Starting

The cult of Lean start-ups

By Oliver Milman
Tuesday, 06 December 2011

Entrepreneurs should be naturally wary of fads and trends. They need to be analysed to determine whether they are genuine, sustainable or even useful. Plenty of start-ups have rushed into “the next big thing”, only to promptly fall on their faces.

But sometimes a new way of working emerges that provides tangible results.

Increasing numbers of Australian start-ups are becoming adherents to the Lean Start-up principle, embodied by a book of the same name written by entrepreneur Eric Ries, which was released in September.

Although the book has only been available for three months, Silicon Valley-dweller Ries has written, blogged and lectured about the Lean Start-up model since 2008.

Ries’ theory has been seized upon by countless start-ups in the US, ranging from Dropbox to Google-acquired Aardvark, and now the model is being embraced Down Under.

There are even Lean Startup events in Sydney and Melbourne, with another one set to launch in Brisbane. The meet-ups allow Ries’ disciples to congregate and enthuse about their leanness.

So, what exactly is a Lean Start-up? Ries defines it as not “about being cheap [but is about] being less wasteful and still doing things that are big.”

“Using the Lean Start-up approach, companies can create order not chaos by providing tools to test a vision continuously.”

There are five main principles to this:

Entrepreneurs are everywhere – as Ries says, you don’t have to be in a garage to be an entrepreneur. A good idea can come from anywhere. It’s how you apply it that matters.
Entrepreneurship is management – Ries explains: “A start-up is an institution, not just a product, so it requires management, a new kind of management specifically geared to its context.”
Validated learning – this principle forbids entrepreneurs from hiding their product away and not testing it. “Start-ups exist not to make stuff, make money, or serve customers,” says Ries. “They exist to learn how to build a sustainable business. This learning can be validated scientifically, by running experiments that allow us to test each element of our vision.”
Innovation accounting – the Lean Start-up model requires new ventures to get their ducks in a row. “To improve entrepreneurial outcomes, and to hold entrepreneurs accountable, we need to focus on the boring stuff: how to measure progress, how to setup milestones, how to prioritize work,” says Ries. “This requires a new kind of accounting, specific to start-ups.”
Build-measure-learn – Ries advocates a ‘feedback loop’ that ensures a new business doesn’t veer wildly off course. As he puts it: “The fundamental activity of a start-up is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere.”

So, the premise is quite simple. When starting up, you keep costs to a bare minimum. You then test your concept in the market in a cheap way, so that you’re able to tweak it if needs be, without sinking your business. Repeat to fade.

But isn’t this just common sense? Mick Liubinskas, co-founder of Sydney incubator Pollenizer, which played host to Ries last year, says that the Lean Start-up model is ideally suited to modern start-ups, especially tech-based ones.

“It’s about focusing on your product before buying Superbowl ads,” he says. “It’s the perfect time to do this as the cost of development tools is coming down and you can get a really high granularity with your testing.”

“It’s about getting in front of your customer quickly and finding out if they like your business. The danger now isn’t that you won’t be able to build it, but that people won’t want it. We always say here ‘why would anyone care about your business, other than you and your mum?’”

Liubinskas says that what may seem obvious entrepreneurial processes are only apparent after a failure.

“Having empathy for that common sense isn’t easy without failure,” he says. “We’ve had a lot of failures not applying those principles and Eric Ries has seen those failures too. There are plenty of case studies.”

“Most people think they have the perfect solution the first time. That may be the case, but you need to get out there and find out.”

Ries’ tome isn’t the first book that espouses the need to keep things lean. Start-up guru Steve Blank has touched upon the subject, while Running Lean by Ash Maurya is held in high regard in the entrepreneurial community.

Kym Huynh, co-founder of Australian start-up WeTeachMe, says that the Lean Start-up model was rigorously applied to his business, with set-up costs of just $450.

“We have lived by the motto ‘If you have to buy it, then borrow it; if you have to borrow it, steal it,’” he explains.

“For the first five months, we worked from cafes. They ended up giving us free food. We’d use their free Wi-Fi too, which they were happy with.”

“We’d use friends and contacts to help us out with things like design. You ask for a favour and then be prepared to give a favour back when they need it.”

“It’s also important to have a founding team that covers the major skillsets. It saves you a lot of time and money. Luckily, we have that.”

Huynh has recently been on a tour of the US looking for funding for WeTeachMe, which allows experts to post explanatory videos to users keen to learn certain skills.

“We are all aware of Eric Ries’ book and it’s clear that the principles make sense – to listen to customers, make changes and keep your costs down.”

“You can see that start-up adhere to this in the US, but also in Melbourne now, too. You can launch a business off the back of a credit card now, so you can afford to make a few mistakes. It gives you scope to experiment.”

“You have to build the business for other people at that stage, not yourself. But you need a balance – there will be a time when you need to invest. That is practical, but it’s also a mindset. It makes you realise it’s not a hobby anymore.”

Michael Fox, co-founder of online retailer Shoes of Prey, managed to keep early costs down by staying in cheap hotels when travelling to see Chinese suppliers, held off on hiring until absolutely necessary and kept a home-based office for the first six months.

“If you keep costs down and have good systems in place, it creates a good culture and it impresses investors who can see that you look after your money,” he says.

“But you need to strike a balance. We were frugal with our office space, but because we grew quickly and lots of customers and press kept coming to see us, we needed a nice office space. We needed to project the right image of the brand, so we didn’t skimp.”

Top five Lean Start-up tips

Launch as soon as you can – do you hope to tinker away at your start-up in private until it is absolutely perfect? Best of luck with that, but it means you are missing out on invaluable customer feedback.
Get the right people – having a good mix of skills in your founding team will save you money down the track. “If you start a restaurant, you don’t just need a kitchen – you need the chef too,” says Liubinskas. “It’s the same with any kind of business. If you’re in a tech business, you need someone with the right technical skills. But don’t make the mistake of thinking the product is the business.”
Ask the right questions – as Ries puts it: “The question is not "Can this product be built?" Instead, the questions are "Should this product be built?" and "Can we build a sustainable business around this set of products and services?”
Be ruthless with overheads – do you really need a flashy office? Do you need to hire staff straight away? Question every expenditure and, if possible, go without it.
Don’t be too frugal – yes, you need to keep costs down. Yes, this will give you more flexibility. But, ultimately, your business will need a cash injection at some point if it is to become a fast-growing entity.