Whether it is a tech startup, a new small business, or an initiative within a large corporation, launching a new enterprise has always been a hit-and-miss proposition. The decades-old formula states that you should write up a business plan, pitch to investors, assemble a quality team, and introduce a product that you start selling as hard as you can. However, somewhere in this sequence of events, most new business ventures suffer a debilitating setback. New research by Shikhar Ghosh of Harvard Business School shows that around 75% of all startups are destined for failure, meaning that the odds are definitely not in your favor.
However, the recent emergence of a significant countervailing force is in the form of a methodology known as the ‘lean startup’, which reduces the risks of starting a new company. It favors experimentation rather than elaborate planning, and iterative design rather than traditional ‘big design’ development. The concepts of this methodology such as minimum viable product and pivoting may only be a few years old, but they have quickly taken root in the world of startups with many business schools already adapting their criteria in order to teach them.
The Fallacy of the Perfect Business Plan
The first thing that anybody wishing to start a business must do is write up a business plan, according to conventional wisdom. A business plan is a static document which details the size of an opportunity, the problems to be solved, and the solution which will be solved by the new venture. Typically, a business plan will include predictions for the next five years of income, cash flow, and profits. Essentially, a business plan is a research document written by an entrepreneur before a building a project has even begun. Once a business owner with a convincing business plan obtains money from investment, all too often do they discover down the line that the features offered by their product are not wanted or needed by customers. After decades of watching thousands of startups follow this standard process, we have learned this:
- Business plans rarely survive first contact with customers, and as Mike Tyson once said, everyone’s got a plan, until they are punched in the mouth.
- Five-year forecast plans are generally fictional, and taking the time to dream them up is usually a waste of time.
- Startups are not smaller versions of larger companies, and they do not usually unfold in accordance with master plans.
A critical difference noted by the lean startup model is that although existing companies execute a business model, startup businesses look for one. This is a distinction that is at the heart of the lean startup approach.
Three Key Principles
The lean method includes three key principles:
Firstly, instead of engaging in months of planning and research, entrepreneurs accept that on day one, all they have is a series of untested hypothesis. So, rather than compiling an intricate business plan, founders will summarize their hypothesis in a framework known as a business model canvas. Essentially, this is a diagram of how a company creates value for both itself and its customers.
Secondly, lean startups use a ‘get out the building’ approach known as customer development in order to test their hypothesis. Feedback on all elements of the business model is obtained by going out and asking potential users, purchasers, and partners.
Thirdly, lean startups practice agile development, which has its origins in the software industry. Agile development works hand in hand with customer development. Unlike typical year long product development cycles that presuppose a knowledge of the problems and product needs of customers, agile development minimizes time and resource wasting by iteratively and incrementally developing the product.
The Declining Popularity of Stealth Mode
The language that start-ups are using to describe their work is being changed by lean methods. During the dot.com boom, startups often operated under ‘stealth mode’ in order to avoid alerting potential competitors to market opportunities, and exposing prototypes to customers only through highly orchestrated beta tests. These concepts are made obsolete by the lean startup methodology because it holds to the idea that in the majority of industries, customer feedback is more valuable than secrecy and constant customer feedback will yield more and better results than cadenced unveilings.
The lean startup method is growing in popularity and is even taught in a number of highly respected business schools. If you are planning to start a business and are considering the lean startup method, why not get in touch with highly qualified and experienced lean consultants today.