Lean Startup

Definition

The term lean startup refers to an approach to founding a company and developing products that aims to keep all processes as lean as possible. Hence the name "lean startup", because "lean" means as much as lean. Streamlining all product development and start-up processes means trying to bring a product to market as quickly as possible and at the lowest possible cost. To this end, less emphasis is placed on many years of advance planning and much more on launching an initial functional product, a so-called MVP, onto the market with the least possible expenditure of time and capital. This simplified, first version of a product makes it possible to quickly find out whether the developed product satisfies customer needs or not. Based on these findings and customer feedback, the MVP can then be further developed and tested again, resulting in a finished product that ideally satisfies the customer's needs.

As part of the lean startup method, products or business models are therefore always developed in an iterative process and are constantly improving. The products and business models are not planned for a long time and at great expense; instead, the "learning by doing" method is used. An unfinished product is brought to market and tested so that lessons can be learned and the product can be improved in the next step.

Emergence of the lean startup method

After the dotcom bubble burst in 2000, many start-ups failed immediately after they were founded. As a result, the American investor Steve Blank introduced a new approach to founding start-ups that aimed to avoid mistakes and only develop products that customers really needed. This method was then popularized by his former student Eric Ries under the term lean startup, based on the lean production method. Ries first mentioned his thoughts on Lean Startup in his blog in 2008. This was followed in 2011 by the publication of his book The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, marking the beginning of the Lean Startup movement.

Lean production

Lean production is a precursor to the lean startup method and is based on the assumption that in order to make production efficient and optimized, the waste of resources must be minimized in any case. The term lean production primarily refers to the streamlining of the production process in which all production factors such as operating resources, personnel, materials or even the organization are used more economically and time-efficiently. The concept of lean production then evolved into lean management.

Lean management

In addition to lean production, which is intended to save costs and time, the lean management method also extends these streamlining processes to personnel and employees. Here, existing skills are used and employees are integrated into the lean management way of thinking and acting in order to motivate them and raise awareness of the lean management method in all areas of the company. This approach involves the streamlining and optimization of processes in all areas of the company. The aim is to achieve process-oriented corporate management with the highest possible efficiency.

Lean Startup

The term lean startup encompasses both the lean production and lean management approaches and applies them to the development of a company. The aim here is to successfully build up a company with as little capital and reduced processes as possible.

The term was first coined in Silicon Valley by Eric Ries, who took up the ideas of his professor and serial entrepreneur Steve Blank. The lean startup method is therefore based on the basic assumptions of Steve Blank's customer development method.

The customer development method, for its part, aims to get to know customers and their problems as early as possible in the development process (of a product). The entrepreneur Steve Blank had four steps in mind:

1. Customer discovery: This involves trying to get to know the customer and their needs by formulating and testing hypotheses about the nature of the problem and their interest in the product or service solution.
2. Customer validation: During customer validation, the business viability of the idea is tested through initial customer purchases. A so-called "sales roadmap" is created and an attempt is made to map a repeatable sales process.
3. Customer creation: In this step, new customers are acquired and the business model is scaled up. User requirements are created and the respective sales channels are aligned accordingly.
4. Company build: In the final step of the customer development method, processes and departments of the company are now formalized and standardized, and now the actual business activities can begin.

The Lean Startup process

The basic principle of the Lean Startup approach is based on setting up and testing hypotheses. Product and business development is carried out using this approach through an iterative process in the form of a cycle. The first step is to formulate a hypothesis about which product potential customers consider useful and need. This product is then built in the first step of the lean startup cycle. This is either a so-called mockup, a prototype or an MVP. These first versions of a product are then used in the next step to test the hypotheses about the product with customers and to learn from the feedback.

The second step in the cycle is the measurement. Prior to this, it should already be clear which actions and actions of the customers provide information on whether a hypothesis is rejected or not and what needs to be measured for this. In this step, the customer data that is relevant for this decision is collected.

In the last step of the cycle, learning, the initial hypotheses are then accepted or rejected with the help of the customer feedback received. This last step is also the first step in the new cycle, as you can now learn from the mistakes made in the first product version, develop new ideas and then develop the product further. The process starts all over again.

Build-Measure-Learn cycle ©Startbase, 2021

1. Build
2. Development of a mockup, prototype or MVP to test the hypotheses with the customer
3. Measure
4. Testing the mockups, prototypes or MVPs on the customer
5. Learning
6. Analyze the results from the measurements/customer feedback. Comparison with the hypotheses and derivation of changes for the next product iteration.

This iterative product development enables the founders to develop a product that is as close as possible to the customer's needs and is actually needed. This avoids an unnecessary waste of resources in the form of time or money, as only those development steps are taken that are really needed and desired by the customer.

If it is determined during product testing or within the Lean Startup process that a fundamental or radical reorientation of the existing product or business model is necessary, this is referred to as a "pivot".

Methods

Various methods are used to maintain an overview of the entire Lean Startup process. One important method, for example, is the Lean Startup Canvas, based on the Business Model Canvas.

Comparison: Lean Startup Canvas and Business Model Canvas

The Lean Canvas model developed by Ash Maurya in 2009 is a variation of the tried-and-tested Business Model Canvas, but with a special focus on founders and start-ups.

The Lean Canvas Model focuses primarily on customer problems that need to be solved and serves as a way of approaching the iterative product development cycle step by step. To this end, the Lean Canvas Model has various fields that need to be filled in by the founders, some of which differ from the Business Model Canvas. The following points are part of the model:

Problem: This point involves working out all the fundamental problems that you are trying to solve with your own business model.

In the Business Model Canvas, this point is called Key Partners. However, this is omitted in the Lean Canvas model, as key partnerships are usually not so important in the early stages of a company's development. Much more important is the development and testing of the actual product or service offered.

Customer segments: This area is included in both the lean canvas model and the business model. The respective target group of the start-up/company is defined here.

Unique value proposition or value proposition: This defines the added value that the manufactured product or service provides for the customer and the extent to which the product differs from other existing products.

Solution: As the name suggests, this field describes the solution to the problem. In other words, to what extent the initial problem can or should be solved by the product. This point is also a special feature of the Lean Canvas model.

In the Business Model Canvas, this is where the key activities of the company are located. However, as a start-up is a new product development, it makes more sense to replace the field at this point and work on a specific problem solution. The definition of the key activities can then follow at a later stage.

Key Metrics : The Key Resources field is also replaced in the Lean Canvas Model with the Key Metrics field. The key metrics are all relevant measurement figures of the start-up that are intended to provide information about the risks or opportunities that await the young company.

Unfair Advantage: Another innovation in the model is the replacement of Customer Relationships with the so-called Unfair Advantage, which is about the competitive advantage that a start-up has over other start-ups or companies. Although this field often remains empty at the beginning, it serves as an incentive for founders to concentrate on working out a competitive advantage for their start-up.

The other fields of the Lean Canvas Model correspond to the Business Model Canvas. There are also the fields: Channels, Cost Structure and Revenue Streams.

Channels: In this field, you define the channels through which you want to reach your target group.

Cost Structure: This field lists the expenditure and expenses.

Revenue Stream: Product sales and revenue are listed here.

All in all, the Business Model Canvas and the Lean Canvas Model are similar in many respects, but the focus of the Lean Canvas Model is clearly on the development of new business models and brings some important aspects of founding a start-up to the fore. For founders, the use of this model is therefore more suitable for their beginnings. However, the two models are only used for internal quality control and can therefore be expanded or modified to suit your own needs.

Principles of the Lean Startup method

Important principles that are used in the Lean Startup method include the so-called MVP, which represents an initial functional product version. The MVP is then used to test the hypotheses made with customers. A second important principle comes into play here, the so-called split test. The A/B test method is often used as part of the test phase (measurement) of the lean startup method. For this purpose, the customer is offered a product in two different versions and hypotheses are derived from the different customer behavior, depending on the product version offered, and product improvements are sought.

Advantages and disadvantages of the Lean Startup method

Advantages of the Lean Startup method:

• No products are developed that are not sold on the market.
• Information for the development of a successful product is collected efficiently. Large expenditures are only made once the hypotheses have been confirmed.
• Development of a sustainable business model that is competitive for a long time, as the products are developed closely in line with customer needs.
• Due to rapidly changing customer needs, agile methods such as the lean startup method are becoming increasingly important in order to successfully assert oneself in a market.

Disadvantages of the Lean Startup method:

• A lack of customer satisfaction could occur if you enter the market with an unfinished product (MVP). There is a risk of losing these first customers.
• There is a risk of falling into endless testing and development cycles due to the build-measure-learn cycle and therefore not making any progress.