Angel Investing

Kevin Learned: Rethink startups, recognize wisdom of going ‘lean’

KEVIN LEARNED, director of the Venture College at Boise State and an experienced angel investor.November 19, 2013 

Entrepreneur, Stanford/Berkley/Columbia professor, and startup expert Steve Blank published an article in the Harvard Business Review in May 2013 titled "Why the Lean Startup Changes Everything." The article is available for free downloading at steveblank.com.

Blank says, "no business plan survives first contact with customers." By this he means we have startup business planning all wrong. Rather than assume the plan is correct, Blank urges us to realize the plan is based upon a series of assumptions, some of which are highly likely to be wrong. This is because a startup, by its very nature, deals with uncertainty. It's trying to do something new and different.

That was certainly my case. In one of the blunders for Learned-Mahn (a computer software company I co-founded), we designed and programmed a very specialized accounting system for trusts and estates. We wrote the system because my father, a retired accountant, was the trustee and executor for a large estate. Once the program was complete, we learned no one else did such accounting the way my father did.

One accounting firm that tried the product, however, forced the system into something it wasn't meant to do - keep small company books. We then modified the program to allow accountants to use it to keep books for their small business clients. Turned out that most accountants found that uninteresting as well. Finally, almost in spite of ourselves, large companies found the system and began to use it. By then, several years had passed and most of our capital was gone. If only we had first gone to the market and then built the product rather than the other way around.

For the 40 years or so we have been teaching entrepreneurship, the standard prescription for an entrepreneur intending to start a business has been to write a business plan. Once written, the entrepreneur proceeds to execute the plan, building the product or service and bringing it to the market. Yet we know that many, if not most, business startups fail. Rather than accepting this fact as immutable, Blank argues persuasively that what entrepreneurs have been doing frequently leads to failure because the startup business-planning model is wrong.

Here's the hallmark of Blank's approach: A startup is a temporary organization in search of a scalable, repeatable and profitable business model - how the business will create and capture value. The founder's vision initially is a series of unproven assumptions about the market. The job of the founder is to turn the assumptions into facts as quickly and inexpensively as possible. Hence the phrase "Lean Startup."

I've seen in my business counseling and angel investing career dozens of examples of the entrepreneur raising capital and beginning to execute a series of assumptions that turn out to be wrong. Most heartbreaking is when an entrepreneur invests his or her life savings, and perhaps that of family and friends, into inventory of a physical product only to learn the design is wrong, or the price needed to produce a profit is too high.

So Blank prescribes a rigorous, formal process of testing assumptions as quickly and cheaply as possible in the search for the business model. It involves consciously writing down the assumptions about the business model and then designing inexpensive tests of those assumptions. Getting these assumptions right before a lot of time and money are invested is important to entrepreneurs and those who finance them.

Fellow Venture College directors Ed Zimmer, Mary Andrews and I were privileged to sit at Blank's feet in New York recently as we learned his methodology. We have embraced the methodology at Venture College, and our entrepreneurs are successfully implementing it. In coming articles I will write about how entrepreneurs can utilize Lean Startup techniques to search for a scalable, repeatable and profitably business model.

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kevinlearned@boisestate.edu, kevinlearned.blogspot.com, 426-3875

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