This article is part of a series on what causes a firm’s value to increase
Entrepreneurship is a very hot topic globally. And it is growing in importance in Northwest Louisiana. Witness Gregory Kallenberg’s first StartUp Prize in June and July 2014 at John Grindley’s Cohab here in Shreveport. Seventy-five would-be entrepreneurs will go through one or two qualifying events to possibly earn $50,000 in prize money and/or have their ideas funded. These events use Lean Startup principles in the application process and throughout the days’ learning activities. The Bio Medical Research Foundation has also raised $1.5 million in seed capital to partially fund new ventures in their space.
Learning who your real customer really is, what they will pay for, building and launching products and services and then scaling up for size and wealth creation have always been part of capitalism. But how we used to do this is very different from what successful entrepreneurs are now doing. At the very least, learning about starting and growing a business that is expected to grow large and be a generator of wealth is a lot easier than before.
Lean Startup principles are starting to be used in the established firm as well, which is why this is a topic of discussion in this series of articles.
“In the old days” entrepreneurs huddled secretly to give birth to a new idea. Everyone involved signed non-disclosure agreements. Market research would show a product or service might have demand and the design teams would try to perfect the first version, almost in isolation, for fear the idea would be poached. They would then go to venture capitalists and make the big pitch trying to raise as much money as possible, given cash burn requirements. Research shows this approach was successful only one or two times out of ten.
What the new entrepreneur is doing is called the Lean Startup. If you knew nothing about this topic and wanted to start learning I recommend five books in the order written (if you only have time for one I recommend Running Lean):
- Business Model Generation – Alexander Osterwalder and Yves Pigneur, 2010
- The Startup Owner’s Manual – Steve Blank and Bob Dorf, 2012
- The Lean Startup – Eric Ries, 2011
- Running Lean – Ash Maurya, 2012
- Lean Analytics – Alistair Croll and Ben Yoskovitz, 2013
Much in the Lean Start Up approach may be known to you, sort of. You read it and probably you will say to yourself “why did we do the old way in the first place”? Let’s review the approach as I offer some caveats from my experience using Lean Startup principles.
I think the main principles of the Lean Startup Movement are:
- Sense an opportunity by “getting out of the office” – visit potential customers and observe how they behave using your product or service idea. Using traditional “market research” through impersonal surveys almost never yields key customer insights
- Quickly and inexpensively prototype a new product or service via a model
- Fund this investment through “crowdsourcing” if you cannot fund it yourself
- Gain early customer feedback and edit the prototype to create the first “minimum viable product” (MVP)
- Gain necessary minimum new seed funding to improve the MVP if you cannot fund yourself
- Iterate these improvements very quickly and gain key learning by involving potential early adopter customers along the way
- Assess if the idea passes the “smell test”, if not drop the idea
- If so, continue iterating and learning
- If continue iterating the MVP, does it get to the point where it passes “the fatal flaws test”? The fatal flaw is the customer “willingness to pay” price point will not cover your costs. If the idea does not pass this test, drop the idea
- If so, fund the venture with minimum adequate capital to “put it into play” to scale it up
Steps 1 through 10 were done in four months for Keen Footwear and this idea was launched already full grown on a global scale, earning $30 million in revenue in its first six months.
I think the real revolution here is what the approach makes you do, not think – although the new thinking is great as well. In my view the two hardest things to do are:
- Sensing an opportunity that will be a winning idea. If you watch customers actually using your prototype or MVP product or service, not through some impersonal survey research, you really improve your odds your MVP will be demanded at a price point that is acceptable
- Listen to customers who may not like early MVP models and measure in real time customers’ growing acceptance or lack thereof of a rapid introduction of revised MVPs. You need to develop a thick skin and shed any ego for the Lean Startup principles to really work for you. If you view this as learning and the price of admission as short term failure, you will do well with Lean Startup principles
Next Up: Growth After the Lean StartUp
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is involved with several global professional strategy organizations and can be reached at firstname.lastname@example.org and www.strategybest.com