HBR.ORG

Spotlight Why the Lean Start-UpChanges Everything 64by Steve Blank

What EntrepreneursGet Wrong 74by Vincent Onyemah,Martha Rivera Pesquera,and Abdul Ali

Six Myths AboutVenture Capitalists 80by Diane Mulcahy

How to Negotiatewith VCs 84by Deepak Malhotra

In Search of theNext Big Thing 92an intervievi/ withMarc AndreessenbyAdilgnatius

EntreDreneurshi

ARTWORK Sara Hughes, Wish You iVere Here2005, vinyl and concrete installation, Museum ofNew Zealand Te Papa Tongarewa, Wellington

May 2O13 Harvard Business Review 63

HBR.ORG

ARTWORK Sara Hughes, Download, 2005Acrylic on linen, 1.5 m x 1.5 mWallace Trust Collection

Steve Blank is a consultingassociate professor atStanford University anda lecturer and NationalScience Foundation principalinvestigator at the Universityof California at Berkeley andColumbia University. Hehas participated in eighthigh-tech start-ups as eithera cofounder or an earlyemployee.

Why theLeanStart-UpChanges

\ Everythingby Steve Blank

May 2013 Harvard Business Review 65

SPOTLIGHT ON ENTREPRENEURSHIP

aunching a new enterprise—whether it's a tech start-up, asmall business, or an initiativewithin a large corporation-has always been a hit-or-missproposition. According to thedecades-old formula, youwrite a business plan, pitch itto investors, assemble a team,

I introduce a product, and startselling as hard as you can. And somewhere in thissequence of events, you'll probably suffer a fatalsetback. The odds are not with you: As new researchby Harvard Business School's Shikhar Ghosh shows,75% of all start-ups fail.

But recently an important countervailing forcehas emerged, one that can make the process of stat-ing a company less risky. It's a methodology calledthe "lean start-up," and it favors experimentationover elaborate planning, customer feedback overintuition, and iterative design over traditional "bigdesign up front" development. Although the meth-odology is just a few years old, its concepts—such

as "minimum viable product" and "pivoting"—havequickly taken root in the start-up world, and busi-ness schools have already begun adapting their cur-ricula to teach them.

The lean start-up movement hasn't gone totallymainstream, however, and we have yet to feel its fullimpact. In many ways it is roughly where the big datamovement was five years ago—consisting mainly ofa buzzword that's not yet widely understood, whoseimplications companies are just beginning to grasp.But as its practices spread, they're turning the con-ventional wisdom about entrepreneurship on itshead. New ventures of all kinds are attempting toimprove their chances of success by following itsprinciples of failing fast and continually learning.And despite the methodology's name, in the longterm some of its biggest payoffs may be gained by thelarge companies that embrace it.

In this article I'll offer a brief overview of leanstart-up techniques and how they've evolved. Mostimportant, I'll explain how, in combination withother business trends, they could ignite a new entre-preneurial economy.

Sketch Out Your HypothesesThe businessmodel canvas letsyou look at all ninebuilding blocks ofyour business onone page. Eachcomponent ofthebusiness modelcontains a seriesof hypotheses thatyou need to test.

KEY PARTNERS

I Who are our key partners?

Who are our keyI suppliers?

I Which key resources areI we acquiring from our1 partners?

Which key activities dopartners perform?

KEY ACTIVITIESwhat key activities do our

value propositions require?

Our distributiorî channels?

Customer relationships?

Revenue streams?

KEY RESOURCESwhat key resources do ourvalue propositions require?Our distribution channels?

Customer relationships?

Revenue streams?

VALUE PROPOSITIONSwhat value do we deliver to thecustomer?

Which one of our customers'problems are we helping tosolve?

What bundles of products andservices are we offering to eachsegment?

Which customer needs are wesatisfying?

What is the minimum viableproduct?

CUSTOMERRELATIONSHIPSHow do we get, keep, and growcustomers?

Which customer relationshipshave we established?

How are they integrated withthe rest of our business model?

How costly are they?

CHANNELS

Through which channels do ourcustomer segments want to bereached?

How do other companies reachthem now?

Which ones work best?

Which ones are mostcost-efficient?How are we integrating themwith customer routines?

CUSTOMERSEGMENTS

For whom are wecreating value?Who are our mostimportant customers?What are the customerarchetypes?

COST STRUCTURE

I what are the most important costs inherent to our business model?

I Which key resources are most expensive?

Which key activities are most expensive?

REVENUE STREAMSFor what value are our customers realty willing to pay?

For what do they currently pay?

What is the revenue model?

What are the pricing tactics?

66 Harvard Business Review May 2013

WHY THE LEAN START-UP CHANGES EVERYTHING HBR.ORG

Over the past few years,a new methodologyfor launching compa-nies, called the "leanstart-up," has begun toreplace the old regimen.

Instead of executing busi-

ness plans, operating in stealth

mode, and releasing fully func-

tional prototypes, young ven-

tures are testing hypotheses,

gathering early and frequent

customer feedback, and show-

ing "minimum viable products"

to prospects. This new process

recognizes that searching for a

business model (which is the

primary task facing a start-

up) is entirely different from

executing against that model

(which is what established

firms do).

Recently, business schools

have begun to teach the

methodology, which can also

be learned at events such as

Startup Weekend. Over time,

lean start-up techniques could

reduce the failure rate of new

ventures and, in combination

with other trends taking hold

in the business world, launch

a new, more entrepreneurial

economy.

The Fallacy of thePerfect Business PlanAccording to conventional wisdom, the first thingevery founder must do is create a business plan—astatic document that describes the size of an oppor-tunity, the problem to be solved, and the solution thatthe new venture will provide. Typically it includes afive-year forecast for income, profits, and cash fiow.A business plan is essentially a research exercise writ-ten in isolation at a desk before an entrepreneur haseven begun to build a product. The assumption isthat it's possible to figure out most of the unknownsof a business in advance, before you raise money andactually execute the idea.

Once an entrepreneur with a convincing businessplan obtains money from investors, he or she beginsdeveloping the product in a similarly insular fashion.Developers invest thousands of man-hours to get itready for launch, with little if any customer input.Only after building and launching the product doesthe venture get substantial feedback from custom-ers^when the sales force attempts to sell it. And toooften, after months or even years of development,entrepreneurs learn the hard way that customers donot need or want most of the product's features.

After decades of watching thousands of start-upsfollow this standard regimen, we've now learned atleast three things:

1. Business plans rarely survive first contact withcustomers. As the boxer Mike Tyson once said abouthis opponents' prefight strategies: "Everybody has aplan until they get punched in the mouth."

2. No one besides venture capitalists and the lateSoviet Union requires five-year plans to forecastcomplete unknowns. These plans are generally fic-tion, and dreaming them up is almost always a wasteof time.

3. Start-ups are not smaller versions of large com-panies. They do not unfold in accordance with mas-

ter plans. The ones that ultimately succeed go quicklyfrom failure to failure, all the while adapting, iterat-ing on, and improving their initial ideas as they con-tinually learn from customers.

One of the critical differences is that while exist-ing companies execute a business model, start-upslook for one. This distinction is at the heart of thelean start-up approach. It shapes the lean definitionof a start-up: a temporary organization designed tosearch for a repeatable and scalable business model.

The lean method has three key principles:First, rather than engaging in months of planning

and research, entrepreneurs accept that all they haveon day one is a series of untested hypotheses—basi-cally, good guesses. So instead of writing an intricatebusiness plan, founders summarize their hypothesesin a framework called a business model canvas. Es-sentially, this is a diagram of how a company createsvalue for itself and its customers. (See the exhibit

"Sketch Out Your Hypotheses.")Second, lean start-ups use a "get out of the build-

ing" approach called customer development to testtheir hypotheses. They go out and ask potential us-ers, purchasers, and partners for feedback on all ele-ments of the business model, including product fea-tures, pricing, distribution channels, and affordablecustomer acquisition strategies. The emphasis is onnimbleness and speed: New ventures rapidly assem-ble minimum viable products and immediately elicitcustomer feedback. Then, using customers' input torevise their assumptions, they start the cycle overagain, testing redesigned offerings and making fur-ther small adjustments (iterations) or more substan-tive ones (pivots) to ideas that aren't working. (Seethe exhibit "Listen to Customers.")

Third, lean start-ups practice something calledagile development, which originated in the softwareindustry. Agile development works hand-in-handwith customer development. Unlike typical year-

AiwuttheSpotlight ArtistEach month we illustrateour Spotlight package witha series of works from anaccomplished artist. Wehope that the lively andcerebral creations of thesephotographers, painters,and installation artistswill infuse the pages withadditional energy and intel-ligence to amplify what areoften complex and abstractconcepts.

This month the Spotlightartist is Sara Hughes, anartist from New Zealand.Hughes's abstracts explorethe way modern technologyinfluences perception. Shealso draws on the cultureof consumerism for some ofher symbolism.

View more of thé artist'swork at sarahughes.co.nz.

May aoi3 Harvard Business Review 67

SPOTLIGHT ON ENTREPRENEURSHIP

long product development cycles that presupposeknowledge of customers' problems and productneeds, agile development eliminates wasted timeand resources by developing the product iterativelyand incrementally. It's the process by which start-ups create the minimum viable products they test.(See the exhibit "Quick, Responsive Development.")

When Jorge Heraud and Lee Redden startedBlue River Technology, they were students in myclass at Stanford. They had a vision of building ro-botic lawn mowers for commercial spaces. Aftertalking to over 100 customers in 10 weeks, theylearned their initial customer target—golf courses—didn't value their solution. But then they began totalk to farmers and found a huge demand for anautomated way to kill weeds without chemicals.FilUng it became their new product focus, and within10 weeks Blue River had built and tested a proto-

Listen to CustomersDuring customer development, a start-up searches for a busi-ness model that works. If customer feedback reveals that itsbusiness hypotheses are wrong, it either revises them or "piv-ots" to new hypotheses. Once a model is proven, the start-upstarts executing, building a formal organization. Each stage ofcustomer development is iterative: A start-up will probably failseveral times before finding the right approach.

EXECUTION

CUSTOMERDISCOVERY

CUSTOMERVALIDATION

Founders translatecompany ideasinto businessmodel hypotheses,test assumptionsabout customers'needs, and thencreate a "minimumviable product"to try out theirproposed solutionon customers.

Start-up continuesto test all otherhypotheses andtries to validatecustomers' inter-est through earlyorders or productusage. If there's nointerest, the start-up can "pivot" bychanging one ormore hypotheses.

The product isrefined enoughto sell. Usingits provenhypotheses, thestart-up buildsdemand by rap-idly ramping upmarketing andsales spending,and scales upthe business.

Business transi-tions from start-up mode, witha customer de-velopment teamsearching foranswers, to func-tional depart-ments executingits model.

type. Nine months later the start-up had obtainedmore than $3 million in venture funding. The teamexpected to have a commercial product ready justnine months after that.

Stealth Mode's Declining PopularityLean methods are changing the language start-upsuse to describe their work. During the dot-comboom, start-ups often operated in "stealth mode"(to avoid alerting potential competitors to a marketopportunity), exposing prototypes to customersonly during highly orchestrated "beta" tests. Thelean start-up methodology makes those conceptsobsolete because it holds that in most industriescustomer feedback matters more than secrecy andthat constant feedback yields better results than ca-denced unveilings.

Those two fundamental precepts crystallized forme during my career as an entrepreneur. (I've beeninvolved with eight high-tech start-ups, as either afounder or an early employee.) When I shifted intoteaching, a decade ago, I came up with the formulafor customer development described earlier. By2003 I was outlining this process in a course at theHaas School of Business at the University of Califor-nia at Berkeley.

In 2004,1 invested in a start-up founded by EricRies and Will Harvey and, as a condition of my in-vestment, insisted that they take my course. Ericquickly recognized that waterfall development, thetech industry's traditional, linear product develop-ment approach, should be replaced by iterative agiletechniques. He also saw similarities between thisemerging set of start-up disciplines and the ToyotaProduction System, which had become known as

"lean manufacturing." Eric dubbed the combinationof customer development and agile practices the

"lean start-up."The tools were popularized by a series of suc-

cessful books. In 2003,1 wrote The Four Steps to theEpiphany, articulating for the first time that start-ups were not smaller versions of large companiesand laying out the customer development processin detail. In 2010, Alexander Osterwalder and YvesPigneur gave entrepreneurs the standard frame-work for business model canvases in Business ModelGeneration. In 2011 Eric published an overview inThe Lean Startup. And in 2012 Bob Dorf and I sum-marized what we'd learned about lean techniques ina step-by-step handbook called The Startup Owner'sManual.

68 Harvard Business Review May 2013

WHY THE LEAN START-UP CHANGES EVERYTHING HBR.ORG

What Lean Start-Ups Do Differently

The lean start-up method is now being taughtat more than 25 universities and through a popularonline course at Udacity.com. In addition, in almostevery city around world, you'll find organizationslike Startup Weekend introducing the lean methodto hundreds of prospective entrepreneurs at a time.At such gatherings a roomful of start-up teams cancycle through half a dozen potential product ideasin a matter of hours. Although it sounds incredibleto people who haven't been to one, at these eventssome businesses are formed on a Friday evening andare generating actual revenue by Sunday afternoon.

Creating an Entrepreneurial,Innovation-Based EconomyWhile some adherents claim that the lean processcan make individual start-ups more successful, Ibelieve that claim is too grandiose. Success is predi-cated on too many factors for one methodology toguarantee that any single start-up will be a winner.But on the basis of what I've seen at hundreds ofstart-ups, at programs that teach lean principles, andat established companies that practice them, I canmake a more important claim: Using lean methodsacross a portfolio of start-ups will result in fewer fail-ures than using traditional methods.

A lower start-up failure rate could have profoundeconomic consequences. Today the forces of disrup-tion, globalization, and regulation are buffeting theeconomies of every country. Established industriesare rapidly shedding jobs, many of which will neverreturn. Employment growth in the 21st century willhave to come from new ventures, so we all have avested interest in fostering an environment thathelps them succeed, grow, and hire more workers.The creation of an innovation economy that's drivenby the rapid expansion of start-ups has never beenmore imperative.

In the past, growth in the number of start-upswas constrained by five factors in addition to thefailure rate:

1. The high cost of getting the first customer andthe even higher cost of getting the product wrong.

2. Long technology development cycles.3. The hmited number of people with an appe-

tite for the risks inherent in founding or working ata start-up.

4. The structure of the venture capital industry, inwhich a small number of firms each needed to investbig sums in a handful of start-ups to have a chance atsignificant returns.

The founders of lean start-ups don't begin with a business plan;they begin with the search for a business model. Only afterquick rounds of experimentation and feedback reveal a modelthat works do lean founders focus on execution.

LeanstrategyBusiness ModelHypothesis-driven

Traditional

Customer DevelopmentGet out of the office and test hypotheses

Agile DevelopmentBuild the product iteratively andncrementally

Customer and Agile Development TeamsHire for learning, nimbleness, and speed

Metrics That MatterCustomer acquisition cost, lifetimecustomer value, churn, viralness

ExpectedFix by iterating on ideas and pivoting awayfrom ones that don't work

Operates on good-enough data

5. The concentration of real expertise in howto build start-ups, which in the United States wasmostly found in pockets on the East and West coasts.(This is less an issue in Europe and other parts of theworld, but even overseas there are geographic entre-preneurial hot spots.)

The lean approach reduces the first two con-straints by helping new ventures launch productsthat customers actually want, far more quickly andcheaply than traditional methods, and the third bymaking start-ups less risky. And it has emerged ata time when other business and technology trendsare likewise breaking down the barriers to start-upformation. The combination of all these forces is al-tering the entrepreneurial landscape.

May 2013 Harvard Business Review 69

SPOTLIGHT ON ENTREPRENEURSHiP HBR.ORG

Today open source software, like GitHub, andcloud services, such as Amazon Web Services, haveslashed the cost of software development from mil-lions of dollars to thousands. Hardware start-ups nolonger have to build their own factories, since off-shore manufacturers are so easily accessible. Indeed,it's become quite common to see young tech com-panies that practice the lean start-up methodologyoffer software products that are simply "bits" deliv-ered over the web or hardware that's built in Chinawithin weeks of being formed. Consider Roominate,a start-up designed to inspire girls' confidence andinterest in science, technology, engineering, andmath. Once its founders had finished testing anditerating on the design of their wired doUhouse kit.

Street small businesses that make up the bulk of theeconomy. If the entire universe of small businessembraced them, I strongly suspect it would increasegrowth and efficiency, and have a direct zind imme-diate impact on GDP and employment.

There are signs that this may in fact happen. In2011 the U.S. National Science Foundation beganusing lean methods to commercialize basic scienceresearch in a program called the Innovation Corps.Eleven universities now teach the methods to hun-dreds of teams of senior research scientists across theUnited States.

MBA programs are adopting these techniques,too. For years they taught students to apply large-company approaches—such as accounting methods

Lean start-up practices aren't just for youngtech ventures. Large companies, such as GE andIntuit, have begun to implement them.

they sent the specs off to a contract manufacturer inChina. Three weeks later the first products arrived.

Another important trend is the decentralizationof access to financing. Venture capital used to bea tight club of formal firms clustered near SiliconValley, Boston, and New York. In today's entrepre-neurial ecosystem, new super angel funds, smallerthan the traditional hundred-million-dollar-sizedVC fund, can make early-stage investments. World-wide, hundreds of accelerators, like Y Combinatorand TechStars, have begun to formalize seed invest-ments. And crowdsourcing sites like Kickstarter pro-vide another, more democratic method of financingstart-ups.

The instantaneous availability of information isalso a boon to today's new ventures. Before the in-ternet, new company founders got advice only asoften as they could have coffee with experiencedinvestors or entrepreneurs. Today the biggest chal-lenge is sorting through the overwhelming amountof start-up advice they get. The lean concepts pro-vide a framework that helps you differentiate thegood from the bad.

Lean start-up techniques were initially designedto create fast-growing tech ventures. But I believethe concepts are equally valid for creating the Main

for tracking revenue and cash fiow, and organiza-tional theories about managing—to start-ups. Yetstart-ups face completely different issues. Now busi-ness schools are realizing that new ventures needtheir own management tools.

As business schools embrace the distinction be-tween management execution and searching for abusiness model, they're abandoning the businessplan as the template for entrepreneurial education.And the business plan competitions that have beena celebrated part of the MBA experience for over adecade are being replaced by business model com-petitions. (Harvard Business School became the lat-est to make this switch, in 2012.) Stanford, Harvard,Berkeley, and Columbia are leading the charge andembracing the lean start-up curriculum. My LeanLaunchPad course for educators is now training over250 college and university instructors a year.

A New Strategy for the21st-century CorporationIt's already becoming clear that lean start-up prac-tices are not just for young tech ventures.

Corporations have spent the past 20 years in-creasing their efficiency by driving down costs. Butsimply focusing on improving existing business

70 Harvard Business Review May 2013

SPOTLIGHT ON ENTREPRENEURSHIP HBR.ORG

Quick, Responsive DevelopmentIn contrast to traditional product development, in which eachstage occurs in linear order and lasts for months, agile devel-opment builds products in short, repeated cycles. A start-upproduces a "minimum viable product"—containing only criti-cal features—gathers feedback on it from customers, and thenstarts over with a revised minimum viable product.

REQUIREMENTSINITIAL

PLANNING

IMPLEMENTATION

DEPLOYMENT

IMPLEMENTATION

DEPLOYMENT

SIS & DESIGN

VIABLE PRODUCT

models is not enough anymore. Almost every largecompany understands that it also needs to deal withever-increasing external threats by continually inno-vating. To ensure their survival and growth, corpora-tions need to keep inventing new business models.This challenge requires entirely new organizationalstructures and skills.

Over the years managerial experts such as Clay-ton Christensen, Rita McGrath, Vijay Govindarajan,Henry Chesbrough, Ian MacMillan, Alexander Os-

terwalder, and Eric von Hippel have advanced thethinking on how large companies can improve theirinnovation processes. During the past three years,however, we have seen large companies, includingGeneral Electric, Qualcomm, and Intuit, begin toimplement the lean start-up methodology.

GE's Energy Storage division, for instance, is us-ing the approach to transform the way it innovates.In 2010 Prescott Logan, the general manager ofthedivision, recognized that a new battery developedby the unit had the potential to disrupt the indus-try. Instead of preparing to build a factory, scale upproduction, and launch the new offering (ultimatelynamed Durathon) as a traditional product extension,Logan applied lean techniques. He started search-ing for a business model and engaging in customerdiscovery. He and his team met face-to-face withdozens of global prospects to explore potential newmarkets and applications. These weren't sales calls:The team members left their PowerPoint slides be-hind and listened to customers' issues and frustra-tions with the battery status quo. They dug deepto learn how customers bought industrial batteries,how often they used them, and the operating condi-tions. With this feedback, they made a major shift intheir customer focus. They eliminated one of theirinitial target segments, data centers, and discovereda new one—utilities. In addition, they nwrowed thebroad customer segment of "telecom" to cell phoneproviders in developing countries with unreliableelectric grids. Eventually GE invested $100 millionto build a world-class battery manufacturing facilityin Schenectady, New York, which it opened in 2012.According to press reports, demand for the new bat-teries is so high that GE is already running a backlogof orders.

THE FIRST HUNDRED YEARS of management educa-tion focused on building strategies and tools thatformalized execution and efficiency for existingbusinesses. Now, we have the first set of tools forsearching for new business models as we launchstart-up ventures. It also happens to have arrivedjust in time to help existing companies deal with theforces of continual disruption. In the 2lst centurythose forces will make people in every kind of orga-nization—start-ups, small businesses, corporations,and government—feel the pressure of rapid change.The lean start-up approach will help them meet ithead-on, innovate rapidly, and transform businessas we know it. 0 HBR Reprint R1305C

72 Harvard Business Review May 2013

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