I recently read an interesting paper on lean startup. The paper points out 3 challenges of lean startup.

Challenge 1: Applying lean manufacturing to startups

Lean got its origin from manufacturing.

• Toyota’s lean production system: the approach seeks to address a series of operational issues, such as inventory management (just-in-time), waste reduction, the optimization of supply chains and continuous improvement in manufacturing.

The lean startup movement explicitly builds on these lean manufacturing principles. However, the central challenge is that lean production techniques were explicitly developed for continuous and incremental improvement of existing processes and products.

Challenge 2: Experimentation and customer validation

Lean startups should quickly develop an MVP (minimum viable product) and get rapid customer feedback/input. Business plans are discouraged because business plans fail on contact with customers. Instead, founders and managers are told to interact with potential customers as soon as possible to iterate.

It’s hard to disagree with the importance of focusing on customers. But the question is, precisely when (and for what types of products) does engaging with customers make sense? This is the reason Apple has historically shied away from the type of customer interaction suggested by lean startup. The problem is customer imagination is delimited by what is presently there.

Steve Jobs:

It isn’t the consumers’ job to know what they want.

Henry Ford:

If I’d asked customers what they wanted, they would have told me, a faster horse!

Startup founders need to, in some sense, look beyond the present and into some unknown future - beyond existing products and realities.

Challenge 3: Canvas, business models and experimentation

Lean startup features a popular tool - the business model canvas.

The canvas features 9 distinct boxes (key partners, key activities, key resources, value propositions, customer relationships, channels, customer segments, cost structure, and revenue streams) to fill in. The hope is that by addressing the 9 elements of the canvas that valuable hypotheses will emerge.

However, in the authors’ perspective, the initial step is not to broadly canvas the environment in search of a full-fledged business model, but rather to develop a unique and potentially valuable hypothesis, built around an entrepreneur’s unique beliefs and coherent theory of value. This theoretical hypothesis development must be more than a mere guess. As in science, hypotheses originate and derive from sound theoretical logic, which at its best provides guidance for what to look for in the first place.

In short, the entrepreneurial exercise should begin by deciding what to look for not cataloging what you see.

Startup strategy: Theory and commitment

Lean startup prompts low-cost ideas: beta products can be rapidly developed; customers and investors can already easily understand and agree/disagree with what a startup is doing.

Well-composed theory enables experiments that permit unique and clearer conclusions about a startup theory’s merits leading to faster and more productive pivots.

Entrepreneurs who were taught to carefully frame their problems, formulate falsifiable hypotheses, and compose rigorous experiments (before taking up lean startup) are more likely to avoid pursuing bad ideas longer than they should, and unpromising ideas.

Customers of course are the ultimate test. But listening to them prematurely - before a compelling theory of value is formed and testable hypotheses derived - may lead startups astray, or toward incremental value.

The authors suggest that instead of quickly focusing on low-cost MVPs and customer feedback, startup founders may find social proof a particularly important signal of value. Eg: funding sources, who join your startup, etc. However, they also note that public markets are poor at assessing truly novel strategies, and therefore alternative forms of validation and funding are needed.

The mechanism of self-selection (into and out of organizations) then is a powerful tool for not only assessing the prospects of organizations in decline, but also the viability and potential of nascent organizations and startups.

The most valuable entrepreneurial ideas are those that are unlikely to permit an easy, immediately recognizable experiment. They require some kind of contrarian belief, vision about and commitment toward a counterfactual world that may not easily be recognizable by other market actors.

My conclusion

If there is anything to take out from this paper, it is acknowledging lean has its limitations, as anything else. However, there are a few good points to notice:

• Lean increases the value of existing products incrementally.
• Startup founders need to look beyond existing products and realities.
• Entrepreneurial exercise should begin by deciding what to look for not cataloging what you see.
• The most valuable entrepreneurial ideas are those that are unlikely to permit an easy, immediately recognizable experiment. They require some kind of contrarian belief that may not easily be recognizable by other market actors.