In a previous post, I wrote about how large companies are poised to be the greatest beneficiaries of the lean startup movement. We are entering an era of technology that is well suited to the resources that large companies have (i.e. The Third Wave). This next wave of technology will involve products and services that are costly to create and industry sectors that are highly regulated by governments (e.g. healthcare and education). These factors suit large companies because they have the resources to make the needed financial investments, form partnerships with other companies and influence government policy.
In addition to all this, the lean startup movement has revealed innovation best practice to the business world. We now know that innovation involves the search for sustainably profitable business models. There are several large companies that are currently working hard to embed some of these practices into their businesses. If large companies succeed in adopting innovative startup methods, then they will be in the best position to benefit from the era of technology we are about to enter.
Lean Startup Is Dead
There are some commentators that disagree with this idea. Instead, they argue that the third wave of technology actually means that the lean startup movement is nearing its end. Their view is that the large investments and the long lead times that are needed to do innovation in, for example healthcare, mean that lean startup practices are now irrelevant. My strong view is that the commentators making these claims have taken the wrong lessons from the lean startup movement. Below are some examples of these misconceptions:
- Lean startup is about being cheap and investing only small amounts of money into products. If this is the case, then the lean startup only applies to products that can be made with little money such as apps and websites.
- Lean startup is only for digital products. Physical products are expensive and take longer to make. Therefore, they cannot be made iteratively.
- Lean startup is only for small companies with a small vision. If you have a big vision of putting a dent in the universe, then you cannot possibly use lean methods to do that.
- Lean startup is all about running experiments and building minimum viable products. Oh yes, and don’t forget to pivot while you are at it.
- Lean startup is about failing fast. And failing fast means failing next week.
These misconceptions have been around from the beginning of the movement. However, as we move into the third wave of technology, they have taken more prominence. If what large companies learn from lean startup are these ‘myths’, then they will not benefit from the movement. In order to benefit from their resources and current advantages in this new era of technology, large companies have to draw the right lessons from the lean startup movement.
Doing The Right Things At The Right Time
The number one reason why startups fail is premature scaling. This happens when a new product is launched into the market before the team is sure that anybody wants it. So the key take away from the lean startup movement is that innovators should be doing the right things at the right time. This principle has nothing to do with the amount of investment money that is available or the resources that a company has. Regardless of the type of product we are making, it is still important to make sure that we understand our customers needs and their jobs to be done. It is also important to ensure that the product we are creating will deliver value to our customers. This is the real valuable insight from the movement: first we search, then we execute.
This insight applies to digital as well as physical products. In fact, when larger investments are at stake, ensuring that we are making stuff people want becomes more, not less, important. Many commentators forget that the lean startup movement was actually inspired by companies that make physical products, for example Toyota’s lean manufacturing or Zara’s lean management of their inventory. IDEO, the legendary pioneers of design thinking, use ‘lean principles’ to make physical products (e.g. the mouse for the first Macintosh). Design thinking puts the customer at the centre of innovation, regardless of the product that is being made.
Business Models Matter
Even with the best R&D department in your company, the business model question doesn’t go away. In fact, research shows that there is no relationship between R&D spending and revenue or profits within a company. In discussing some of the failures of Xerox PARC to commercialize their inventions, former Chief Scientist John Seely Brown, notes how it is important for innovators to find the “architecture of revenues”. So beyond making stuff people want, another key takeaway from the lean startup movement is that business models matter.
Steve Blank defines a startup as an institution that is setup to search for a sustainably profitable business model. As much as we want to know that we are making products people want, we also want to ensure that we are able to create and deliver this value profitably. This means that we have to test our business model in the market before we scale. As we make prototypes of our products, we can use them to test our assumptions about the costs of production, price points and potential routes to market. The key is to do as much early work as possible to remove business model risk from our products. We are not just running experiments and building minimum viable products for the sake of it. We are not just pivoting or iterating because Eric Ries says it is a good idea. All these practices serve the singular goal of helping us figure out our business model before we scale. This is the lesson from the lean startup.
Asking The Right Questions At The Right Time
Lean startup has nothing to do with exact amounts of money that are spent on an innovation project. The key practice in this context is incremental investing or what Dave McClure calls Moneyball for Startups. Just because an innovation project will cost $20 million to complete, does not mean that all the money has to be invested upfront. If we want our innovation teams to be doing the right things at the right time, then managers and investors have to make investment decisions by asking the right questions at the right time.
Remember that it doesn’t really matter whether the team are on time or on budget if they are making stuff that nobody wants. Incremental investing allows us to make the appropriate levels of investment depending on the team’s innovation stage. First, we want to know if there is a real customer need; so we invest in finding that out. Then we want to know if the team can make a solution that meets those customer needs, so we invest in that. Ultimately we want to know whether the product has a viable business model, so we invest as much as we need to for the team to find product-market fit. If the team succeeds, then we double-down investment to scale the product. This is the principle of searching before we execute, applied to investment decision making.
Big Dreams Are Made Of This
Who am I to disagree? Having a vision is important for innovation. In fact, during the third wave we will be building the internet of everything. This is an ambitious goal that will require visionary innovators to be unleashed. But having a big vision is not an antithesis of the lean startup. In fact, having a vision lies at the heart of the movement. The only question that is raised concerns the best way for innovators to realise their visions. Should we make them write 40 page business plans before the get their large investment? Or should we just give them the money and allow them to get on with it?
The answer from the lean startup movement is… neither! There is a third way. We can allow innovators to pursue their vision, while at the same time using lean methods to test how well that vision matches up to reality. How long the testing takes depends on the complexity of what is being tested. Failing fast does not mean failing next week. In fact, the focus is not really on failing. The goal is to learn and make decisions on what we should do next. This is the power of doing the right things at the right time, and asking the right questions at the right time. So regardless of what you are working on as an innovator, dream big then test your assumptions!
I still strongly believe that large companies will benefit the most from the lean startup movement. However, they have to draw the right lessons from the movement in order to benefit from it. Lean is not about being cheap, it is about minimizing waste. Waste happens when we do the wrong things at the wrong time. Innovators are often criticized for engaging in innovation theater. Understanding the underlying principles of lean is the most important thing for us to do, before we imitate the visible practices. If we attribute the wrong principles to the practices, then we will miss the chance to fully leverage their power. The lean startup is not dead!
This article was first published on Forbes where Tendayi Viki is a regular contributor. Tendayi Viki is the author of The Corporate Startup, a book on how large companies can build their internal ecosystems to innovate like startups.