Lean Startup Methodology

Editor's Note: Take a look at our featured best practice, Lean Startup Canvas: Guide, Process and Tools (56-slide PowerPoint presentation). The Lean Canvas is an adaptation by Ash Maurya of the Business Model Canvas. Four building blocks were replaced with new ones with the aim of making the canvas more startup-oriented. The adaptation emphasizes importance of clearly understanding the problem the customer faces. Beyond the canvas [read more]

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Traditional Startups demand that the entrepreneurs formulate a comprehensive 5-year Business Plan.

The approach that traditional startups typically adopt is a linear, effort-intensive, and costly process that necessitates in-depth reflection, planning, and execution with minimal customer interaction and feedback. The approach requires careful deliberation over detailed financial projections during the planning phase to make potential investors believe that it’s a viable investment.

Once funding from the venture capital firms is secured, the traditional startups begin developing products in an insular fashion, spending countless man hours while maintaining confidentiality to avert the rivals from imitating the offering.

Their traditional product development stages occur in linear order, and each stage continues for months.  They rely more on intuition than customer feedback and realize it too late that the proposition they launched a long time ago isn’t getting traction from customers.

The Lean Startup methodology, in contrast, spares startups from wasting valuable resources and man hours on flawed ideas or prototypes that are unappealing to customers.  The term “Lean Startup” methodology was first put forth by Eric Ries in his book “The Lean Startup.”  The approach takes its roots from Toyota’s Lean Manufacturing concept, emphasizing optimum resource allocation and minimization of waste.

The central premise of the Lean Startup methodology is that when startups devote their efforts to continuously developing products to meet the needs of early customers, they minimize market risks, evade substantial initial financing of projects, costly new product releases, and insolvency.

Lean Startups avoid complex Business Plans and laborious planning as conventional businesses do.  They try out untested hypotheses, iterate, and improve using customers’ feedback.

The goals of using the Lean Startup methodology are to get rid of wasteful practices and extraneous expenditures, obtain continuous customer feedback, iterate the product based on feedback, and dump a flawed idea soon enough without spending a fortune on it.

The implementation of the Lean Startup methodology involves a 4-stage iterative cycle called the Lean Startup Cycle.  The 4 stages are:

1. Map Ideas Using the Business Model Canvas
2. Develop and Test Your Hypotheses
3. Create a Minimum Viable Product (MVP)
4. Learn, Validate, and Improve

Let’s delve deeper into the first two stages of the Lean Startup Cycle.

Stage 1. Map Ideas Using the Business Model Canvas

The first stage of the cycle requires startups to innovate new and existing Business Models using the Business Model Canvas.  The Business Model Canvas renders a graphical depiction of the 9 key building blocks or elements of Innovation on a single page that have to be critically analyzed by every startup.

The 9 building blocks include:  customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partners, and cost.  Executives need to make assumptions, ask questions, and find answers regarding each of the building blocks.

Stage 2. Develop and Test Your Hypotheses

The second stage demands sketching out, testing, revising, or discarding the hypotheses based on the insights generated by an in-depth evaluation of the Business Model Canvas.  Founders decode company ideas into Business Model hypotheses and test their assumptions regarding customers’ needs.

The hypotheses are categorized into 3 risk categories: Desirability, Viability, and Feasibility.

• Desirability: The goal is to determine whether or not the customer desires the product.  A sample hypothesis to be tested could be, “Kids aged 9—15 will be interested in this product.”
• Viability: This hypothesis category evaluates the Business Model viability risks.  The aim is to make certain that the product solves customers’ problems and finding a solution is worth it.
• Feasibility: This category evaluates risks related to the startup’s ability to develop and deliver products, critical capabilities, and skills required.  A sample hypothesis to be tested could be, “We can develop X number of products within 2 months.”

Interested in learning more about the steps of the approach to Financial Forecasting? You can download an editable PowerPoint presentation on Lean Startup Methodology here on the Flevy documents marketplace.

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