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2016-01-18 11:25:01
Steve Blank
From the May 2013 Issue
Launching a new enterprise whether it s a tech start-up, a small business, or
an initiative within a large corporation has always been a hit-or-miss
proposition. According to the decades-old formula, you write a business plan,
pitch it to investors, assemble a team, introduce a product, and start selling
as hard as you can. And somewhere in this sequence of events, you ll probably
suffer a fatal setback. The odds are not with you: As new research by Harvard
Business School s Shikhar Ghosh shows, 75% of all start-ups fail.
But recently an important countervailing force has emerged, one that can make
the process of starting a company less risky. It s a methodology called the
lean start-up, and it favors experimentation over elaborate planning, customer
feedback over intuition, and iterative design over traditional big design up
front development. Although the methodology is just a few years old, its
concepts such as minimum viable product and pivoting have quickly taken
root in the start-up world, and business schools have already begun adapting
their curricula to teach them.
The lean start-up movement hasn t gone totally mainstream, however, and we have
yet to feel its full impact. In many ways it is roughly where the big data
movement was five years ago consisting mainly of a buzzword that s not yet
widely understood, whose implications companies are just beginning to grasp.
But as its practices spread, they re turning the conventional wisdom about
entrepreneurship on its head. New ventures of all kinds are attempting to
improve their chances of success by following its principles of failing fast
and continually learning. And despite the methodology s name, in the long term
some of its biggest payoffs may be gained by the large companies that embrace
it.
In this article I ll offer a brief overview of lean start-up techniques and how
they ve evolved. Most important, I ll explain how, in combination with other
business trends, they could ignite a new entrepreneurial economy.
The Fallacy of the Perfect Business Plan
According to conventional wisdom, the first thing every founder must do is
create a business plan a static document that describes the size of an
opportunity, the problem to be solved, and the solution that the new venture
will provide. Typically it includes a five-year forecast for income, profits,
and cash flow. A business plan is essentially a research exercise written in
isolation at a desk before an entrepreneur has even begun to build a product.
The assumption is that it s possible to figure out most of the unknowns of a
business in advance, before you raise money and actually execute the idea.
Once an entrepreneur with a convincing business plan obtains money from
investors, he or she begins developing the product in a similarly insular
fashion. Developers invest thousands of man-hours to get it ready for launch,
with little if any customer input. Only after building and launching the
product does the venture get substantial feedback from customers when the sales
force attempts to sell it. And too often, after months or even years of
development, entrepreneurs learn the hard way that customers do not need or
want most of the product s features.
After decades of watching thousands of start-ups follow this standard regimen,
we ve now learned at least three things:
1. Business plans rarely survive first contact with customers. As the boxer
Mike Tyson once said about his opponents prefight strategies: Everybody has a
plan until they get punched in the mouth.
2. No one besides venture capitalists and the late Soviet Union requires
five-year plans to forecast complete unknowns. These plans are generally
fiction, and dreaming them up is almost always a waste of time.
---
Sketch Out Your Hypotheses
The business model canvas lets you look at all nine building blocks of your
business on one page. Each component of the business model contains a series of
hypotheses that you need to test.
[canvas]
---
3. Start-ups are not smaller versions of large companies. They do not unfold in
accordance with master plans. The ones that ultimately succeed go quickly from
failure to failure, all the while adapting, iterating on, and improving their
initial ideas as they continually learn from customers.
One of the critical differences is that while existing companies execute a
business model, start-ups look for one. This distinction is at the heart of the
lean start-up approach. It shapes the lean definition of a start-up: a
temporary organization designed to search for a repeatable and scalable
business model.
The lean method has three key principles:
First, rather than engaging in months of planning and research, entrepreneurs
accept that all they have on day one is a series of untested hypotheses
basically, good guesses. So instead of writing an intricate business plan,
founders summarize their hypotheses in a framework called a business model
canvas. Essentially, this is a diagram of how a company creates value for
itself and its customers. (See the exhibit Sketch Out Your Hypotheses. )
Second, lean start-ups use a get out of the building approach called customer
development to test their hypotheses. They go out and ask potential users,
purchasers, and partners for feedback on all elements of the business model,
including product features, pricing, distribution channels, and affordable
customer acquisition strategies. The emphasis is on nimbleness and speed: New
ventures rapidly assemble minimum viable products and immediately elicit
customer feedback. Then, using customers input to revise their assumptions,
they start the cycle over again, testing redesigned offerings and making
further small adjustments (iterations) or more substantive ones (pivots) to
ideas that aren t working. (See the exhibit Listen to Customers. )
---
Listen to Customers
During customer development, a start-up searches for a business model that
works. If customer feedback reveals that its business hypotheses are wrong, it
either revises them or pivots to new hypotheses. Once a model is proven, the
start-up starts executing, building a formal organization. Each stage of
customer development is iterative: A start-up will probably fail several times
before finding the right approach.
[customers]
1. Founders translate company ideas into business model hypotheses, test
assumptions about customers needs, and then create a minimum viable product
to try out their proposed solution on customers.
2. Start-up continues to test all other hypotheses and tries to validate
customers interest through early orders or product usage. If there s no
interest, the start-up can pivot by changing one or more hypotheses.
3. The product is refined enough to sell. Using its proven hypotheses, the
start-up builds demand by rapidly ramping up marketing and sales spending, and
scales up the business.
4. Business transitions from start-up mode, with a customer development team
searching for answers, to functional departments executing its model.
---
Third, lean start-ups practice something called agile development, which
originated in the software industry. Agile development works hand-in-hand with
customer development. Unlike typical yearlong product development cycles that
presuppose knowledge of customers problems and product needs, agile
development eliminates wasted time and resources by developing the product
iteratively and incrementally. It s the process by which start-ups create the
minimum viable products they test. (See the exhibit Quick, Responsive
Development. )
When Jorge Heraud and Lee Redden started Blue River Technology, they were
students in my class at Stanford. They had a vision of building robotic lawn
mowers for commercial spaces. After talking to over 100 customers in 10 weeks,
they learned their initial customer target golf courses didn t value their
solution. But then they began to talk to farmers and found a huge demand for an
automated way to kill weeds without chemicals. Filling it became their new
product focus, and within 10 weeks Blue River had built and tested a prototype.
Nine months later the start-up had obtained more than $3 million in venture
funding. The team expected to have a commercial product ready just nine months
after that.
---
Quick, Responsive Development
In contrast to traditional product development, in which each stage occurs in
linear order and lasts for months, agile development builds products in short,
repeated cycles. A start-up produces a minimum viable product containing only
critical features gathers feedback on it from customers, and then starts over
with a revised minimum viable product.
[responsive]
---
Stealth Mode s Declining Popularity
Lean methods are changing the language start-ups use to describe their work.
During the dot-com boom, start-ups often operated in stealth mode (to avoid
alerting potential competitors to a market opportunity), exposing prototypes to
customers only during highly orchestrated beta tests. The lean start-up
methodology makes those concepts obsolete because it holds that in most
industries customer feedback matters more than secrecy and that constant
feedback yields better results than cadenced unveilings.
Those two fundamental precepts crystallized for me during my career as an
entrepreneur. (I ve been involved with eight high-tech start-ups, as either a
founder or an early employee.) When I shifted into teaching, a decade ago, I
came up with the formula for customer development described earlier. By 2003 I
was outlining this process in a course at the Haas School of Business at the
University of California at Berkeley.
In 2004, I invested in a start-up founded by Eric Ries and Will Harvey and, as
a condition of my investment, insisted that they take my course. Eric quickly
recognized that waterfall development, the tech industry s traditional, linear
product development approach, should be replaced by iterative agile techniques.
He also saw similarities between this emerging set of start-up disciplines and
the Toyota Production System, which had become known as lean manufacturing.
Eric dubbed the combination of customer development and agile practices the
lean start-up.
The tools were popularized by a series of successful books. In 2003, I wrote
The Four Steps to the Epiphany, articulating for the first time that start-ups
were not smaller versions of large companies and laying out the customer
development process in detail. In 2010, Alexander Osterwalder and Yves Pigneur
gave entrepreneurs the standard framework for business model canvases in
Business Model Generation. In 2011 Eric published an overview in The Lean
Startup. And in 2012 Bob Dorf and I summarized what we d learned about lean
techniques in a step-by-step handbook called The Startup Owner s Manual.
The lean start-up method is now being taught at more than 25 universities and
through a popular online course at Udacity.com. In addition, in almost every
city around world, you ll find organizations like Startup Weekend introducing
the lean method to hundreds of prospective entrepreneurs at a time. At such
gatherings a roomful of start-up teams can cycle through half a dozen potential
product ideas in a matter of hours. Although it sounds incredible to people who
haven t been to one, at these events some businesses are formed on a Friday
evening and are generating actual revenue by Sunday afternoon.
Creating an Entrepreneurial, Innovation-Based Economy
While some adherents claim that the lean process can make individual start-ups
more successful, I believe that claim is too grandiose. Success is predicated
on too many factors for one methodology to guarantee that any single start-up
will be a winner. But on the basis of what I ve seen at hundreds of start-ups,
at programs that teach lean principles, and at established companies that
practice them, I can make a more important claim: Using lean methods across a
portfolio of start-ups will result in fewer failures than using traditional
methods.
A lower start-up failure rate could have profound economic consequences. Today
the forces of disruption, globalization, and regulation are buffeting the
economies of every country. Established industries are rapidly shedding jobs,
many of which will never return. Employment growth in the 21st century will
have to come from new ventures, so we all have a vested interest in fostering
an environment that helps them succeed, grow, and hire more workers. The
creation of an innovation economy that s driven by the rapid expansion of
start-ups has never been more imperative.
In the past, growth in the number of start-ups was constrained by five factors
in addition to the failure rate:
---
What Lean Start-Ups Do Differently
The founders of lean start-ups don t begin with a business plan; they begin
with the search for a business model. Only after quick rounds of
experimentation and feedback reveal a model that works do lean founders focus
on execution.
[lean]
---
1. The high cost of getting the first customer and the even higher cost of
getting the product wrong.
2. Long technology development cycles.
3. The limited number of people with an appetite for the risks inherent in
founding or working at a start-up.
4. The structure of the venture capital industry, in which a small number of
firms each needed to invest big sums in a handful of start-ups to have a chance
at significant returns.
5. The concentration of real expertise in how to build start-ups, which in the
United States was mostly found in pockets on the East and West coasts. (This is
less an issue in Europe and other parts of the world, but even overseas there
are geographic entrepreneurial hot spots.)
The lean approach reduces the first two constraints by helping new ventures
launch products that customers actually want, far more quickly and cheaply than
traditional methods, and the third by making start-ups less risky. And it has
emerged at a time when other business and technology trends are likewise
breaking down the barriers to start-up formation. The combination of all these
forces is altering the entrepreneurial landscape.
Today open source software, like GitHub, and cloud services, such as Amazon Web
Services, have slashed the cost of software development from millions of
dollars to thousands. Hardware start-ups no longer have to build their own
factories, since offshore manufacturers are so easily accessible. Indeed, it s
become quite common to see young tech companies that practice the lean start-up
methodology offer software products that are simply bits delivered over the
web or hardware that s built in China within weeks of being formed. Consider
Roominate, a start-up designed to inspire girls confidence and interest in
science, technology, engineering, and math. Once its founders had finished
testing and iterating on the design of their wired dollhouse kit, they sent the
specs off to a contract manufacturer in China. Three weeks later the first
products arrived.
Lean start-up practices aren t just for young tech ventures. Large companies,
such as GE and Intuit, have begun to implement them.
Another important trend is the decentralization of access to financing. Venture
capital used to be a tight club of formal firms clustered near Silicon Valley,
Boston, and New York. In today s entrepreneurial ecosystem, new super angel
funds, smaller than the traditional hundred-million-dollar-sized VC fund, can
make early-stage investments. Worldwide, hundreds of accelerators, like Y
Combinator and TechStars, have begun to formalize seed investments. And
crowdsourcing sites like Kickstarter provide another, more democratic method of
financing start-ups.
The instantaneous availability of information is also a boon to today s new
ventures. Before the internet, new company founders got advice only as often as
they could have coffee with experienced investors or entrepreneurs. Today the
biggest challenge is sorting through the overwhelming amount of start-up advice
they get. The lean concepts provide a framework that helps you differentiate
the good from the bad.
Lean start-up techniques were initially designed to create fast-growing tech
ventures. But I believe the concepts are equally valid for creating the Main
Street small businesses that make up the bulk of the economy. If the entire
universe of small business embraced them, I strongly suspect it would increase
growth and efficiency, and have a direct and immediate impact on GDP and
employment.
There are signs that this may in fact happen. In 2011 the U.S. National Science
Foundation began using lean methods to commercialize basic science research in
a program called the Innovation Corps. Eleven universities now teach the
methods to hundreds of teams of senior research scientists across the United
States.
MBA programs are adopting these techniques, too. For years they taught students
to apply large-company approaches such as accounting methods for tracking
revenue and cash flow, and organizational theories about managing to start-ups.
Yet start-ups face completely different issues. Now business schools are
realizing that new ventures need their own management tools.
As business schools embrace the distinction between management execution and
searching for a business model, they re abandoning the business plan as the
template for entrepreneurial education. And the business plan competitions that
have been a celebrated part of the MBA experience for over a decade are being
replaced by business model competitions. (Harvard Business School became the
latest to make this switch, in 2012.) Stanford, Harvard, Berkeley, and Columbia
are leading the charge and embracing the lean start-up curriculum. My Lean
LaunchPad course for educators is now training over 250 college and university
instructors a year.
A New Strategy for the 21st-Century Corporation
It s already becoming clear that lean start-up practices are not just for young
tech ventures.
Corporations have spent the past 20 years increasing their efficiency by
driving down costs. But simply focusing on improving existing business models
is not enough anymore. Almost every large company understands that it also
needs to deal with ever-increasing external threats by continually innovating.
To ensure their survival and growth, corporations need to keep inventing new
business models. This challenge requires entirely new organizational structures
and skills.
Over the years managerial experts such as Clayton Christensen, Rita McGrath,
Vijay Govindarajan, Henry Chesbrough, Ian MacMillan, Alexander Osterwalder, and
Eric von Hippel have advanced the thinking on how large companies can improve
their innovation processes. During the past three years, however, we have seen
large companies, including General Electric, Qualcomm, and Intuit, begin to
implement the lean start-up methodology.
GE s Energy Storage division, for instance, is using the approach to transform
the way it innovates. In 2010 Prescott Logan, the general manager of the
division, recognized that a new battery developed by the unit had the potential
to disrupt the industry. Instead of preparing to build a factory, scale up
production, and launch the new offering (ultimately named Durathon) as a
traditional product extension, Logan applied lean techniques. He started
searching for a business model and engaging in customer discovery. He and his
team met face-to-face with dozens of global prospects to explore potential new
markets and applications. These weren t sales calls: The team members left
their PowerPoint slides behind and listened to customers issues and
frustrations with the battery status quo. They dug deep to learn how customers
bought industrial batteries, how often they used them, and the operating
conditions. With this feedback, they made a major shift in their customer
focus. They eliminated one of their initial target segments, data centers, and
discovered a new one utilities. In addition, they narrowed the broad customer
segment of telecom to cell phone providers in developing countries with
unreliable electric grids. Eventually GE invested $100 million to build a
world-class battery manufacturing facility in Schenectady, New York, which it
opened in 2012. According to press reports, demand for the new batteries is so
high that GE is already running a backlog of orders.The first hundred years of
management education focused on building strategies and tools that formalized
execution and efficiency for existing businesses. Now, we have the first set of
tools for searching for new business models as we launch start-up ventures. It
also happens to have arrived just in time to help existing companies deal with
the forces of continual disruption. In the 21st century those forces will make
people in every kind of organization start-ups, small businesses, corporations,
and government feel the pressure of rapid change. The lean start-up approach
will help them meet it head-on, innovate rapidly, and transform business as we
know it.
A version of this article appeared in the May 2013 issue of Harvard Business
Review.
Steve Blank is a consulting associate professor at Stanford University and a
lecturer and National Science Foundation principal investigator at the
University of California at Berkeley and Columbia University. He has
participated in eight high-tech start-ups as either a cofounder or an early
employee.