One of the questions we at Angel Investment Network are most frequently asked by budding entrepreneurs is:
“What is the least product I need to raise funds?”
And in truth, there is no real answer to this question. Some companies receive investment at concept stage; some have to wait until they have fully developed their product through their own funds.
It all depends on the objective strength of the idea, the type of idea, the market, trends, investor confidence, strength of the team etc…
This can create a large degree of difficulty for many entrepreneurs, as frequently you are looking for funds in order to build the product! If you fit this bracket, this section will help you prove the concept in a way that is attractive to investors and will do wonders for your business CV.
If you have already built your product and need funding to launch, this section will help you understand where and how to ‘bootstrap’ (i.e. be as cost efficient as possible) and will be invaluable knowledge in deciding where to concentrate your spending post-funding.
What is a ‘Lean Startup’?
Keep it lean, keep ‘em keen…
75% of all startups fail.
Starting a new business enterprise, of any sort, is a risky proposition. There is a generally accepted and widely followed formula for starting a business: 1. Idea, 2. Business plan, 3. Funding from investors, 4. Sell, sell, sell. Fine. But at some point in that process 75% of businesses die a dispiriting death. This means that a lot of people end up putting in a great deal of effort and money only to see it wasted.
The so-called ‘Lean Startup’ methodology has come into vogue in recent years and aims to solve this problem of financial loss during the early stages. In other words it advocates proving your concept as far as possible without building the finished product. It aims to take the financial risk out of building a startup (as far as that is possible).
The lean startup methodology is all about experimentation, feedback and iteration. Or to use the vernacular of a school science teacher: hypothesis, evidence, synthesis and improvement.
The methodology is proving popular and although it has only been a few years since Eric Ries first coined it, it has already been adopted onto business school curricula. That said, it is still not mainstream and you can get your head in front of the competition by following its precepts to save costs and provide proof of your business acumen.
How do you save costs?
The idea is that rather than writing a business plan, keeping your ideas hush-hush and finally launching a fully developed product in the hope that investors and consumers will be won over, you test hypotheses by collating customer feedback from your MVP (minimum viable product- see below). For example, you could throw up a landing page selling a product/service that, as yet, does not exist, and measure the popularity and interest in it. By this means, you can calculate whether the idea is worth pursuing and how it can be optimised; or whether you should ‘pivot’ or iterate, or change the concept entirely.
Traditionally, people spend hours and hours and hours writing and tinkering with their business plan. They view it as a masterpiece that must be perfect, flawless and watertight. This is delusional. In the whole course of human history, there has never been a perfect startup business plan. How could there have been? Startups cannot be treated like larger companies as their model has never been proved and their financial forecasts are pure fiction. Every business has had to alter course from the original idea in some way in order to grow and succeed. The perfect business plan is a fool’s task so why bother at such an early stage?
Far better is to prove the concept as much as possible before writing the business plan. That way, when you come to write it, it will be as close to perfect as your early stage allows; and you will have the evidence to prove it!
Darwin couldn’t have made the case for evolution by kicking his feet in Victorian England. So why should you be able to figure out what you need to know in order to raise money and execute your idea by brainstorming at your desk rather than talking to customers? Get on your metaphorical HMS Beagle and collect some data…
Key point: Look for a business model before executing one.
Main Principals of the Lean Startup Methodology:
- Accept that your starting idea, no matter how convinced you are of its genius, is merely an hypothesis or several hypotheses without proof. It is helpful to work out exactly what these hypotheses are so that you can test them. Draw your business model canvass!
- Don’t build your concept but test your hypotheses. This is called customer development. Go out and get feedback on all aspects of your proposed business model from your potential users and partners. Listen to their feedback and re-assess your idea either proving or disproving your original hypotheses. Those that are disproved can then be adapted to suit the feedback and the process can start again. This process produces the necessary pivots and iterations until all the hypotheses, individually and taken together, have been proven as far as possible. This is what Eric Ries called “Validated Learning”.
- Creating a Minimum Viable Product (MVP):
We have discussed the two ways of starting a business. One involves taking one shot and making it the best possible shot. This approach often involves months or even years of ‘stealth R&D’ only to discover that people don’t want/need the product you have built. The second involves releasing early and releasing often and responding to people’s feedback. This is the lean approach; and the problem with it can be that from 30 people you receive 30 different opinions.
Minimum Viable Product is a concept that aims to resolve these problems by synthesising both ideas. The question is: what is the minimum amount of product possible to engage with the early enthusiasts for your idea and so get productive feedback?
Most entrepreneurs want, naturally, to be proud of their product and are accordingly reticent to ever ship something they think people will hate because it is so minimal. But it is far preferable to ship a product that people hate such that they give feedback demanding that you change x, y and z features, than to ship a product that no one cares about; that is, not only do they not want it, they are so indifferent that they decline to provide any feedback.
“When customers ultimately communicate, through their indifference, that they don't care about the idea, the startup fails.”
It is often the case that most features on most products have this effect on people – they neither use them, want them nor care about them. The notion of minimum viable product aims to eliminate these features.
Early adopters of your product are often very forgiving and are able to see the long term vision. In addition because they are early adopters they will want to offer feedback and will be flattered to be asked. It is a fact of the human condition that we love to be asked our opinion; it butters our ego and boosts our pride. Hence it is easy to create a dialogue from which to collate valuable data.
Another bonus of this process, aside from cost/time efficiency, is the fact that, by the time you have collected enough data to know that the product should be built and how it should be built, you have already established distribution channels to established customers. The upshot: fast, cheap growth.
Key Point: The most important thing you can do when embarking on a business idea is to talk to your prospective customers. Only then can you ever know if you actually have product/market fit.
Examples:
AirBnB - The Founders of Airbnb initially set out to solve their own problem, the fact that they couldn’t afford their rent. They built a website and advertised lodging space when a conference was coming to town. As a result they received requests asking when the service was expanding. It was this feedback that made them realise that they had the makings of a product that people really wanted. “People told us what they wanted, so we set off to create it for them.” Read the full story here
- When Drew Houston (CEO & Founder of Dropbox) stumbled across the concept of the Lean Startup, he started iterating Dropbox’s features far more quickly in order to really test what users wanted. By this means he grew the registered users from 100,000 to 4 million in 15 months!
Your Lean Startup:
“Startup success can be engineered by following the process, which means it can be learned, which means it can be taught.”
The theory discussed above is simple; nor is it mere conjecture, as the legion of companies that started out by ‘bootstrapping’ and following the methodology testify.
Set out below are the steps you need to follow in order to implement this strategy:
- Sketch out your initial hypotheses. You need to write up questions and their answering hypotheses for each of the nine areas of your business model (1. Key Partners, 2. Key Activities, 3. Key Resources, 4. Value Propositions, 5. Customer Relationships, 6. Customer Segments, 7. Channels, 8. Cost Structure and 9. Revenue Streams). A useful canvass for this and more advice can be found here
- Once you have established what your initial hypotheses are, you are then ready to test them. Build your MVP whether it takes the form of a landing page, a prototype, an advertisement etc.
- With your MVP created you are then ready to ‘ship’ it to your potential customers. This can mean anything from selling a version, offering it as a freebee, running a survey on a concept; any way in which you will receive useful feedback for your chosen enterprise.
- Collate the feedback and measure it against your initial hypotheses. The information you receive from this will be what dictates your next step. If some or all of your hypotheses were wrong, it is time to iterate and suggest new hypotheses to test. This is how the feedback loop works.
- Eventually when this process has been carried out enough times you will find a high level of satisfaction among your early adopters such that all your latest hypotheses are looking sound. Then, and only then, can you tentatively claim to have found a product/market fit.
In a nutshell, the Lean Startup methodology helps new companies to launch products/services that customers actually want, helps them to do so more quickly and cheaply, and reduces the risk of the entire undertaking while improving the chances of success.
Reminder of the Benefits:
Saves you time and effort
Saves you money
Reduces your risk
Gives you the best, scientific chance of finding a product/market fit
Establishes a customer base
Establishes distribution channels
Gives you early traction figures
These all add up to give you strong proof of your concept and to demonstrate a canny business mind on your part; both of which will make investing in your company extremely attractive to investors. They want to see any company they invest in succeed; and they want it to do so as quickly as possible. The only thing better than substantial returns are rapid, substantial returns!
Summary:
The Lean startup model is useful as far as it goes in teaching people the importance of real data-driven validation. Too often people sink money into an idea that was never going to work – they believed in it, but the market didn’t and so it was doomed to fail. The idea behind the lean startup is not to avoid funding for as long as possible, but to know how to use the funding you receive as successfully as possible. Funding will accelerate your growth; and with knowledge of the lean startup methodology, you’ll spend your funding in the right ways to make your business succeed.