November 15, 2023

The Lean Startup

The Seedfunders Podcast
The Seedfunders Podcast
The Lean Startup

Show Notes

Joe, you look a little tired and sweating there. 

Oh yeah, well when you told me what today’s topic was, I figured I better go do a couple of 100 feet on the stationary bike. That took it out of me, but I’m glad. I feel ready. I’m in character.  

What is the topic? 

It’s lean startups. So, I clearly haven’t figured out yet what is lean. Enlighten me. 

First, I think we have to say what it is not. The name implies it’s doing something on the cheap – lean startup. That’s what everybody thinks, “Do it cheaply,” but that’s not at all what it’s about. An example. Before lean startup philosophy, entrepreneurs would do a lot of research, hopefully. Write a detailed business plan, 40-50 pages. Make pitches to investors. Then if they got funding, they would assemble a team, produce their product. Then start knocking on doors to sell their product. Lean startup changes all that. Basically, it does the reverse. It requires the entrepreneur to knock on the doors first to gauge the customer interest, before they go on to do everything else and raising the money. 

Hm, so does that mean that big business plans and focus groups are out?  

Absolutely. Pitch decks and real customer input are in. Think about it. In the past eight years, I’ve not seen one significant thick business plan. Yet, SeedFunders and Florida Funders before SeedFunders have made over 100 investments. The business plan really isn’t necessary any more. Also, focus groups. Focus groups are people who are hired to sit in front of a one-way mirror and answer questions about your product. They might be customers eventually, but a lot of times they’re just there to make the money. I have personal experience implementing plans based on what focus groups have said. And only find out when I go to implement them, they were totally wrong. What my real customer wanted or would pay for was something totally different. Again, big business plans and focus groups are out, and lean startup is in. 

Let’s dig a little deeper. Can you define what a lean startup is? 

Sure, I think it would be best to look at various definitions that the industry experts and respective publications have offered. Let’s start with Wikipedia. Wikipedia says, “Lean startup is a methodology for developing businesses and products that aims to shorten the product development cycle, and rapidly discover if a proposed business model viable.” Is your proposed business model viable? That happens by talking to customers. Let’s look at Investopedia. They say, “The lean startup method advocates developing products that consumers have already demonstrated they desire. So that the market already exists as soon as the product is landed.” Again, talking to the customers first. Finally, Harvard Business Review says, “Lean startup favors experimentation over elaborate planning, customer feedback over intuition, and [3:02] design over big design upfront and development. And then trying to sell the product. 

Got it. So, all three of those definitions have some common themes. How would you kind of distill those out and summarize them? 

I think, it’s best to look at Eric Reece – he’s the author of The Lean Startup, the 2011 book. He created the lean startup methodology. According to him, there are five main principles for creating lean startups. First, entrepreneurs are everywhere. There are lots of opportunities for entrepreneurs to tap into and build successful businesses. Second, he says, “Entrepreneurship is management. It needs to be flexible. It’s a learning-based management system.” Third, validated learning, and this is key. Adapt to the market by learning what the customer wants through experimentation. Four, innovation accounting. This is the detailed records of tests and analysis to see what really works. Finally, build, measure and learn. Launch with an MVP and get feedback from actual customers after you’ve launched your MVP. 

Nobody knows danger more than us Dave, but an MVP of just launching with only a Minimum Viable Product sounds risky? 

I think a lot of enterpreneurs waste a lot of time and money, because they don’t understand really what an MVP is – a Minimum Viable Product. The keyword here is viable, not minimum. It’s viable. It needs to have enough fundamental functionality so early adopters can use it for its intended purpose. So, it’s not something that’s thrown out there to see what they’re going to say. It’s something that is viable but it’s minimally developed. Then the developers can add features. The entrepreneur can add features requested or pivot to meet the client needs. So, it’s getting something out there in the hands of the actual clients who are going to pay for it. Basically, you want feedback from real users. But the product does need to be functional regarding its original purpose, not incomplete.  

So, there’s a fine line between too little and too much. 

Exactly, that’s why the customer discovery is so important. The entrepreneur needs to discern between what the customer needs and what the customer wants. A lot of times, customers will tell you, “Here is what I need.” When you really look at it, they don’t really need that. They just want it. The entrepreneur can waste a lot of time doing things that really aren’t necessary. But if you launch with an MVP, that meets their needs, you can always add these things. You see how many customers want to have certain features. Then you could add those, but you need to launch with that MVP. I’ve seen a lot of startups that spend way too much time in development, because they react to every suggestion from potential customers. They don’t separate the need from the want. So, they’re cranking up, but they don’t have an MVP. They’re cranking out, because they talked to some customers. You can’t put all those features into your initial product. It’s really maybe a little difficult to discern what the difference is, between the need and the want. If they do that, they’re going to be out of money and still short of launching if they keep developing without actually getting an MVP out. Even worse, I’ve seen some developers convince entrepreneurs to add features to a product because they like it.  

The developers are telling the entrepreneur, “You need to put this. You need to put that in, not the customer.” I think that’s really not good, because the developer thinks it’s cool. And the customer really hasn’t even been asked about it, but that can really waste a lot of time.  

You mentioned pivots. So, when does a pivot come into play? 

In lean startup terms, a pivot is a change in strategy that takes place after the product is launched. It’s not the MVP, which is the Minimum Viable Product. It’s a change after the product is launched. Even though the entrepreneur has done customer discovery, and entered the market, the product may not be living up to its expectations, or even worse just fail completely. This is not to be confused with adding a new product or adding new features to an existing product. This is a pivot, and a pivot is where the entrepreneur goes in a different direction, but tries to serve the same customers, based on the customer feedback. 

One of the most famous examples by the way of a pivot is Levi Strauss, believe it or not. In 1850, he was 17 years old. He moved from New York to San Francisco with a bunch of canvas to sell to the gold rush miners as tents. The miners had no interest in tents, but Levi Strauss saw that their pants just couldn’t stand the conditions out there in the mine. So, he basically created Levi’s. Created pants out of the canvas to sell to the miners.  

It depends what you’re into I guess, but I don’t think that canvas pants would be on my Christmas list. 

Actually, they weren’t comfortable at all. But they were durable, and desirable. So, because the clients wanted them, the miners wanted them, he was able to sell them. But he did listeners to the customers again, another lesson. And he started making the pants out of denim. It was soft. It was more comfortable with than canvas. Once he got his start with one product. Call it a Minimum Viable product of the canvas pants, he then changed. He originally pivoted from tents into pants. Then he listened to the customers and changed his minimum viable product and added the different feature or the different material. One more feature by the way, the miners found carrying heavy tools in their pockets, tended to rip the pants at the seam. He ended up putting copper rivets on the pants to keep the seams from tearing. That’s how you see copper rivets fitting on Levi’s. Again, a few things here. He pivoted from tents to pants. Then he improved the product by listening to the customers. Then he added a feature, another feature – the copper. Obviously, a real US success story. 

I’ll have to just wait for that come up on Jeopardy and I’m going to ace it. Moving back to the 21st century. How has the lean startup movement been accepted this far?  

It’s pretty much been accepted throughout the country as the way to really do things in the startup world. There are detractors of course, but most of all the criticism really comes from those who don’t understand the details of the process, or try to apply it in the wrong situation or the wrong way. For example, I googled, “Lean startup doesn’t work.” You can obviously get a number of hits, but when I went through them, the reasons were all reasons I wouldn’t consider valid. For example, there were titles called, “Why lean startup doesn’t work?” “Lean startups, how it almost killed our company.” Does the lean startup method actually work? Why the lean startup doesn’t always work? Five reasons not to follow lean startup process. Let’s get real, why lean startup is not right for everyone.” Basically, there’s a lot of opinions out there of why it doesn’t work. 

None of that is going to come up on Jeopardy. I hope we’re not going to have to throw out those articles. 

No, fortunately, I read them all. I could summarize them here. As I said, I think most of the reasons that you’ll see here that come out of these articles really aren’t valid. First of all, sometimes corporations already set in their ways try to use lean startup to develop a new product or a new service. That tends to not work unless, you’re a really dynamic cooperation, you could spin off a unit to do it. But if you’re in a corporation and they’re already set in their ways, trying to insert lean startup philosophy is not going to work. Another problem is if somebody said, “They missed the actual market in discovery.” That’s not the problem with the lean startup system. It’s the problem that they didn’t ask the right questions when they were doing discovery to their potential clients. They concentrated on the shortest time to market rather than a complete MVP. They really ran and then he says, “Let’s get this to market.” They didn’t get a complete MVP when it should have taken longer,” again, within the lean startup, it doesn’t mean it’s the shortest time. It means it’s the most successful time. The most successful way to do things.  

There are other multiple areas of uncertainty. Things like too much testing, iterations, where they keep testing to tell you and they never get out of their testing mode or huge projects. If you take Elon Musk’s tunnel, you can’t prototype that and test that, and get customers to use it. There are big projects like that. It’s not applicable. Then there is this one, long lasting success comes from surviving the dips, not running away from them. It’s basically saying, all these startups need to have problems when they start. They can’t run away by using lean startup to avoid the problems, which doesn’t make any sense at all to me. I didn’t see any validity to any of these reasons why entrepreneurs should not follow the lean process if it’s implemented correctly.  

With all of those, I assume there’s got to be plenty success stories or it won’t be our topic for today. So, how about a few of those? 

Yes, there are a lot. The companies that are large now like Dropbox, Slack, Airbnb and Groupon. Even Google and Facebook, before it was even a formal philosophy of lean startup, they used these kinds of principles in developing and launching. It really needs to be applied correctly. It’s not meant to take short cuts on MVP or customer validation to get the market quicker. It’s not meant to do so much testing, you never get to success. It’s up to the entrepreneur to determine the best use. But if it is implemented as intended, it’s way better than the, “Build it and they will come,” philosophy. 

Wonderful, any Minimum Viable closing remarks. 

Yes, lean startup should be thought as the opposite of, ‘Build it and they will come,” philosophy. By talking to the customer first, you can get input before you build it and expect them to come. The question isn’t really, “Can it be built?” the question is, “Will they buy it, once it’s built?” that’s the point of lean startup. Trying to determine if the customer will buy the product once it is built, before it’s actually built. Then once it’s launched as an MVP then determine how to or when to modify it, pivot, add features etcetera. I got a little personal story here too. I belong to a group of CEOs who always accuse me of – they said, “Dave, sometimes you know me. You do, ready, fire, aim.” I tried to change. Then when I thought about it, and I learned about lean startup philosophy. That’s what lean startup philosophy is about. you get ready. Then you launch. Then if you miss the target, you re-aim and you keep moving. But you don’t do, ready, aim and take all your time aiming and aiming, if you’re not even sure you’re aiming at the right target. I think the ready, fire, aim is the lean startup philosophy. 

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