Lean Startup

DEFINITION of 'Lean Startup'

A teachable and learnable method for creating success when founding a new company or when introducing a new product by an existing company. The lean startup method advocates developing products that consumers have already demonstrated a desire for so that a market will already exist as soon as the product is ready rather than developing a product and then hoping that a market will grow around it.

BREAKING DOWN 'Lean Startup'

By employing lean startup principles, product developers find out whether a product interests customers and how the product might need to be refined, through a process called validated learning, before spending time and money to create that product. This way, when an idea isn’t interesting, it fails 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 canvas based on hypotheses that they need to quickly test. Data doesn’t need to be complete before proceeding; it just needs to be good enough. When customers don’t react as desired, the startup quickly adjusts to limit its losses and get back on track to developing a product customers actually want. Failure is the rule, not the exception.

Entrepreneurs following this method test their hypotheses by engaging with potential customers, purchasers, and partners to get their reactions about product features, pricing, distribution, and customer acquisition. With the information they gain, they make small adjustments called iterations to fix anything minor that isn’t working, and large adjustments called pivots to fix anything major that isn’t working. 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 prepared meal delivery service that wants to target single 20-something workaholics in the city 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 with the ability to add on 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. It is faster and less expensive to develop than the full-blown product idea. This method reduces the risk that startups face and decreases their typical high failure rate. Lean startup also redefines a startup as an organization that is searching for a scalable business model, not one that has an existing business plan that it’s determined to execute.

Despite its name, the lean startup method need not be used exclusively by startups. Even a large, established company can use this method when it wants to develop a new product or redevelop an existing one. Indeed, companies such as General Electric, Qualcomm and Intuit have used the lean startup method; GE recently used it 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 are able to 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.