Maximize your Chances for Success from the Start with Lean Thinking

I am a big proponent of the “lean startup movement” as espoused by Steve Blank & Eric Ries. Other then just the term “lean” (as the founder of LeanLogistics some 12 years ago, I have been known to have an affinity for it) the part of the movement that resonates the most with me is that entrepreneurs should be good stewards of their capital — for many reasons. They need to keep their expenditures very low while they are trying to figure out their business model and experimenting with their product/service to determine whether there is a real (and hopefully large) market for what they have.

Get on With It Already

In the initial phases of the development of a new company you need to really understand the market you’re developing a product or service for, getting feedback from customers every step of the way. That in turn helps you refine your solution based on user feedback, “pivoting” and then re-launching. (Pivoting is the new term for quickly failing — staying grounded to what you have learned and then correcting and moving on). One iteration rapidly after another (but I would recommend not going in circles).

The hardest part of entrepreneurship is to develop the judgment to know when it’s time to change direction and when it’s time to stay the course. That’s why so many lean startup practices are focused on learning to tell the difference between progress and wasted effort. We need to learn to tell the difference.

Don’t get me wrong though, I am not advocating that you have to get it 100% correct at launch; speed and rapid corrections are more important than perfection. What is that anyway? We all know that definition continues to evolve, just as your business will. It is better to get your solution out there than to get it perfect. Period.

A Quick Startup Story

When we first started LeanLogistics early in 1999, we developed a trusted outside advisory group of practitioners, shippers and carriers, that we were able to test our assumptions with until we had our first real customer to test them on — it took us two years. (Back then we didn’t have all of the “plug and play” cloud services available — we had to create them all ourselves — remember this was 12 years ago.) Do you think that we changed anything in that process? We changed almost everything. We changed our entire value proposition, delivery and pricing model, well just about everything.

Early on there are too many unknowns and nobody really knows whether or not your vision will get any traction, much less if it is going to be a commercial success, especially if you are blazing a new trail as we were. As such, and while this might be counter-intuitive, I believe in not over capitalizing too early. Believe it or not this benefits you, the entrepreneur, more than it would your outside capital. You still have options at this stage.

If you over capitalize too early you can lose much of your flexibility — and it often favors the very capital that you have been craving. New capital will have a say in the Board Room on where and how that capital can be deployed. Throwing money at a problem rarely works. This might yield a different outcome driven by a predictable, if not advantageous, conclusion for you. It can also drive perverse incentives. If you are creating truly innovative solutions, you usually do not know if there is really a market for it or not. You may have a feeling or maybe even an early indication, but you really do not know. It is all about risk management and reward. More capital may  “de-risk” your balance sheet today but it may do the opposite in the long-term.

Bowling With a Blindfold On

Over funding also often produces bad behavior in early-stage companies. You hire people too fast, you over build your products or services out without fully forming their solution, you try to force adoption and you do marketing blitzes before your product is really ready for prime time. Having too much money also raises expectations that you will do big things very quickly. No Investor is going to give you $20 million up front and then expect your first year expenditures to be $2 million.

Capital with an Agenda

When our team was at a prominent Venture Capitalist (VC) office overlooking the Boston harbor in 2000 and was offered some 10x the capital that we were looking for, we knew two things. 1) we might be on to something great (a good thing) and 2) we could have a serious conflict with the very hand that would feed us (a bad thing).

You have to realize that the minute you take outside capital the game and its rules change. We were trying to build a company the way we had done it before and to get around the baseball field one base, one associate and client at a time. They wanted us to swing for the fences. We were both going for home plate, but we already had disagreement on how to do it.

It’s the ROI Stupid (or is it Alignment?)

First, capital obviously deserves a return on its investment and risk (I will talk more about this at another time). The second and more important consideration for success at that point was that we also knew that our eventual success depended on more than just capital. While “if $2 million was good, how much better would $20 million be” was more than tempting, we still had some serious unanswered questions on this new market and business model — and our strategies to attack it. Ten times the capital deployed against that would not result in an answer in one tenth of the time, nor would it yield ten times the return (e.g. the bigger the denominator the more difficult is is to generate a return). One of our tougher decisions, but we did not pursue their “generous” offer. It turned out to be one of the best decisions that we ever made.

Five years later almost all of our “well funded” competition, save one or two, we gone. Victims of the harsh reality of venture funding and their return requirements. Those that were left had little hope of having a real return for their capital invested and had few if any real options for the future. This was the “dot bomb” reality of the early 2000’s. You have to have alignment of purpose, vision and reality with your capital (and associates) or you will eventually have to pay the piper.

Today, some of the best new companies of the past several years seem to stay lean until they figure out their product / market fit too. Twitter took a few years until people really understood how to use it effectively. In the process Twitter had some serious learning and evolution to do as well. I’d hate to see what Twitter would have become if they had started with $50 million.

This is not a science. You will soon learn, if you have not already, that it is almost more an art; even with your best science and engineering. My friends at NewNorth Center for Design in Business would tell us it is about connecting both hemispheres of your brain. After all, who doesn’t want to use their whole brain anyway (now you know what a half-wit really is)?

I hope that you will have the confidence to “think lean” and resist Investors who are pressuring you to over-fund too early. While it may be a great problem to have, it is a problem non-the-less. I also know that there are those that will tell you to take all of the money you can when it is offered — at any cost. I know how it feels when the money beckons. It’s tempting. Just be honest with yourself and also know how the end game often plays out …