What Does a Lean Startup Look Like?

Lean is a management philosophy that has been unfairly associated with cost reduction. At its root, lean focuses on value—what the customer truly wants—and eliminates any complexity or waste that gets in the way. Lean has been widely adopted by large manufacturers and, more recently, service-based firms, and some have wondered about lean’s usefulness for startup enterprises.

To learn more, we went to the expert—Barry Cross, Distinguished Faculty Fellow of Operations Strategy at Smith School of Business. His assessment: entrepreneurs would be wise to take lean seriously.

Smith Business Insight: How well do lean principles map onto what we understand of the startup process?

Barry Cross: It’s a tough question because the entrepreneurial process is going to be different for every case. The challenge you have with lean is that many people think it’s about doing more with less or head count reduction. That’s not really what lean is. Lean is customer-centric. It’s focused on creating value for internal or external customers. It’s based on the allocation of scarce resources around the business in the interest of creating that value.

When you think about the entrepreneur in their garage, coming up with a concept or a market is essentially about identifying a customer. And finding that customer is probably the most difficult part of the entrepreneurial process. The process they go through often involves some level of experimentation, and that’s very much lean. Trying different approaches with different customers in small, controlled settings and seeing what works and what doesn’t, and then tailoring the product or service towards the more receptive market is the essence of a lean startup.

When you think of lean in the classic setting of a large organization, there’s an existing customer base for which an offering can be finely tuned. But in a startup setting, there are no customers. It’s like chasing a phantom. Lean in this setting seems much more challenging.

Very much so. In most cases, someone develops an idea that they deeply believe is going to have value, and quite often they misidentify their initial customer. That’s why most startups fail.

It takes management awareness and a willingness to see that the people they thought were going to be customers perhaps don’t like what’s being offered, or the offering doesn’t really fit the needs that were anticipated for a particular market. But nearby may be other people who say, ‘That offering is pretty cool.’ With that awareness, a startup can start to shift or pivot.

What does an entrepreneurial venture that uses lean principles look like?

In any operating entity, we’re used to seeing an HR manager, a finance person. We have someone over here doing customer interface, someone managing technology. What’s more important with a startup is appreciating that our processes and products will need to adapt, so initially you want to keep job titles and descriptions as loose as possible.

You’ll want people who are higher energy, people who have a broad background and experience and are focused on solving problems, regardless of job title. The most important thing is to ship one more product today or to engage with one more customer, to see how they react and then adapt as necessary. We’re steering the organization. It’s not point-and-shoot.

People have a romantic perception of the way startups work. I come up with a great product and suddenly I’m selling it on Amazon. No. Consider those [now successful] organizations that were steered in the early days, reacting to how particular customers received their products. That’s what’s most important. It’s less about focus groups and more about focus individuals. Sometimes you can get a very good sense of what’s going on from a minimum viable product or service, talking to just five distinct customers. You’ll learn 80 per cent of what you need to know and avoid some of that focus group mentality, which is often just groupthink.

It has been suggested that with a lean startup approach, the traditional business plan is not nearly as important.

I would agree that the traditional business planning exercise often doesn’t create the value that we anticipate. They may be 50 or 100 pages long, and hundreds of hours can go into their creation, but they are rarely impactful. In many cases, entrepreneurs don’t have the depth of information that’s required.

For any of these startups, creating a simple road map for their particular segment can be more effective. Build a vision around the idea of how they’re going to create value for that segment, and why that segment needs their product or service. And then identify the gaps between where they or the market is right now and where that vision is and find a way to fill those gaps. Outside of messing up a whiteboard and writing a half-dozen pages, it doesn’t have to be a significant plan with all kinds of depth. Run some trials, get a few minimum viable products or services out there and see what happens.

If you’re a venture capitalist with lean in mind, what startup metrics are you focusing on?  

The bankers will want to see the balance sheet and profit-and-loss statement. Anyone with any type of financial connection to your startup will want to see that on a quarterly or even monthly basis.

But more important, at least initially, is getting down to the number of customers we connected with today, whatever that connection looks like. The number of products shipped today. The number of service encounters today. It really does get down to the number of touches with a customer that you have on a daily basis. What will it take to go from three to six, and then from six to 12? How are you fine-tuning your process or technology interface or product to help get you up to six a day or 12 a day?

Some startups that are flush with seed capital are being advised to take a go-big-or-go-home approach. Does lean have anything to say to them?

My strong belief is if they’re not taking some type of a lean mentality upfront, it’s very risky. I don’t want my capital to be risked wholesale on scaling up before they know they have something that will be adopted and bought by the marketplace. Entrepreneurship is about being aware and reacting to specific customer adoption patterns. You don’t scale up until you have that confirmation.

Some entrepreneurs worry about competitors getting there first or quickly copying what they’re doing. Certainly, that’s a risk. There’s the adage, “the early bird gets the worm but the second mouse gets the cheese.” [In other words] “we’ll let the entrepreneur problem-solve and then we’ll react really quickly.” I’m okay with being a fast follower. I’ve been that individual in organizations many times. But at the same time, entrepreneurs that are first in the market get to define what the market looks like, get to define some of the customer behaviours, assuming they’re creating value or closing a gap in one way or another. Because in some cases they’re training customers in a certain pattern of behaviour. That would be pretty tough to follow for some of those other businesses.