from the wrong decision.
When the MVP is successful and the initial hypothesis is confirmed, the startup can move to the next phase: improving and measuring.
IMPROVING AND MEASURING
The next step is to iterate as fast as possible through the BML cycle (Build-Measure-Learn cycle) to improve the product.
The first step of the BML cycle is to Build the first additional feature of the product. Then, in the Measure phase, the new version of the product is released, and key metrics are analysed. Finally, in the Learn phase, the key metrics analysed are compared to the baseline (the previous best version of the product). If the metrics have improved, a new baseline is established; if the metrics have not improved, the previous version will remain the baseline from which different improvements will be tested. Figure 2 shows the entire process summarized.
PIVOT OR PERSEVERE
Sometimes, even if a company is iterating through the BML feedback loop, the metrics do not improve as planned. In this case, Ries suggests a Pivot: “A pivot requires that we keep one foot rooted in what we’ve learned so far, while making a fundamental change in strategy to seek even greater validated learning” (Ries, 2011, p. 154). In other words, if the company is not making enough progresses, the entrepreneur should change a part of the strategy. Table 2 and Table 3 provide a summary of the most common types of pivots. The decision to pivot is not easy but Ries warns against the problem of waiting too much.
He proposes a “pivot or persevere meeting” held periodically (every 2 to 8 weeks) where a critical evaluation of the progress is carried out to make the final decision.
GROW, GROW AND GROW!
The next phase in the life of a startup is the growth. Following Ries’ framework, a startup must identify and use the correct “engine” to create sustainable growth, a mechanism by which “new customers come from the actions of past customers” (Ries, 2011, p. 207). The three main engines of growth are summarized in Table 4.
CONCLUSION
The Lean Startup Framework proposed by Eric Ries is a very efficient way to quickly test if the startup idea can work while, at the same time, wasting as few resources as possible. It also offers a clear structure to improve the product, solve problems and grow the company.
However, although the book is a must-read for every entrepreneur, it should not be taken as the “holy grail” of entrepreneurship. Every startup is different and there are cases in which using a different approach can bring the same amount of success, if not more.
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