A new way of launching a startup

From Harvard Business Review:

According to conventional wisdom, the first thing every founder must do is create a business plan—a static document that describes the size of an opportunity, the problem to be solved, and the solution that the new venture will provide. Typically it includes a five-year forecast for income, profits, and cash flow. A business plan is essentially a research exercise written in isolation at a desk before an entrepreneur has even begun to build a product. The assumption is that it’s possible to figure out most of the unknowns of a business in advance, before you raise money and actually execute the idea.

Once an entrepreneur with a convincing business plan obtains money from investors, he or she begins developing the product in a similarly insular fashion. Developers invest thousands of man-hours to get it ready for launch, with little if any customer input. Only after building and launching the product does the venture get substantial feedback from customers—when the sales force attempts to sell it. And too often, after months or even years of development, entrepreneurs learn the hard way that customers do not need or want most of the product’s features.

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One of the critical differences is that while existing companies execute a business model, start-upslook for one. This distinction is at the heart of the lean start-up approach. It shapes the lean definition of a start-up: a temporary organization designed to search for a repeatable and scalable business model.

The lean method has three key principles:

First, rather than engaging in months of planning and research, entrepreneurs accept that all they have on day one is a series of untested hypotheses—basically, good guesses. So instead of writing an intricate business plan, founders summarize their hypotheses in a framework called a business model canvas. Essentially, this is a diagram of how a company creates value for itself and its customers. (See the exhibit “Sketch Out Your Hypotheses.”)

Second, lean start-ups use a “get out of the building” approach called customer development to test their hypotheses. They go out and ask potential users, purchasers, and partners for feedback on all elements of the business model, including product features, pricing, distribution channels, and affordable customer acquisition strategies. The emphasis is on nimbleness and speed: New ventures rapidly assemble minimum viable products and immediately elicit customer feedback. Then, using customers’ input to revise their assumptions, they start the cycle over again, testing redesigned offerings and making further small adjustments (iterations) or more substantive ones (pivots) to ideas that aren’t working. (See the exhibit “Listen to Customers.”)

Third, lean start-ups practice something called agile development, which originated in the software industry. Agile development works hand-in-hand with customer development. Unlike typical yearlong product development cycles that presuppose knowledge of customers’ problems and product needs, agile development eliminates wasted time and resources by developing the product iteratively and incrementally. It’s the process by which start-ups create the minimum viable products they test. (See the exhibit “Quick, Responsive Development.”)

This flattened, scaled-back approach that emphasizes flexibility has shown up in the software industry as well:

The software industry has seen major changes in the past 10 years, as the business of software has gotten increasingly efficient and friction-free.  Expensive software stacks, primitive tools, million dollar server farms, and 50+ person development teams have given way to free, open source, high-quality tools, small teams, and rentable infrastructure.  There are more skilled people creating software than ever before, and the market provides ways for the best talent to find opportunity well above an annual salary.  And just when you think it couldn’t get any easier to create software, it does.

As friction goes away, things become much more fine-grained.  You don’t need $5m anymore to start a company:  a laptop and a cafe wifi connection will do.  This enables an explosion of new projects, but with smaller teams and narrower ideas.  The industry gorilla platforms fuel a “feature ecosystem”:  are those icons on your phone “apps” or “features”?  Viewed in person terms:  a thousand 100-person software teams might now be 30,000 3-person teams.  Software is no longer a sport of kings.

This effect, in turn, is flattening the industry.  Most projects now start on nearly identical footing, often with many competitors or near-competitors.  It’s like starting a civilization in a desert vs the mountains; there are far fewer strategic passes and valleys to control and extract disproportionate value from surrounding areas.  It’s a maddening conundrum for entrepreneurs and investors:  we’re all toting personal super computers, the world is bathed in wireless access, and there are millions & millions of mobile apps and Web sites.  But why does it feel harder than ever to create a $1b software company?  This is why.

Social media consultant Mark Schaefer has benefitted from this flexibility first hand:

It wasn’t always this way.  I have loved having a private, beautiful, quiet office but when I moved a few years ago, I put off setting up the desk for a few weeks as our lives settled into a new home. Weeks turned into months. Months turned into years. I found that I didn’t need all that stuff. I discovered that my desk was simply a place to hold photos, books, and files and I can do all of that on an iPhone.

Consequently, my beautiful desk has remained under cloth sheets in the garage for four years. I have come to embrace the simple, mobile business life. The world headquarters for Schaefer Marketing Solutions is wherever I am sitting.

By contrast, I recently visited the glorious offices of a Fortune 500 Titan. Up on the 50th floor of a skyscraper, many of the private offices had a leather couch, beautiful art, and tasteful decor. Quite a shock to my senses. It occurred to me that they really don’t need any of that stuff. Just get a good chair and wi-fi would do it, right? They could profit from living in my world for a little while!

I’ve come to take pride in this simple business approach. I can beg and borrow a meeting room when I need it. I commandeered the family dining room when I had to spread out documents, outlines, and research while writing a book. I thrive with almost no overhead. I run a naked business.

Bottom line: Launching a startup doesn’t necessarily require huge amounts of money, tons of VC investment, and a five year business plan. Rather, it simply requires a computer and a person with the prerequisite knowledge to create that new software product. The down side is that the number of people with that knowledge and skill set is relatively small. The good news is that because the costs and risks involved have been reduced, it’s easy to take the time necessary to learn, make mistakes, and figure out what will work.