Teaching a ‘Lean Startup’ Strategy
Most startups fail because they waste too much time and money building the wrong product before realizing too late what the right product should have been, says HBS entrepreneurial management professor Thomas R. Eisenmann. In his new MBA course, Launching Technology Ventures, Eisenmann introduces students to the idea of the lean startup—a methodology that has proven successful for many young high-tech companies. Key concepts include:
- Rather than spending months in stealth mode, a lean startup launches as quickly as possible with a "minimum viable product" (MVP), a bare-bones product that includes just enough features to allow useful feedback from early adopters. The company then continues hypothesis testing with a succession of incrementally refined product versions.
- Lean startup executives do not invest in scaling the company until they have achieved product market fit (PMF); that is, the knowledge that they have developed a solution that matches the problem.
- In lean startup lingo, "pivoting" refers to a major change in a company's direction based on user feedback. Eisenmann's students discuss how entrepreneurs can stay true to their vision while still maintaining the flexibility to pivot.
- Adhering to a lean startup strategy is especially challenging for companies that require a great deal of time to launch a workable product, such as clean-tech or biotech companies.
A dozen years ago, it seemed like all it took to launch a successful technology company was a vague idea, a PowerPoint presentation, a trade-show booth with a sexy spokesmodel, and a URL. Then the dot-com bubble burst and investors got wiser and warier. Gone are the days when entrepreneurs could spend years burning through venture capital while they figured out their strategy. These are the days of the lean startup.
"Most startups fail not because they can't build the product they set out to build, but because they build the wrong product, take too long to do that, waste a lot of money doing that, and waste a lot of money on sales and marketing trying to sell that wrong product," says Tom Eisenmann, a professor in the Entrepreneurial Management Unit at Harvard Business School. "It takes a lot of time, time equals money, the money runs out, and the startup fails painfully."
"Lean startups don't try to scale up the business until they have product market fit, a magical event-more easily recognized in retrospect than in the moment-when they finally have a solution that matches the problem."
Eisenmann has developed a new MBA elective course called Launching Technology Ventures (LTV), offered as a half-course at the beginning of the term, with some students continuing on to work on a field-based project during the second half. The course focuses on the "lean startup" methodology, created by HBS Entrepreneur-in-Residence Eric Ries and serial entrepreneur and Stanford/UC Berkeley lecturer Steve Blank. The "lean" in lean startup has its roots in the Toyota Production System ; hence, the lean startup methodology is all about avoiding waste, in terms of both time and money.
For starters, it nixes the traditional idea of a company spending several months in stealth mode while perfecting a full-featured product and planning an expensive launch party at a Las Vegas trade show. Rather, the lean startup launches as quickly as possible with what Ries calls a "minimum viable product" (MVP), a product that includes just enough features to allow useful feedback from early adopters. This makes it easier for the company to speed to market with subsequent customer-driven versions of the product. And it mitigates the likelihood of a company wasting time on features that nobody wants.
"The MVP is a controversial idea because it can be perceived as something thrown together with shoestring and bubblegum," Eisenmann says. "But through a series of MVPs, a lean startup can validate a specific and comprehensive set of hypotheses about what the business is, where it's going, and what it has to do."
The Dropbox team initially announced a bare-bones version of its service on the website Hacker News. The company collected reams of immediate feedback from site readers, and continued to incorporate feedback into several successive product launches-each of which added only a couple of new features. While the feature additions were gradual, they were rapid, as was company growth: Dropbox increased its user base from 100,000 to 4 million in the course of 15 months.
Aardvark, which enables users to garner answers to questions via an extended network of friends' friends, used a Wizard-of-Oz-inspired method in its early days. Rather than building out the technology infrastructure to make their idea a reality, the team launched the service with humans routing users' questions "behind the curtain" instead of computers. This allowed the company to observe how and what users were asking—and then spend time and money on a technology backbone that would best meet their needs.
"Lean startups don't try to scale up the business until they have product market fit [PMF], a magical event—more easily recognized in retrospect than in the moment—when they finally have a solution that matches the problem," Eisenmann says. "And after you have that solution you can step on the gas pedal."
"What we're learning in the course is that pivoting is really hard."
Of course, in carving a path to the PMF, startups may find that they have to shift the company in a completely new direction. In lean startup lingo, it's a process known as "pivoting."
"Pivoting simply means making a major change of some sort," Eisenmann explains. "In lean startup logic, it's something you do, ideally, after you've run some decisive test to disprove a hypothesis. It can be changing the target customer segments by narrowing or broadening them. It can be changing the product itself, either by adding features or by taking features away. It can be a dramatic change: 'We were going business-to-consumer, but we should be going business-to-business.' Or it can be a change in business model: 'We were doing transaction-based pricing, but we've realized we should be doing subscription-based pricing.' The notion of a pivot is to make a change, and ideally, after you pivot, you have a new set of assumptions and hypotheses that you're going to test. And what we're learning in the course is that pivoting is really hard."
There's a core problem inherent in pivoting—the risk of looking disloyal to the company vision. A startup's founders have worked so hard to sell employees, investors, customers, and partners on an idea that switching gears can feel almost like a betrayal.
"So much of what a CEO has to do is talk people into things," Eisenmann says. "If you have to take people away from what you sold them on, that's hard. A fascinating issue for the students has been, how do you square the need to do that with the need to be flexible and pivot?"
Eisenmann was surprised by students' fascination with this issue, and modified class discussions accordingly.
"In many ways I'm using the lean startup strategy. A lot of the course is cobbled together—it's an MVP in itself," he says. "When you teach a case for the first time you're often surprised at what does and doesn't work. So this issue of the tension between vision and feedback is something I had thought about a little. But the students really seized on the question: When is the product shaped by the founder's vision, and when is it shaped by market feedback?"
Eisenmann acknowledges that the lean startup methodology is easier to apply in the field of web-based startups than in the clean tech and biotech fields, both of which often require a great deal of time and capital to create any workable product. The same is true of the transportation industry—inventor Dean Kamen's Segway, for example, or startup Terrafugia's flying car. "It's the nature of some products that you have to spend a whole lot of money before you know if the product is going to work," he says.
To that end, Eisenmann teaches the cases "Predictive Biosciences" and "Aquion Energy." In studying Predictive, a venture-backed, "pee-in-a-cup," cancer diagnostic testing company, students ask themselves whether lean startup principles are applicable at all. With Aquion , they talk about the "clean-tech valley of death"—meaning that a firm is able to raise enough money to fund the bench science, but not enough money to build a workable prototype.
Eisenmann hopes to sell students on the idea of first working as high-tech product managers before jumping into CEO roles.
"I would love Harvard Business School to crank out a 100 high-tech product managers per year," he says. "Nobody reports to the product manager, so there's very little direct authority. But there's lots of responsibility. It's their job to figure out what the product should look like. It's their job to persuade the engineers that this is what they need to build, and to persuade the sales team that this is what they need to sell. It's a wonderful job—perfect for an MBA who wants an early general management role."
For a more complete description of Launching Technology Ventures and a course syllabus, please see http://bit.ly/ffx4jN