Lean Start-ups and Business Plans

Lean Start-ups are used for developing products and businesses based on ‘validated learning’, getting customer feedback quickly and often. It was introduced by Eric Ries during 2011 (1) with the objective to eliminate uncertainty in the product development process. Since then, this practice has transformed the way companies are developed (Natasha Hussein, Entrepreneur).

Most astonishingly was the news that Lean start-ups have made business plans redundant. Indeed, a whole industry has grown up around the idea that business plans are now no longer necessary, says David Ehrenberg, Young Entrepreneur Council in the Chicago Tribune.


You can’t really blame start-ups that swap business plans for Lean Start-ups. Who wants to battle through 200-page business plan documents? And then trying to explain cumbersome projects that often render themselves obsolete in a fraction of the time it took to create them initially?

That’s why the proponents of the Lean Start-up methodology had no problem convincing prospective entrepreneurs that they should “focus all their resources on the customer and frequent iterative cycles of development and testing to identify a monetizable product or scalable service in an expeditious manner (2). “

However, the concern about Lean Start-ups are that they are not applicable for all products and industries.

So which method should you use to plan your start-up? Let’s first have look at the ‘traditional’ business plan.

The traditional business plan

A business plan is essentially a blueprint that gives you a glimpse into the future of your start-up. It has two basic objectives:

1. It identifies the nature and context of the business opportunity. (Why does the opportunity exist?); and
2. It explains how the entrepreneur will develop this opportunity.

Additionally, the business plan must indicate the following:
• The activities the enterprise will be engaged in;
• The mission, objectives and goals of the business;
• What strategy must be followed to attain these goals; and
• What the control measures will be used if goals are not attained.

Therefore, a well written and researched business plan will help you as follows (3):

1. It organizes your thoughts on paper and help you to structure your ideas, thus giving insight into yourself and your business concept.

2. A business plan can help you to identify your objectives,  shows you where you are heading, and what vision you have for the future.

3. Strategies can be easier developed if you have a business plan.

4. Problems are identified and the ways to solve or avoid them are noted in the plan.

5. It points out gaps which you as an entrepreneur might not have thought about when planning your business.

6. It creates a structure for your business by defining activities and responsibilities.

7. A very important aspect is that a business plan enables you to obtain the necessary financing to start your business.

8. Lastly, it communicates your ideas to others and gives credibility to your ideas.

A business plan is not unfamiliar with business start-ups. Indeed, when building a start-up, most founders understand the need for having some sort of business plan. After all, banks and potential investors require it, and most business schools today still say it’s essential to increasing the likelihood of success, says Sabrina Parsons in AlleyWatch.

In spite of all the above, the proponents of the Lean Start-up methodology announced the business plan dead. Here’s the view of David Kabata in the Business Daily:

1. It is wrong to believe that the growth trajectory of a large firm is similar to that of a start-up since for large companies the market being targeted already exists. Therefore their customers are known and the firm has a tested brand.

2. Successful entrepreneurs will agree that the growth of a business is not predictable. In fact, having a static document as a road map in early stages may lead to failure, especially when things do not turnout as predicted in the business plan.

3. There is a misconception that an investor will fund your business idea because of how well the plan is written. As a result, no investor will put their money in a plan whose products are not viable.

And then the Lean Start-up arrived to break the all the conventions, beliefs and stronghold of the business plan communities.

Lean Start-ups

SearchCio define a Lean start-up as an approach to building new businesses based on the belief that entrepreneurs must investigate, experiment, test and iterate as they develop products.

Indeed, according to Ries 2011 (1), a start-up’s job is to (A) rigorously measure where it is right now, confronting the hard truths that assessment reveals, and then (B) devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan.

Because of its logic, simplicity, and applicability, the Lean Start-up has grown and has a large following. Reviewing Ries’s bestseller book (1), Michael Schein in Forbes explained the premise of Lean Start-ups as follows: “instead of dedicating lots of time and money to perfecting your product before launching, start-ups should put out the most bare bones (potentially not even functional) version of the product, see if people will pay for it, and then go from there.”

Many researchers and practitioner advocate this conceptual scheme that emphasizes quick iterations of product development and market testing to learn how to create consumer acceptance and commitment with little or no waste of start-up resources.

Are Lean Start-ups the ‘silver bullets’ that entrepreneurs were hoping for?

So, what are the advantages of Lean Start-ups? (Dmitriy Yerebakan, Business Analyst in MLSDev)

1. Identity value – before your product development starts, you need to define what the problem is that it addresses. Chances are, that you will come up with an idea which tackles a non-existent problem or solves a real problem that was not completely solved. Following the first Lean principle, you will save a lot of time and money to rather spend on the development of a worthy idea.

2. Map the value stream – this principle will help you to understand what leads to the success of your project and what doesn’t. Also, you will learn what needs to be done and what people may help you with this. Doing it this way, your attention will not become dissipated, and you will be fully concentrated on your major goals – saving your time and money.

3. Create flow – this principle helps you to understand what step you are taking  now and how to measure the results of your actions accordingly. So, not only will you be able to plan further activities successfully, but also to efficiently evaluate the results of the completed ones. Indeed, if you do not know, where and when you should go with your product, how will you ever know if you are on the right way?

4. Establish pull – if you focus only on those features of your project that really matter to your customers, you will add more value to your product faster.  Not doing so you may stretch yourself too thin by trying to create excessive functionality from the start.

5. Seek perfection – following this principle you will maintain the creative atmosphere in your team. As a result, they will generate more interesting and useful ideas. However, you won’t see all of the benefits instantly.

Entrepreneurs planning their start-up business

Lean Start-ups may not be the solution for every start-up and in all of the industries…

Some of the limitations of Lean Start-ups that were identified by Dr. Julius Parrisius:

1. Does it work for big ideas? Customers may need ‘an almost finalized product’ to get the intended experience, so balancing sufficient learning and the minimization of waste in the process becomes increasingly difficult.

2. The risk of premature pivoting. Lean Start-up teaches us to focus on experimenting and learning directly from customers. As a result, when our data refutes the hypotheses we have about our product, we are told to pivot. Of course, testing and tweaking a product can be done quickly, as long as you’re talking about a website or software. Unfortunately  it’s not so easy when the solution isn’t limited to lines of code…

3. Pivoting away from passion? An entrepreneur doesn’t usually wake up in the morning and think: ‘Today, I’m going to pivot my way to success, whatever it takes’. Much rather, most entrepreneurs starts out with a vision to change the world for the better (and make a lot money in the process).

4. What to do when Lean Start-up isn’t enough? The age-tested heuristics (versus the scientific method) may be the way to go when Lean Start-up reaches its limits. Heuristics are proven rules-of-thumb that can be derived from decision-making patterns of practitioners.

Now then, you have a great business idea which you think may change the world and will make you rich. So what methodology are you going to use to conceptualize your idea… A business plan or a Lean Start-up?

Concluding

Lean Start-ups haven’t caused the death of business plans. On the contrary, they gave business plans a second lease of life by making them more fluid, relevant and in time. I suggest that business start-ups do both methodologies.

First the Lean Start-up and then, after getting some clarity about why your customers need your product and what they are willing to pay for it, write a formal ‘traditional’ business plan.

A well researched and written Business Plan helps to get your business started the right way.

Read more:
1. Every Business Needs A Business Plan
2. The value of business plans when you start a business
3. Why Do You Want To Write A Business Plan?

Storyboard of The Lean Start-up Introduction

Notes

(1) Ries, E. 2011. The Lean Startup: How Constant Innovation Creates Radically Successful Businesses, Kindle Edition.
(2) Gonzalez, G. 2017. Startup Business Plans: Academic Researchers and Expert Practitioners Still Disagree?, Muma Business Review, 1(15):189-197.
(3) Cronje, G.J. de J., Breebaart, H., de Klerk, A., Old, S., and Swanepoel, E. 2001. Introduction to Entrepreneurship and Small Business Management, Only study guide for MNE202-V, Department of Business Management, University of South Africa, Pretoria.

Images

  1. Feature image: Pexels
  2. Image in post: Pexels
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Douw G Steyn

Douw G Steyn

Management consultant, blog writer, dreamer

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