The Lean Startup by Eric Ries made its mark in entrepreneurship by changing the way startups build and launch new products. To teach the principles of The Lean Startup and to help companies and investors become successful, Thomas Janson started Lean Berlin. Janson has been involved in several early-stage startups including Team Europe ventures and is the current CEO of PowerControlCenter.
To meet Janson on a night that brings together fashion and entrepreneurship, check out Decoded Fashion Berlin on March 25 at the Factory. This will be Decoded Fashion’s first event in Germany. He will also have a workshop at the HEUREKA Conference on May 6.
The concept of founding a company is still heavily influenced by accounts from a rather distant past. When asked about an inspiring role model, one might think of Marc Zuckerberg (leaving aside founders that admire investors or talented sales people). But when asking people about how Zuckerberg actually achieved his success, many still imagine him as some kind of mad scientist that was hiding in a dark basement (o.k. dormitory) inventing what his peers thought to be impossible.
Yet, he didn’t invent anything in the classical sense. Unlike what one might think, we don’t live in times of great technological advancements in comparison to the industrial revolution or other periods – and that holds specifically true for web, mobile, and social focused business models.
That makes one statement attributed to the acclaimed author, investor, and advisor Guy Kawasaki questionable. He says, “prototype beats powerpoint”. He actually leads the reader to the underlying problem when stating that “all you need these days to build a prototype is either free or cheap”. The development of native mobile apps has become a very annoying counter trend due to limited resources for prototypes and for app development in general.
In a non-invention world, the only benefit of pitching with a ready prototype is that an investor might be repelled by the fact that the founder didn’t have the courage, time, or skills to build one. The result is that a prototype, instead of providing proof of a business model, is simply to show that the founder did what was expected of him or her.
The big innovations that needed little validation and that fulfill the basic needs of large parts of the population have been made. Of course, there are still some big leaps ahead of us, like a cure for cancer, however these innovations are outside the topic covered by this article. Besides these innovations, most everything has been been tried out through already established business models even before the age of free or cheap prototyping. The majority of new ideas are rather innovative replacements or enhancements of existing models.
The basic question is always if the business model solves a problem that consumers believe is worth solving. However, in cases where new ideas merely improve an experience, it is not about developing a new idea or building a prototype but rather proving that the benefits consumers experience outweigh the mental cost of switching to a new service or product. This is something only the consumer can prove.
Even scaling a business is no solid proof of its concept as was shown lately in the case of Groupon and Fab. Companies seem to be perfectly happy to ignore the fact that they lack a working business model as long as they receive sufficient new funding to buy growth through short-lived marketing stunts.
This is where Eric Ries’ The Lean Startup comes into play. It explains what you can learn from engaging early adopters with a prototype, or how he calls it: minimum viable product (MVP). Having an MVP and trying to finance a company without validated learning from real customer engagement really means giving away shares for free.
Any solid verification of an unproven business model raises the value of a startup substantially. An entrepreneur should try to prove the following in a strictly experimental setup at costs that allow for a founder to run on its own funding for an extended period:
Sustainable value creation: Customers are willing to pay for a product or service more than is needed to build or supply it (positive customer lifetime value or CLV)
Feasible customer acquisition costs: Attracting new users costs less than the CLV
Scalable marketing channels: Not only can customers be acquired below CLV, but the channels through which this was achieved also offer access to the anticipated quantity of customers
In terms of resources scarcity, production resources nowadays are usually not threats to a business model and are, therefore, seldom found on the list of risky assumptions.
What we can aim towards is that the future success of a company can be predicted with very limited resources, turning the initial investment of any third party into mere classic growth financing. This will ultimately help prevent the dilution of the founders stake in the company.
This sounds familiar. News about companies being third-party funded from a very early stage can be found every day. However, these companies come mostly from the dying species of copycats, technological advancements that often don’t requirement a market tested approach, or are simply a sign of blind faith from the side of investors.
While it can be nice to spend other people’s money, failing continuously will ultimately ruin one’s reputation. It means there was a failure to check all hypotheses in the business model. The Lean Startup approach is recommended to not only secure funding through a favorable evaluation but to put your startup on track for success.
Image Credit: Thomas Janson