Guest Contributor Matthew Klein is the director of business development for Clemson’s College of Business and Behavioral Science, Greenville. He teaches lean startup methodologies in the Clemson MBA in Entrepreneurship program. He is co-founder of Redrock Capital, a member of the Upstate Carolina Angel Network and a member of the Michelin Development Steering Committee.
[break]
Launching a new venture has always been an inherently risky activity, which is in some part due to the prevailing formula most startups follow: Come up with an idea, write a business plan, pitch it to investors, assemble a team, produce a product, and hope it sells like gangbusters once it is presented to the marketplace. The formula has certainly produced some successful businesses through the years, but the harsh reality is that 75 percent of new business ventures fail.
Over the last few years, a new model for launching a business has emerged, one which relies on experimentation instead of elaborate planning and favors customer feedback over intuition. The key concepts of lean startup are being embraced by the entrepreneurial community and are taught at forward-thinking business schools. The philosophy behind lean startup turns conventional wisdom about starting a business on its head in many ways. New ventures and established companies alike can improve their chances of success by following this methodology.
Under the old model, anyone founding a company would first create a business plan, which typically includes five-year forecasts for income, profits and cash flow. This plan is a theoretical exercise created at a desk before an entrepreneur has even begun to build or test a product, and was often cloaked in secrecy until the final product was produced and released to market. It relies on the assumption that it’s possible to determine the unknowns in advance to see if the company can be successful before you raise money or invest in development. But after decades of watching the majority of startups fail, a few things are now readily apparent:
-Business plans rarely survive once they are presented to customers.
-Since no one can accurately predict the future, these plans are largely fiction, and dreaming them up is often a waste of time that could be better spent gathering hard data.
-The key to startup success is being able to adapt and improve as you learn from your customer base.
Lean startup has three key principles that address the failings of the old process. First, instead of spending months planning and guessing at outcomes, entrepreneurs begin under the assumption that all they have to work with is a series of untested hypotheses – essentially, good guesses. Instead of writing a business plan, they summarize their ideas in a framework called a business model canvas. This diagram illustrates how a company creates value for itself and its customers.
Next, founders must test their ideas in the real world. They do this by actually asking potential users, purchasers and partners for feedback on all elements of the business model, including product features, pricing, distribution channels and any other factors that are relevant to their plan. The emphasis is on speed and adaptability – founders quickly create a version of their product or service and release it in the marketplace so they can elicit customer feedback, which is then used to improve or even change the product and increase its chances for success. Ideas that are generally well received but require small adjustments go through a series of iterations, with each new version going through the cycle of feedback. Ideas that aren’t working at all will cause the founder to pivot – completely change the product, target market or business concept and start again. The paradoxical key to success is to “fail early” and “fail often” in the real-world tests. The sooner an entrepreneur knows what doesn’t work, the faster he or she can move on and find what will work.
Finally, lean startups embrace something called agile development, a term coined in the software industry. In contrast to traditional product development, in which each stage occurs in linear order and lasts for months, agile development builds products in short, repeated cycles. A startup creates a minimum viable product – one that contains only critical features – gathers feedback from customers, and then begins again with a revised minimum viable product. Instead of assuming what customers want, agile development allows entrepreneurs to develop their product iteratively and incrementally using actual customer feedback.
Lean startup helps draw a distinction between management execution and searching for a business model, and business schools are increasingly abandoning the business plan as the template for entrepreneurial education. Business plan competitions are being supplanted by business model competitions, showing a true embrace of the lean startup model in higher education.
In our world of rapid change, the lean startup approach will help entrepreneurs and existing companies meet challenges head-on, allowing them to innovate rapidly and remain competitive.
