Startup 101

Lean Startup: Look Before You Leap

If you're thinking about creating a startup, do your homework and learn about lean startup. Don't spend six months coding a product; prove that people want to buy it first.

Have you ever thought about creating your own software startup? Perhaps you're a great programmer with an idea for the next Twitter or Facebook. Maybe you have an "itch you need to scratch." Or maybe you just want to learn what it feels like to be an entrepreneur.

Go for it! This is a great time to build a startup, and there's no substitute for just doing it.

But … there's also something to be said for preparation. The startup world has figured out quite a few things in the last five years, and the leaders of the startup community have been kind enough to write them down.

Eric Ries is carrying the banner for the most prominent movement in the startup world, "Lean Startup." Although rooted in the concepts of lean manufacturing, you can think of lean startup as an extension of agile software development principles to business.

Just as agile strives for tight iterations for software development, lean startup strives for a tight cycle of build-measure-learn. Instead of spending six months building something that you hope customers will buy, lean startup suggests building the smallest thing that you can measure effectively to learn if you are moving your business forward or if you need to "pivot" in a different direction.

Agile guru Kent Beck once described it to me this way: the most important business question is whether or not people will buy your product; so instead of building it, make a webpage with a "click here to buy" button and see if you can get people to click on it. If people click the button, then you ask for their email address to let them know when the product will be ready. If nobody clicks on it, then aren't you happy you didn't build the product?

Think about that for a second. That Big Idea of yours – how long would it take you to build it? Six months? A year? More? Have you proven that people will pay for it once you build it? How long would it take you to build a simple webpage describing your product – selling your product – with a "click here to buy" button? A day or two? If you can't sell it, why build it?

What are the consequences of spending six months or a year building something only to find out people don't actually want it (or don't want to pay for it)? For most people, it would be devastating. It would drain your finances and bruise your ego. By contrast, what are the consequences of finding out that nobody clicks on your landing page? Not much; it simply means you have to try again with another idea – you need to pivot – and because you only spent a day or two attempting to validate this idea, you probably still have the energy and resources to pivot toward another one.

Even when you build a simple Web page to validate your idea, you still have to figure out how to get people to visit it. Unless you're already a celebrity or have thousands of Twitter followers, that likely means "renting" traffic by paying for Google or Bing search terms. Rob Walling discusses this technique in detail in his book Start Small, Stay Small. Rob cautions that you have to plan for the cost of search terms as you decide what product to build, as this represents your cost to acquire customers.

Every commerce site has a "conversion rate": for every 100 visitors, let's say only one will buy; that's a 1 percent conversion rate. If you have an idea of your conversion rate (perhaps from people clicking on your Buy button) and you know how much it costs to generate 100 visitors (from paying Google or Bing), then you know how much you need to make from each customer who buys. If you test a 1 percent conversion rate for a $25 product, and it only costs $15-20 to get 100 visitors, that's a good sign you can profit.

On the other hand, if the cost of acquiring customers is greater than what you can charge those customers, then you will fail, no matter how great your idea seems. In practice, online businesses that would likely be found using very common or general search terms are incredibly difficult to pull off, because those search terms are expensive ("to-do list manager" and "twitter client" come to mind).

There's no reason to guess; you can prove whether or not people will pay a profitable price for your product before you even build it by creating a landing page and paying to drive traffic to it. If you can charge more than it costs to drive traffic, you have a winner. If not, it's time to pivot. That's lean startup in a nutshell.

Developers usually resist lean startup; when you have a great idea, you want to open Visual Studio and build it! You probably figure you'll worry about all that sales and business stuff after you've perfected your software. It doesn't usually work. Lean startup flips these activities around, and it takes some getting used to, just as it takes practice to get used to agile concepts like writing tests first and pair programming. Now you're not just building software, you're building a business.

To move your business forward, you have to learn. Just as agile prescribes building the "simplest thing that could possibly work," lean startup prescribes building the "minimum viable product" or MVP. You have to constantly ask yourself, "What is the absolute least I can build to test my next business hypothesis?" If you prove your hypothesis, go further in that direction. If you disprove it, you pivot into a new direction. Just as with agile iterations, early cycles of build-measure-learn should probably take a week or two, not six months.

These principles apply whether you're a one-person bootstrapper or a VC-funded hotshot. There's simply no reason to build something until you've proven that people will buy it -- and that customers will pay more than it costs to acquire them. Even though you're probably more comfortable programming, get the selling right first. I can't stress this enough: spend your upfront energy proving that you can make money, instead of writing code.

Lean startup is a movement with lots of variations and interesting voices. Eric Ries's book is a great overview. Eric built upon Steve Blank's customer development ideas as outlined in The Four Steps to the Epiphany. Other authors have built upon Eric's ideas. I'm particularly fond of Ash Maurya's Running Lean as a prescriptive guide to applying these principles, and there are many helpful blogs on these topics as well. At some point, you have to learn by doing; but it's awfully helpful to arm yourself with knowledge first. Learning the principles of lean startup will increase the likelihood that you'll succeed once you make the leap.

Please let me know if this column is useful. If it is, then next month, I'll address one of the most dreaded business activities for programmers: talking to customers.

About the Author

Patrick Foley is an ISV Architect Evangelist with Microsoft and cohost of the Startup Success Podcast. He can be reached at Patrick.Foley@microsoft.com or @patrickfoley.

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Reader Comments:

Thu, Feb 9, 2012 peter gottlieb

The greatest deficiency in the lean startup as you describe it: An expression of willingness to buy does not necessarily mean someone is willing to pay your asking price. I have found this out the hard way with the Android Market (google). I am giving away several apps with several hundred downloads a month, but get less than 6 downloads a month for a much more useful app charging a mere $2.50. $.99 is somewhere in between.

Mon, Jan 23, 2012 Patrick Foley United States

Mike - Lean Startup IS hard because starting ANY business is hard. Check out http://leancanvas.com from Ash Maurya. I like that it helps focus the key issues of your business into a small space in a small amount of time. Then it emphasizes a key point of Lean Startup that you are continually RUNNING EXPERIMENTS to move your business forward. I essentially highlight one common type of experiment in this article, but your business might involve experiments along many different axes in order to work. Good luck!

Fri, Jan 20, 2012 Mike Piccolo userladder.com

It is way harder than you think to follow the lean startup methodology. I am in the process of making a startup social network for user generated content at userladder.com, and I find it very difficult to stay disciplined enough to stick to a minimum viable product when there are so many idea you want to implement. Lean startup is definitely the way to go but it is tough not to stray.

Wed, Jan 18, 2012 Patrick Foley Grand Rapids, MI USA

Thanks for chiming in, Chris. There is much more ground to cover, yes - this is going to be a monthly column, where I discuss lots of different aspects of creating a startup. In my experience, the NUMBER ONE mistake I see people make (including myself in the past) is building something nobody wants. The Lean Startup movement goes a long way toward fixing that. Yes, there are times you don't want to tip your competitor's hand, but that's the exception, not the rule. The vast majority of startups have the opposite problem - nobody even knows they exist.

Wed, Jan 18, 2012 Patrick Foley Grand Rapids, MI USA

Thanks, Josh - Kickoff labs looks cool! Good luck.

Wed, Jan 18, 2012 Chris Michigan, USA

I agree certain parts of this article however there are many points that are glossed over. What if you put the sign up page to "test" the waters only to find out that everybody loves your idea? This then creates competition for others to get your product before you do. What if Facebook or MySpace did this? I don't think they would've been as successful. Also I don't completely agree with clicks=buys formula. For instance as I am sure everyone here knows the history behind the 2 piece bathing suit (bikini) for women was created by a French man. No woman would buy it until he hired a woman to model it and got it posted in a magazine and history tells the rest. Just because nobody buys your product does not mean its unsuccessful all there needs to be is creative advertisement. This article is a great start but has more ground to cover on different aspects on start ups.

Fri, Jan 6, 2012 Josh Ledgard United States

I love the Lean Startup movement. It was precisely the idea behind our startup (http://www.kickofflabs.com - Create a signup page test. If people don't pay you with their email address you won't get far. ) One tip for developers is to stop focus on building cool stuff and build tests that focus on social engineering. If you can't socially engineer X number of signups in X amount of time you will have a hard time profiting from your endeavor.

Thu, Jan 5, 2012 Troy Adelaide, South Australia

Thanks Patrick. Very clearly explains a problem I have encountered. As you say, it is easy to put off the sales thoughts until later. It is all about making the best use of your time. Good article.

Thu, Jan 5, 2012 Patrick Foley Grand Rapids, MI USA

Trevor - I would think more generally, "How can I prove my hypothesis that I can make money with this idea?" In your situation, I suspect that the simplest way is to talk to potential customers and make sure that you understand what they want AND that they are willing to pay you. Get them to pay you upfront if at all possible. I'll talk about this more in my next column, but feel free to email me if you'd like to discuss more. If user experience is important, then build a small product with great user experience instead of a mediocre product that does everything - Jason Fried has a colorful expression for this: http://gettingreal.37signals.com/ch05_Start_With_No.php - "build half a product ..."

Thu, Jan 5, 2012 Patrick Foley Grand Rapids, MI USA

Brahmana, You bring up some good and challenging questions. With a social website, even though your USERS are not paying, there is a CUSTOMER somewhere who is. For example, with Facebook, it’s advertisers. With Twitter ... Ok, you MIGHT be able to get away with building a large user base before having some sort of paying customer. A large user base is inherently valuable, so this can be a worthwhile thing to do, but it’s also very expensive (since there is nobody paying) – which means that it might require outside investment. I'll continue via email :)

Thu, Jan 5, 2012 Trevor

I, too, am wondering how much this applies to something I'm trying to build. It is an online service, rather than a product, and I know there is a need for it because it used to exist and I was one of the customers, and I have also talked to others that were customers. I've been working on building this for quite some time, and I must admit I've procrastinated some or else it would already be done. Anyway, I'm wondering how these ideas might apply in my situation. Yes, I could try to just throw up a site with minimal functionality, but I want my customers to have the best possible experience from the beginning so that they keep using it. It could also be harder to scale later if I start with something minimal.

Thu, Jan 5, 2012 Steve Poling just down the road

I was surprised to think of the relative expense of search terms in limiting start-up opportunities. Thus the world will beat a path to your door only if your idea can be search-engine optimized.

Thu, Jan 5, 2012 Rob Vander Sloot

This is a great summation of much of what I've learned by following the lean startup movement over the past couple of years. It may be worth noting that another benefit of collecting email addresses from the landing page is that it gives you a list of potential early adopters who can provide valuable feedback during early iterations. For those in and around Michigan, the Michigan Lean Startup Conference is comming up on May 15. Registration should be open soon.

Wed, Jan 4, 2012 Brahmana

Hi Patrick, This is good write up. You speak business in a developer's language. That's immensely helpful. I have been following the Lean Startup movement for quite some time, reading several blogs, watching videos of Steve and Eric talk, etc. I have got Eric's book, but haven't started reading it yet. I am totally fascinated with this philosophy and am trying to incorporate it. However, whatever I have read till now provide very specific illustrations and I find it hard to map it to my case. For instance you talk about the customer acquisition price and the way to figure out profitability. It makes sense if you are building a product that people "buy" - i.e. pay upfront. In such a case the "Click here to buy" exercise makes sense to find out if people are willing to buy. Now how about a social website where users do not pay and hence they do not "buy" anything per se. A relevant action here would be "Sign Up". Consequently we would have a "Click here to Sign up" button on our mock website. But how do we go about the profitability calculation here? Some insights here would be very helpful. Also there is this talk about customer development, where Steve talks about going to customers and talking to them. How would one talk to (probable) customers of a social website? An online survey? Or is there a better approach? This second aspect is probably something you can cover in your next post since you are going to write about "Talking to customers". Looking forward for the next article. P.S : I am sending this same content in a email to you.

Wed, Jan 4, 2012 Patrick Foley Grand Rapids, MI USA

Thanks, Zubair! Eric covers quite a bit more in his book than I cover here, of course, so I still encourage you to read it. :) I am personally a fan of his writing style, and I found his examples useful. Importantly, he also shows how Lean Startup principles can even be applied in large organizations. Since I work for Microsoft, I found that to be an inspiring message. Good luck!

Wed, Jan 4, 2012 Zubair Dubai

Hi, This is a very useful column I liked how you clarified Lean principles, I have Eric's book but don't think I need to read it anymore since you explained it well in a nutshell. Keep it up.

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