What is 'Lean Startup'?

The lean startup is a method used to found a new company or when an existing company introduces a new product. The lean startup method advocates developing products that consumers have already demonstrated they desire so that a market will already exist as soon as the product is launched rather than developing a product and then hoping that demand will emerge.

BREAKING DOWN 'Lean Startup'

By employing lean startup principles, product developers can gauge consumer interest in the product interests and determine how the product might need to be refined. This process is called validated learning and can avoid the unnecessary use of resources in product creation and development. Through lean startup, if an idea is likely to fail, it will fail quickly and cheaply instead of slowly and expensively. The lean startup method considers experimentation to be more valuable than detailed planning. Five-year business plans built around unknowns are considered a waste of time, and customer reaction is paramount.

Instead of business plans, lean startups use a business model based on hypotheses that are tested rapidly. Data does not need to be complete before proceeding; it just needs to be sufficient. When customers do not react as desired, the startup quickly adjusts to limit its losses and return to developing products consumers want. Failure is the rule, not the exception.

Entrepreneurs following this method test their hypotheses by engaging with potential customers, purchasers, and partners to gauge their reactions about product features, pricing, distribution, and customer acquisition. With the information, entrepreneurs make small adjustments called iterations to products, and large adjustments called pivots correct any major concerns. This testing phase might result in changing the target customer or modifying the product to better serve the current target customer.

For example, a healthy meal delivery service that is targeting busy, single 20-somethings in urban areas might learn that it has a better market in 30-something affluent mothers of newborns in the suburbs. The company might then change its delivery schedule and the types of foods it serves to provide optimal nutrition for new mothers. It might also add on options for meals for spouses or partners and other children in the household.

The lean startup method first identifies a problem that needs to be solved. It then develops a minimum viable product or the smallest form of the product that allows entrepreneurs to introduce it to potential customers for feedback. This method is faster and less expensive than developing the final product for testing and reduces risk that startups face by decreasing their typical high failure rate. Lean startup redefines a startup as an organization that is searching for a scalable business model, not one that has an existing business plan that it is determined to execute.

The lean startup method is not be used exclusively by startups. Companies such as General Electric, Qualcomm and Intuit have used the lean startup method; GE used the method to develop a new battery for use by cell phone companies in developing countries where electricity is unreliable.

The lean startup method also differentiates itself from the traditional business model when it comes to hiring. Lean startups hire workers who can learn, adapt and work quickly while traditional businesses hire workers based on experience and ability. Lean startups also use different financial reporting metrics; instead of focusing on income statements, balance sheets and cash flow statements, they focus on customer acquisition cost, lifetime customer value, customer churn rate, and how viral their product could be.

The lean startup method was developed by American entrepreneur Eric Ries, founder and CEO of the Long-term Stock Exchange (LTSE). He fully explains the method in his bestselling book, “The Lean Startup,” which has been translated into 30 languages.

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