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Entrepreneurship is a speculative gamble. This truism has been reiterated innumerable times in business manuals, entrepreneur convention and university lectures. For what seems like forever now, experts have been trying to come up with different formulae and methods to minimise the risk of startups’ failure. They have tried to standardise the methods to some extent too. Most entrepreneurs figured they could work on their idea, develop business forecasts and plans, make the product and then start selling it. That model worked for some, but for most, the cost of failure was very high. Sometimes the failures proved fatal.

In the past few years, a new force has awakened—in the form of a new methodology that seeks to rupture the old convention of making ideas work. Rather than wasting time and resources in researching and formulating longterm plans, basing a hypothesis on intuition and implementing traditional design approaches of making the best product before taking it to the market, the new method chooses experimentation, feedback and a continuous design process. This new method is known as the ‘lean startup’ model.

This ‘revolution’ started in 2005 with Steve Blank’s book The Four Steps to The Epiphany. And Eric Ries, who is acknowledged for coining and defining the term, mainstreamed the model in 2011 with his book The Lean Startup. Numerous books have since been written and conferences held to foster the movement. For many entrepreneurs the term is still merely a buzzword, but its practice has started to pick up pace, because of its concepts such as ‘Minimal Viable Product’ and ‘Pivoting’. The model is already being preached byLean Startup Machine and Startup Weekend in their platforms across the globe. So what is lean startup and does it really help entrepreneurs?

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Lean Startups Increase The Odds Of Success, And Decrease The Odds Of Wasting Resources, Even If The Company Completely Fails.

Tangled up in the old business plan

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This is how things used to unfold in most startups before the lean movement: When entrepreneurs had their idea, they assumed that the unknowns of the business could be known without their executing the idea. The entrepreneurs would write a convincing business plan based on what they had envisioned the final product would be like and how they thought revenue, expenses and profits would be managed; they would then present the plan to investors, and only when the final product was built would they release the product in the market.

For smaller units of big companies, that model might work.

But both Ries and Blank insist that “startups are not smaller versions of big companies.” Big companies already have a working business model in place, but startups have yet to figure things out for themselves when they start out.

With zero customer input, most startups who followed the conventional path were not only struggling to find the right business model, but were also spending resources on features that they later realised customers didn’t want. For instance, say you had an idea for a tech-startup to build a product; you’d spend half a year learning to code and building the application, only to realise that no one wanted your product. Meaning, you’d spend half a year of your resources, which you could have dedicated to something else.

The lean startup model changes everything.

Driven by hypotheses

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In lean startups, to make sure startups are not conjuring products out of thin air, a hypothesis-driven approach is used. In it, instead of focusing on intricate details of business plans that are limited to words on paper, entrepreneurs formulate a series of falsifiable hypotheses based on a ‘business model canvas’ framework. The framework sketches all the building blocks of a business, from revenue and cost structure to partners and customers.

All the hypotheses are then tested with the business’s stakeholders, which includes potential customers, partners and suppliers. Ries urges entrepreneurs to “get out of the building” and get feedback from customers. Based on the stakeholders’ feedback, lean startups make minimum viable products, which are then taken back again to customers to revise the hypothesis. Eric Ries defines this approach as ‘customer development’.

Failing, learning and pivoting

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Hypotheses do fail and can prove to be invalid. But that is what the goal of innovation is, says Ries: “to learn that which is currently unknown.” Entrepreneurs do not innovate a product only to see what happens. When hypotheses fail, it does not mean the whole venture fails; rather, it means the failure will lead you to an understanding of what will work and what won’t. Entrepreneurs, then, must accept failure as a possibility.

Thus the point is to achieve as many validated learnings as possible early in the startup phase. The means by which the team can track the progress of validated learning is through innovation accounting, which allows teams to “build a model of customer behaviour over time, establish validity of vision and the sustainability,” according to Ries.

When the hypotheses are tested, the startups should persevere if they have been validated, but they need to consider a pivot if they fail. Pivots are small changes to the elements of your business model to find out what you need to focus on. “One foot firmly planted where you’ve been and what you’ve learned, one foot moving where you want to go,” says Eric Ries. But every pivot needs a falsifiable structured hypothesis that can change the direction of the business. They must also “demonstrate clear cause and effect”. Otherwise, the team will be making the same mistake by wasting more time and resources.

You thus function in a constant feedback loop while implementing agile development, along with customer development. You build products in short repeated cycles by producing a series of minimum viable products by gathering feedback, and then revising again with the minimum viable product. The feedback loop continues until the entire business model is validated. Only then do lean startups start executing and build a formal organisation.

The key to turning the odds in your favour

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The key is to be fast and nimble. Lean startups reduce the time between pivots, and they achieve it by quickly moving through the feedback loop. You accelerate the overall process: you build faster, you measure faster and you learn faster. Optimising this loop means that on the one hand you are turning out things faster than your competitors, and on the other, making changes before running out of money. That is how lean startups increase the odds of success, and decrease the odds of wasting resources, even if the company completely fails.

When hypothe­ses fail, it does not mean the whole venture fails; the failure will lead you to an understand­ing of what will work and what won’t

Limitations

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But a lean startup is not foolproof. Some of the arguments presented by their proponents are more of the of straw-man variety. Ries and Blank completely dismiss the use of a business plan—even when a business plan is still crucial. They criticise the formal written process of a business plan, but a business plan could also be something that grows along a venture’s journey of growth. Also, they fail to take into account that entrepreneurs will have a hard time changing directions frequently with each customer feedback.

That said the lean startup model does have a lot going for it. The advantages of lean startups will multiply if its adopters are able to incorporate strategic planning along with experimentation. If you do that, you can diminish the risk of failure.

* First published in M&SVMAG