[30 Days] What is a Lean Startup?

Photo by The Lean Startup Conference/Jakub Mosur and Erin Lubin

Today is Day One of our new series, “30 Days of Lean Startup”. We are starting with a very simple, but important question: what is a Lean Startup?

Read more about the different kinds of risks of each in our original post, Lean Startup 101. Also, check out one of Eric’s early posts on how he settled on the name “lean startup”.

The word “startup” often brings to mind an image of two people working in a garage in Silicon Valley. But there’s a more useful definition laid out by Eric Ries, who coined the term Lean Startup: “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.

In other words, in Lean Startup terms, a startup is a group of people working on a risky new product, even if that group of people works for Exxon or the US Marine Corps.

With that definition in mind, there are three areas in which a startup typically faces a very high degree of uncertainty—or risk:

  1. Technical risk, also known as product risk. You could think of this as the question: Can we build this thing at all? For example, if you’re seeking a cure for cancer, there’s a big risk that you’ll fail to find it. If you do find it, you’ll certainly have customers, so there’s no market risk.
  2. Customer risk, also known as market risk. This is the question: If we build this thing, will people use or buy it? Put another way: Should we build this thing? The story of Webvan illustrates this risk: At the turn of the millennium, the company spent $1 billion to build a series of high-performance warehouses and trucking fleets on the assumption that people would buy groceries online. Although it was technically possible to offer groceries online and deliver them to homes, customers weren’t interested in the service at the time, and Webvan folded after a couple of years and a lot of investor dollars down the drain.
  3. Business model risk. This amounts to the question: Can we create a way for this thing to make us money? Strong business models aren’t always obvious. For example, you know Google as a company that makes a lot of money selling search-related ads. But when the Google website launched, it wasn’t obvious that ad sales would become the killer business model, and it took a number of years before they hit on that approach.

If you’re wondering which kind of risk you face, let me help you out: It’s customer risk. Nearly always, it’s the biggest question, because you simply don’t know the value, if any, your new product has for potential customers. When I say, “Nearly always,” I mean: this is so often the case, you should assume it’s true every time.

The tricky part is that commonly, product risk looks more urgent. After all, if you’ve hit on an exciting new idea that you’re pursuing, you’re doing so because you believe other people will be interested in it, too. And if you assume the demand will exist, you’ll be tempted to make sure you can build the product before you offer it to people. But that’s a very big assumption, and many, many startups have failed after building cool stuff, because they relied on a framework of inaccurate assumptions about how customers would behave. Good news: There’s no reason you should put time and money toward a belief you haven’t proven. Below, I’ll talk more about assumptions and how you can avoid repeating a doomed history like Webvan’s.

Note that when you think in terms of risk, rather than company history, it becomes clear that lots of existing organizations have startups within them. For instance, if you’re Gillette and you add a 5th blade to your iconic razor, you have no risks: the product, the market, and the business model are all known. But Gillette’s parent company, Proctor & Gamble, has R&D teams looking at new methods for hair removal. For those new ideas, everything is unknown. Which means the teams working on them are startups.

Incidentally, the biggest company we know of that’s systematically applying Lean Startup methods is GE. Ranked seventh largest in the world, as of May 2014 by Forbes, the company has trained 7,000 managers around the globe in Lean Startup principles and has used them to improve outcomes on things like diesel engines and refrigerators.

If you want to learn more about The Lean Startup methodology and how it applies to enterprise, small business, government, healthcare, and education–this year’s Lean Startup Conference is for you.

Specifically: Here are some talks at this year’s conference that you might be interested in:

GE–Fuel Cells: Running a Lean Start-up inside a big corporation

Johanna Wellington

In this talk, Johanna Wellington who runs an internal startup, GE-Fuel Cells, will share how GE is applying Lean Startup principles in a long cycle, equipment-based business in order to dramatically accelerate their path to commercialization and reduce risk. You’ll also learn how GE has pushed the envelope with out-of-the-box opportunities to apply Lean Startup methodologies including a “Manufacturing MVP”.  

Minimum Viable Taxes: Lessons learned building an MVP inside the IRS

Andrea Schneider, IRS

The IRS isn’t known for quick internal change; it still uses many applications from the Kennedy administration. But it has now partnered with Pivotal Labs to build an MVP to revolutionize your access to basic tax information.  The product will launch early in next year’s filing season and will allow taxpayers to access basic tax information online, including their balance, tax records, and payment histories, as well as make a payment. Andrea Schneider, Senior Manager of Product Management in Online Services and Lauren Gilchrist, Product Manager at Pivotal Labs, will discuss their biggest challenges along the way and share advice for experimenting and iterating inside large bureaucracies.

How Data Can Save Hollywood

Prerna Gupta, TELEPATHIC

Remember when companies would launch massive software projects without A/B testing? It sucked! Believe it or not, there is a multi-billion dollar industry that still produces products like that today. That industry is Hollywood. Join Prerna and explore the final frontier of analytics: creativity. Creative geniuses often have an aversion to incorporating data into the creative process. Creativity is driven by intuition, they argue, and cannot be analyzed. Data kills creativity! But this is a fundamental misunderstanding of analytics, which is costing Hollywood billions of dollars a year. In this talk, Prerna discusses some of Hollywood’s greatest big-budget flops, and how analytics could have saved them. She’ll also provide examples of how innovative storytellers are breaking with tradition and using Lean principles to create modern blockbusters for tremendous gain. Join her in discovering the role Lean Startup can play in revolutionizing Hollywood.

Interested in joining Andrea, Joanna, and Prerna and over 60 other speakers in San Francisco at The Lean Startup Conference? Get all the details here.

Make sure you get the rest of the 30 Days of Lean Startup delivered right to your inbox.

30 days of LS graphic