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The Lean Startup

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Let’s start with a bold statement: YOU DON’T NEED MONEY TO START A BUSINESS. That might be a slight exaggeration but the truth is, with certain lean startup approaches you can get into retail by setting up presales, start a service business by going door-to-door before purchasing equipment, or start a tech company by creating an MVP (minimal viable product) prior to dropping a dime on web developers.

Sadly, this is the step where most entrepreneurs choose not to jump in the ring. Finances are scary. Finances are risky. Finances are extreme! That’s why we figured you can’t start determining if you should explore the world of entrepreneurship without thoroughly considering what you’re jumping into and knowing exactly how to mitigate your own personal risk.

Lean Startup

“The Lean Startup” created by Eric Reis has been all the rage for years. If you visit any Silicon Valley startup, you’ll hear the Lean Approach mentioned dozens of times, and it’s for a good reason. As mentioned above, the financial pressures of jumping into the startup world are immense. Beyond that, startups are scary because their essentially human institutions that are designed to create new products or services under conditions of extreme uncertainty.

We aren’t going to sugarcoat it, that phrase EXTREME UNCERTAINTY is no exaggeration. If you think about a startup, extreme uncertainty is everywhere while working on something new. There is uncertainty that:

  • There is a demand for your product or service
  • Customers will behave as you expect them to
  • You can attract customers to your store/website
  • Your target customer segments will buy the product
  • Your costs will be low enough to make a profit
  • Customers will understand your marketing message
  • Customers will change their behavior for your offering

The EXTREME UNCERTAINTIES are reduced by the Lean Startup. This is because when operating in terms of extreme uncertainty, the lean startup provides you with a methodology that can be used to accelerate learning without wasting money. It forces you to start with a list of things you would like to learn, some ideas for how you can learn it quickly, and a process for measuring data and analyzing the results. That ability to quickly test ideas is the primary reason why the lean startup is so important when it comes to the finances and funding of your company.

Lean Startup Example

When starting a company, you have two options: spend a ton of money and hope something works out or spend very little money and hope something works out. At Educating Entrepreneurs, we definitely believe in the lean approach and so does a friend by the name of Nick Swinmurm.

Who is Nick Swinmurm? Well, he is the founder of Zappos, an online shoe retailer that ended up getting purchased by Amazon in 2009 for $880 million. At the beginning of Zappos existence, Nick felt there was a huge opportunity to sell shoes online because there were few retailers doing it in 1999. Knowing there were some extreme uncertainties, Nick validated his concept through the lean approach.

But before explaining Nick’s lean approach, let’s quickly look at how traditional online shoe retailers were discovering if they could be profitable in 1999. First, they would invest a lot of money in inventory. Then they would buy a factory and distribution center, hire staff, and spend money on large advertising campaigns to increase brand awareness. Lastly, they would sit in their fancy offices and hope that customers buy the shoes on the site.

The lean approach is significantly different. Nick approached local shoe stores and asked if he could take pictures of their shoes. In return, he promised that if anyone bought a pair of those shoes online, he would return to the store to buy the shoes. Nick used a very small budget to buy ads on Google to generate site visitors. He saw that visitors bought the shoes from his site and then he went back to the stores to buy the shoes and send them to the customers.

Although Nick didn’t make any money on this approach and lost some money because he spent a couple hundred dollars in Google Ads, it was still TOTALLY WORTH IT. The cost of Nick’s time and small advertising budget was tiny compared to the cost of setting up a real factory with real inventory and real staff. Nick was also able to validate his idea in a couple of days, instead of the months or years it would have taken to set up a full online retail delivery operation.

The moral of the story is, the lean startup approach can allow you to start any business at a fraction of the cost. On top of that, it allows you to quickly learn so you can move forward with a concept or scrap it in a few short days.

Lean Startup Allows Pivots

Before we move on and dive into the importance of your own personal finances prior to creating a startup, let’s cover one more thing that makes the Lean Startup approach essential to any early entrepreneur. A lean startup allows you to pivot. A pivot is a structured course correction designed to test a new hypothesis about the product or business model (in human terms: it’s a change in a different direction). The pivot is so important because you aren’t always going to get your startup right. You might end up running several experiments and never getting the results you need to back up your startup hypothesis.

Here’s an example many entrepreneurs commonly come across: Let’s say you try to acquire traffic profitably through Instagram, Facebook, Twitter, Google Ads, free content, direct sales, events, etc. but you’re still failing to achieve your desired results. At that point in time, you have two options: you can PIVOT or PERSEVERE. The pivot is where you can change your old hypothesis to create a new one and find a new minimal viable product and try to prove that new hypothesis with the market. While the perseverance approach is where you can keep trying to prove your existing hypothesis correct by designing new experiments or improving the old experiments. Unfortunately, this is going to be your own judgement call. One piece of advice: if the lean approach constantly teaches you that your concept isn’t working, we would highly recommend making a change before sinking too much cash into your new startup.