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What Is a Lean Startup?

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The term “lean startup” describes a method of starting a business that favors a flexible, trial-and-error approach to product development. Unlike traditional startup methods, which include analyzing, testing and verifying potential customer demand, a lean startup anticipates uncertainty in operating conditions and is prepared to quickly pivot the company’s focus. Here’s what a lean startup approach looks like, and how to do it. 

Traditional vs. Lean Startups

The long-followed approach to starting a business is to create a detailed business plan for everything from products and markets to staffing and facilities, raise significant capital, develop a fully formed product and issue multi-year financial projections. And then wait and see how the market responds.

Lean startup founders take the view that it’s difficult to make detailed, long-term projections in the environment of intense uncertainty that surrounds a new venture. They take it as a given that their ultimate business model will be subject to change and that market conditions are hard to predict. Then they set out to learn what works and what doesn’t, apply actionable metrics and adapt on the fly.

Lean Startup Origins

These ideas became mainstream after a 2011 book, “The Lean Startup,” by Eric Ries, a Silicon Valley entrepreneur who, in turn, learned some of its principles from university lecturer Steve Blank in 2004. In his book, Ries discusses how his own failed ventures inspired him to develop a different way.

Specifically, he saw weaknesses in the conventional method of writing a plan describing a business and product, acquiring investors, building a team, designing and building a product and then introducing it to the market. He felt more emphasis should go to getting customer feedback early in the process, experimenting and refining designs based on that feedback.

Ries drew from sources such as the lean manufacturing practiced by Toyota to continuously improve the systems used to make cars. Gathering information about such things as error rates and making small changes to improve the processes can over time generate large gains in quality and cost.

Lean Startup Principles

Business owners studying their financialsLean startups operate in three steps: build, measure and learn. It urges entrepreneurs to approach their job initially as searching for a testable hypothesis for a business model. This is different from the usual goal of coming up with a product that customers will buy. The idea is to “get out of the building” and talk to prospective customers about the hypothesis, including product ideas. This may reveal that the initial hypothesis was off-target, or identify important product features that potential customers value.

  • Build: Using this initial feedback, lean startup entrepreneurs design and build what is called a “minimum viable product” or MVP. This is a stripped-down offering that lets them create a working product as quickly as possible and with the least expense. This MVP is shown to potential customers and the feedback is used to refine the MVP.
  • Measure: Lean startup emphasizes metrics that often differ from those emphasized in traditional startups. Rather than focus on income statements, balance sheets and cash flow statements, a lean startup will focus on customer acquisition costs, retention, churn and “product metabolism.”
  • Learn: One benefit of this approach is what is sometimes referred to as “fast fail,” the ability to quickly (and therefore relatively inexpensively) identify and avoid unsuccessful ideas. This process may be repeated several times until the original hypothesis – albeit modified by the customer and potential customer input – is validated. Ideally, by the time the offering is ready for volume production, it accurately meets actual customer demand. In fact, by then the company may already have advance orders in hand.

Another important idea is pivoting. This refers to being able and willing to significantly re-target the company to a different product or market based on ongoing feedback from customers and prospects.

Lean Cautions

The practice of lean startup has become very popular in entrepreneurial circles. It has spawned countless refinements of its own and has been widely written and talked about by new venture investors and business founders.

However, lean startup doesn’t guarantee any individual company or business idea will succeed. The methodology promises to help more startups succeed with less risk and at less cost.

But just as most products don’t win market acceptance, most startups will continue to fail. Often, despite applying lean startup principles, a hypothesis cannot be refined to correct wrong assumptions or even pivoted around its errors to create a successful business venture.

And although the basic ideas of lean startup are straightforward, in practice it can be complex. The process is research-intensive and requires entrepreneurs be open to changing or scrapping their original vision.

The Bottom Line

Lemonade and ice cream standA lean startup is a convention-busting approach to creating sustainable, scalable and repeatable business models that are widely followed by 21st-century entrepreneurs. Its emphasis on continuous learning, testing and quick refining and iterative development as opposed to planning on comparatively unproven concepts promises to help entrepreneurs find out if their ideas are workable without taking too long or costing too much.

Tips for Entrepreneurs

  • Consider working with a financial advisor experienced in business tax issues. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goalsget started now.
  • If you’re planning to start a business there are some key considerations you should understand. In addition, it’s important to do a self-inventory to make sure you have the personal qualities to be an entrepreneur.

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