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DaVinci Coders
April 25th, 2010 at 9:25 am

Many Young Internet Businesses Are Using the ‘Lean Start-Up’ Principles

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Eric Ries, left, with Farbood Nivi of Grockit, an online education network.

Eric Ries and Steven Blank think they have a better way to build a start-up, one that takes less time and money to try new ideas and find paying customers. They are leading proponents of the “lean start-up” — a fresh approach to creating companies that has attracted much attention in the last year or so among Silicon Valley entrepreneurs, technologists and investors.

 

The concept is gaining a following beyond the Valley as well. “If it works, it will reduce failure rates for entrepreneurial ventures and boost innovation,” says Thomas R. Eisenmann, a professor at the Harvard Business School. “That’s a big deal for the economy.”

The term “lean start-up” was coined by Mr. Ries, 31, an engineer, entrepreneur and blogger. His inspiration, he says, was the lean manufacturing process, fine-tuned in Japanese factories decades ago and focused on eliminating any work or investment that doesn’t produce value for customers.

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“This is lean manufacturing for start-ups,” explains Mr. Blank, 56, a serial entrepreneur.

Since 1978, he has been a founder or early employee in eight start-ups, both winners and losers. To cite a couple, Rocket Science Games, a once-promising video game maker, founded in 1993, cratered amid losses a few years later, while Epiphany, a business software company, founded in 1997, was acquired by a larger corporation for $329 million in 2005 — “one my grandchildren will be grateful for,” Mr. Blank notes.

Today, he advises start-up companies and teaches at Stanford and the University of California, Berkeley.

Technology animates the lean start-up process. Free open-source programming tools and easily distributed Web-based software drive down the cost of developing new products and services. The early companies embracing the principles live largely on the Web, which makes it possible to measure and track customer behavior constantly and to invite suggestions and criticism.

Internet companies have steadily taken advantage of the falling costs of getting up and running — often spending just hundreds of thousands of dollars instead of the millions that were required several years ago. But the lean start-up formula adds management practices tailored to exploit the Web environment.

The concepts apply both to designing products and to developing a market, and emphasize an early and constant focus on customers. To be sure, the methods often build on the work of others.

In product development, for example, Mr. Ries is an enthusiast of so-called agile programming methods, which emphasize rapid development, small teams and constant improvement. But, he adds: “The agile practices have to be adapted, shifting the focus somewhat from generating stuff to learning about what customers will want. Most technology start-ups fail not because the technology doesn’t work, but because they are making something that there is not a real market for.”

So the lean playbook advises quick development of a “minimum viable product,” designed with the smallest set of features that will please some group of customers. Then, the start-up should continually experiment by tweaking its offering, seeing how the market responds and changing the product accordingly. Facebook, the giant social network, grew that way, starting with simple messaging services and then adding other features.

The goal, explains Mr. Blank, is to accelerate the pace of learning. “A start-up is a temporary organization designed to discover a profitable, scalable business model,” he says.

Mr. Ries points to his own experience as a study in contrasts between the traditional start-up model and the lean approach. He was a senior engineer at There.com, a 3-D virtual world, from 2001 to 2003. There.com raised $40 million and spent years in stealth mode, building impressive technology, he recalls. But it had so much invested in one technology path and one business plan that the company lost its ability to change, Mr. Ries says.

To switch course, Mr. Ries joined a founder of There.com, Will Harvey, and in 2004 they started a company called IMVU, a social network in which users chat online and create personalized avatars. By design, it raised no outside money in the early going. “I didn’t want us to have the freedom to go for years without customer feedback,” recalls Mr. Harvey.

IMVU began as a bootstrap operation, a forerunner of the lean start-up model. Its early revenue goals were just a few hundred dollars a month. (Users buy clothing and other virtual goods for their avatars.) Today, while There.com has folded, IMVU claims one million active users — and is profitable, says Mr. Harvey, the chairman.

Many young Internet businesses have embraced the lean start-up principles of beginning small and getting products into the marketplace quickly in pursuit of paying customers. Several gathered last week at a conference in San Francisco, including representatives from Grockit, an online education network; KISSmetrics, a Web site measurement business; and Dropbox, an online file storage and sharing service. Others represented PBworks (Web collaboration tools), Flowtown (software for social media marketing) and Aardvark (a social network search service, recently acquired by Google).

The rise of smaller, fleet-footed companies in the lean start-up mold is also bringing changes in venture financing. These companies are typically funded with $500,000 or so from professional angel investors instead of traditional venture capital firms, which are geared toward investing millions at a time. The venture capital investment may well come later, when the companies need money for expansion.

But, according to some Silicon Valley veterans, this means a shrinking role for venture capitalists in seeking and backing promising young entrepreneurs. That vital task in the food chain of capitalism, they add, is increasingly being taken over by major angel investors like Ron Conway, Dave McClure and Mike Maples Jr.

“Venture capital has to reinvent itself for this world,” says Mitchell Kapor, an angel investor who has made 25 investments in lean start-up companies in the last two years.

Via New York Times

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