Before we take a closer look at ‘Lean’ before Startup, we should clarify again what a startup is. We have already indicated that startups are not ‘small-scale’ versions of large companies, with all their functional areas of research and development, marketing/sales, human resources management, finance, accounting, controlling, etc. On the contrary, startups cannot have all these areas yet because they are still in the process of establishing themselves. And neither do they have a business model around which they can organize the latter. This is also why Steve Blank says: “A startup is a temporary organization used to search for a repeatable and scalable business model.”
Although, in retrospect, things always seem logical and post-rationalized for the success stories in the business press, such a search process always feels chaotic and nerve-wracking for a team in the moment of living through it. That’s probably why another definition of startup by Dave McLure (serial founder and investor) has become the most popular on Quora: “A startup is a company that is confused about what its product is, who its customers are, and how to make money. As soon as it figures out all three things, it ceases being a startup and becomes a real business. Except most times, that doesn’t happen.”
Wow, we have to let that roll off the tongue: Confusion reigns with regard to customers, the product, and possible revenue models. Absolutely hara-kiri for such a startup, isn’t it? Not necessarily, because founders with a lean philosophy have developed sophisticated patterns of action that we can learn from.
„A startup is a company that is confused about what its product is, who its customers are, and how to make money.“
Dave McLure
An entrepreneur who would like to be “lean” will strive to move as quickly as possible from his state of confusion to a state of clarity. The whole thing, however, under the premise of learning the maximum possible about “his blind spots” with as little effort and capital investment as possible. Eric Ries’ great “Lean Thinking” role models, James Womack and Daniel Jones, put it this way: “Waste is any human activity which absorbs resources but creates no value. Of all resources, there is no resource more valuable than time.” But in the context of this worldview, what could be more wasteful for an entrepreneur than to finish building his product and only then test it to see if it meets with the approval and willingness to pay from his customers? And that is precisely what a Lean Startup would never do: make a “build it, and they will come” bet. Far too risky! Far too capital intensive! A Lean Startup works more along the lines of “When they come, build it.” And we’ll take a look at how that works below.
Let’s recall the typical risk dimensions about which there is confusion for any entrepreneur: customer, product, and revenue model. If we divide these up more precisely, the following picture emerges: Customers have problems – e.g., the obligation of a travel expense report. To address them, they use solutions – e.g., Excel spreadsheets (the most common alternative solution, especially in the B2B context, against which a SaaS startup typically competes). Offering a solution incurs costs (mainly on the provider’s side). Therefore, the provider must consider how to provide this cost-efficiently within the framework of a competitive pricing model that the customer accepts and for which he is willing to give up his old solution (e.g., Excel).
If we now recall that the typical Lean Startup founders or engineering product teams do not start solution-free in a kind of “Design Thinking mode” but often already have a (technical) solution on a conceptual level that they are deeply convinced of, we understand the startup dilemma. An existing solution is looking for a problem worth solving — a field of application. In this search, (corporate) startup teams often make strategy pivots that are difficult to understand from the outside but which make total sense when we take a look at what questions the startup now has to ask itself in detail:
Are we really solving the right problem for the customer group that we believe has problem X, is aware of it, wants to solve it, and can acquire a budget (all not self-evident)? If not, does this group have other problems we have discovered that are worth solving because they can also be monetized (problem pivot)?
Or should we stop focusing on these customers and instead look at who else has similar problems that our original solution can best address (customer pivot)? Or, is our real challenge in the current configuration of our solution — its value proposition? Then, we would need to change the solution, emphasize features differently, etc. This often happens on a small scale, without fundamentally questioning the original technology. But there are also cases in which the team radically changes direction and, for example, produces pure software instead of hardware (solution pivot).
Pivots are a fascinating thing in the startup world. For example, did you know that YouTube started as a kind of online dating site like Herzblatt/Je t’aime – Who with whom? The concept didn’t pan out, but users enthusiastically embraced the video functionality. So the founders decided they could upload videos of any kind, not just flirt videos.
The term pivot is inspired by basketball. There is a pivot when a player keeps contact with the floor with one foot without changing his position on the floor and uses the other foot to rotate his body to improve his position while in possession of the basketball.
Similarly, startups can reach temporary impasses from which they try to extricate themselves by changing their strategy without having to change their entire vision. Of course, this is not easy. One representative from the startup world who made it to fame as a highly successful but unwilling pivoter is Stewart Butterfield, who was then a philosophy student from Cambridge. Stewart always wanted to create the perfect online game. That’s his passion. That’s what he strives for. The first game he created was ‘Game Neverending.’ Unfortunately, it was too complicated, and no one understood it. But people liked its photo upload functionality. The birth of Flickr! So Stewart now had to devote his time to developing Flickr, then sold it to Yahoo and went back to his passion: creating the perfect game. Now he had money from Yahoo and was also famous. So he raised millions of dollars for his new game ‘Glitch,’ Game Neverending 2.0, so to speak. But history repeated itself: the game was too weird. It didn’t gain a sufficient fan base. They had to shut it down. Along the way, they created an internal chat system for their game, which they found worked better than existing offerings on the market. So they started commercializing that instead. The rest is history: Slack was born.
If you combine these blind spots to be illuminated with the risk dimensions of desirability, viability, and feasibility mentioned at the beginning of this series of articles, it becomes clear that they are one and the same. For corporate startups, in particular, it is also important to find out whether the organization is willing and able to develop the business model (contextuality) because it fits the strategy.
The key question now is: How does our Lean Startup team find all this out? What does such a “fast learning process” look like under the pressure of a high cash burn rate or even without external venture capital? Well, it’s worth taking a look at the process …
