As soon as you get interested in and read about startups, you will come across the term “Lean Startup”. You are probably familiar with the meaning of both words, but what exactly do they mean when used together? What exactly does it mean to have a lean startup? Why do startups need a different approach than “ordinary” companies?
Definition of the Lean Startup methodology
Lean startup is a methodology used to start a new business or launch a new product. This method advocates the development of a product for which consumers have already shown interest, as opposed to the development of a product for which there is no known demand.
This methodology for developing new business processes, products, and services was developed by Eric Ries in 2011. He fully explains the method in his bestselling book, The Lean Startup, which has been translated into 30 languages (startups can borrow it in the SPARK library). The methodology is based on hands-on experience working with startups that Ries has accumulated in the US. It contains development cycles, which combine a business-scientific process whereby, in different iterations, startups test the market long before they enter the market. This approach reduces market risk and time waste in business because of various problems that startups did not anticipate when developing their business idea. It is important to note that Ries developed this method keeping in mind high-tech companies.
Lean startups help startups market their products and services faster and more efficiently while teaching them management, revision, and perseverance. Using this methodology, startups develop into companies that operate while constantly testing their vision. In this way, startups eliminate mistakes, work smarter, develop ways for solving the problems, with the greatest return on investment, and consistently gain new knowledge.
Basic principles of the Lean Startup methodology
This methodology has five basic principles:
- Entrepreneurs are everywhere – according to Ries, startups are destined to develop new products and services in conditions of extreme uncertainty. Therefore, startups are all around us, and lean startups can apply in any company, regardless of the size and industry in which that company operates.
- Entrepreneurship is management – startups require new ways of management because they operate under conditions of extreme uncertainty. For these conditions, new types of management must emerge, which will be developed following the business scenarios and needs of the specific startup.
- Validated learning – startups do not enter the market with the sole purpose of making a profit or showcasing a new product and service, but to develop a sustainable business concept. Therefore, continuous experiments are needed to test the vision of the business. This is how startups constantly learn by example.
- Innovative metric – for startups to improve their entrepreneurial performance and to become responsible, they must focus on measurable results. These results take an innovative approach to measuring: business progress, milestones in meeting goals, and setting priorities.
- Build-measure-learn – the basic activity of startups is to turn ideas into products and services, to measure how to target customers respond to them, and to learn how they will survive in the market. Therefore, all successful startups focus on the processes that accelerate this feedback loop: build-measure-learn.
Differences between lean startups and traditional companies
Lean startups are very different from “ordinary” companies, and apart from the way they market themselves, there are differences in hiring processes and measuring financial success. Lean startups hire employees who can learn, adapt and work quickly, while traditional companies hire workers based on experience and ability. Startups use different financial reporting metrics; instead of focusing on profit, balance sheet, and cash flow statements, they focus on customer acquisition cost, customer lifetime value, customer growth rate, and how viral their product can be.
What does it take to keep your startup lean?
With this method, experimentation is more important than long-term planning, so lean startups never make business plans with 50+ pages and for the next five years, but present their plan through the business model canvas. There, they enter (and regularly change) information such as the value proposition, their customers and how they reach them, key activities, resources, and partners, how much the product costs and how they charge for it. Startups are looking for a scalable business model. Lean startups first identify the problem that needs to be addressed and then develop a minimum viable product or MVP that allows entrepreneurs to present it to potential customers for feedback. This method is faster and less expensive than developing the final test product – it reduces the failure rate.
Finally, we must emphasize that the lean startup methodology is no longer used only by young startups, but also by big tech companies when they market new products.