Lean, agile, and sometimes fragile: A realistic look at the Lean Startup

Mojca Svetek | 30 January 2024

Over the past decade, the Lean Startup methodology has really taken off. Educators, incubators, start-up accelerators, business angels, and venture capital firms are all jumping on board with this approach. In light of the widespread enthusiasm, we explore whether the Lean Startup truly lives up to its promises.

Promises to address two biggest challenges in launching businesses

Lean is promoted as an alternative to “traditional” business planning. Business planning involves creating a detailed document that describes the problem to be solved, the size of the opportunity, the solution the new venture will provide, and a five-year financial forecast, which includes month-by-month expenditures and revenues. This plan is typically developed in isolation before any real work begins. Once an entrepreneur has a convincing business plan, he or she develops a product. Only after it’s built and launched does the entrepreneur get feedback from customers, often resulting in a costly failure.

Lean Startup approach claims to be a systematic, efficient and effective approach to launching startups. The promise of the lean approach is to reduce the likelihood and cost of new business failures by making product development efficient and more closely aligned with customer priorities. In doing so, the Lean Startup methodology aims to address the two most common reasons for startup failure: launching a product or service that nobody actually wants, and running out of cash before gaining traction.

Figure 1: Most common reasons for startup failure (data source: CNBC Insights)

Hypothesis-driven approach to starting a business

The Lean Startup methodology has three key steps. First, entrepreneurs break down their business ideas into testable hypotheses. Business model canvas is usually used for the purpose of mapping these hypotheses. The second step involves putting these hypotheses to the test, especially the ones critical for the success of the business. To do this, creating a “minimum viable product” (an MVP) is recommended. An MVP is a simplified version of the product, developed with minimal time and resources, that enables entrepreneurs to test their hypotheses. If hypothesis testing is done rigorously, some of the hypotheses will likely be rejected. Step three involves revising rejected hypotheses or “pivoting” to new hypotheses. This process keeps going until all vital hypotheses seem to hold true. Only then does the startup refine the product enough to sell it and ramp up marketing and sales efforts to build demand.

Central to the Lean Startup methodology is learning through a series of experiments to see if business ideas can stand up to the real world. It is not surprising that this method has quickly gained favor among academics who appreciate the concept of hypothesis testing and have embraced the Lean Startup methodology as a kind of scientific approach to launching businesses.

Figure 2: Hypothesis-driven approach to starting a business

Makes entrepreneurship seem less like a roll of a dice

Once the Lean Startup methodology gained traction, researchers jumped in to see how it was shaking things up. What they discovered was that this methodology could benefit aspiring entrepreneurs that are grappling with low entrepreneurial self-efficacy. This is because it makes the entrepreneurial journey seem less like a roll of the dice, dependent on improvisation, luck, and intuition. The Lean Startup method essentially provides a roadmap for entrepreneurship and offers the promise of success or, at the very least, cheap and fast failure. This element appeals to individuals who are more risk-averse and prefer a systematic approach to solving problems. It’s not limited to startups either; established organizations adopting agile approaches, such as the Lean Startup, have reported increased confidence in their ability to adapt quickly and maintain an entrepreneurial atmosphere.

But does it actually work?

Startups that have embraced this approach believe that the Lean Startup methodology is a potent tool for reducing time and costs involved in getting off the ground; they believe it helps align business ideas with customer needs and equips entrepreneurs with means to verify all aspects of the business model.

But does it actually work as well as people think or is there a gap between perception and reality? It has been reported that Lean Startup methodology helps entrepreneurs produce more realistic business models. It has been observed that entrepreneurs following the Lean Startup approach tend to incur lower costs, even though they are running many experiments, compared to those following the traditional business planning approach. Unfortunately, most of these studies fall short of meeting rigorous standards of scientific research. A notable exception to this is a recent experiment on 116 early-stage Italian startups. Researchers randomly divided the startups into two groups: a control group and a treatment group. All startups received training in various areas, including business model generation, customer interviewing, prototyping, and so on. However, only the treatment group received a training in employing a scientific approach throughout the entire process. They learned to identify hypotheses and test them through experiments and data analysis. The result? The treatment group did indeed experience more failures and pivots. But remember, this is not necessarily bad; in fact, it could indicate that startups in the treatment group were better at quickly and cost-effectively identifying ideas that wouldn’t work. The startups from the treatment group were also 3-4 times more likely to generate revenue and generated revenue that was on average 2-6 times higher compared to the control group.

May lead to incremental innovation and excessive pivoting

In the Lean Startup approach, customer feedback plays a pivotal role, but it is likely to lead startups to pivot toward more incremental and obvious opportunities. Customer feedback is excellent for improving existing products, yet it often falls short when testing game changing and disruptive innovations. Ford’s famous quote, “If I had asked people what they wanted, they would have said faster horses,” exemplifies this. In addition, most customers prefer the status quo over innovation, especially if the innovation requires any behavioral change.

While many entrepreneurs, particularly solo-entrepreneurs, refuse to pivot, others pivot excessively. The challenge is finding the balance. Companies that pivot once or twice grow 3.6 times faster and have a 2-times lower probability of failure compared to companies that do not pivot and those that pivot three or more times.

Lean Startup’s emphasis on rapid iteration based on early customer feedback, can lead to a myopic focus on quick wins. This can result in neglect of longer-term strategic planning and insufficient attention to the broader market, hurting companies in the long run.

Ironically, works best in combination with business planning

Ironically, the Lean Startup methodology complements rather than replaces traditional business planning. This synergy was underscored by a large-scale survey, which found that 91% of digital entrepreneurs use Lean Startup techniques to gather data to write (better) business plans, rather than replacing them altogether. While the Lean Startup approach encourages entrepreneurs to be brutally honest with themselves about their assumptions (hypotheses) and discourages them from developing new ventures in isolation from their customers, business planning offers tolls to overcome possible pitfalls of not paying enough attention to the business environment, competition and long-term prospects of the business.

References

2 thoughts on “Lean, agile, and sometimes fragile: A realistic look at the Lean Startup methodology”

  1. achat de granpidam

    Pretty great post. I just stumbled upon your blog and wanted to mention that I have
    truly loved browsing your weblog posts. After all I will be subscribing to your rss feed and I’m hoping
    you write once more soon!

    Reply

Leave a Comment

Your email address will not be published. Required fields are marked *