Statistics tell us more than 90% of startups fail. So, knowing how a startup works can help you avoid many fatal mistakes and increase your chances of success.
The Startup works by using the Lean Startup methodology; this methodology consists of three main components: Business model canvas, Customer Devolvement method, and Agile engineer. These three components increase the chance of startup success.
This article will show you the latest ideas on how a startup works and how to start one. This method was obtained by studying the experiences of previous startups and analyzing the reasons for their failures and successes.
Table of Contents
How a Startup works vs. How an existing company works
About 30 years ago, company founders believed that startups were a small version of a big company. That’s why they used the same tools and management techniques to run startups for existing businesses.
The founder constantly struggled with the tools, rules, and processes that “big companies” learned in business schools, and investors suggested that. Investors were shocked when startups failed to implement the plan, and entrepreneurs never acknowledged that no executive company was implementing its business plan.
The failure rate of startups was increasing, but the founders and managers were at a loss and could not understand why.
During the first ten years of this century, a group of thinkers and startup owners emerged and said, stop using the tools they use in existing companies to run startups because there are different types, and each type has its unique nature.
One of the most famous startup gurus is Steve Blank. He authored his book The Four Steps to Epiphany. And his second book with his co-author” Bob Dorf” “The Startup Owner’s Manual Guide,” which, with his blog “www.steveblank.com“, is required reading among entrepreneurs, investors, and companies around the whole world.
A Free Training Course on How to Build a Startup will be an alternative to these books.
Steve said startups are not small versions of big companies. He has reshaped the way startups are created and how their founders are educated.
A startup is not a smaller version of a large company
Steve Blank
A startup is a temporary organization in search of a business model. The components of a startup business model are guesses and hypotheses of the founder, not confirmed by the market yet.
An existing company executes a well-known business model. Existing companies know their customers and how to contact them. These companies also know the advantages of their products and how they are produced.
For this reason, startups and existing companies need different tools and different management methods. This article will show you exactly how a startup works and the tools used for it.
Lean Startup
The startup business model is a set of guesses and assumptions made by the founders that have yet to be proven. The task of startup management is to test these guesses according to the actual market.
When the testing process is not well-organized, usually, it will take a long time and a lot of effort, leading to the termination of the startup budget and failure.
Lean Startup is an effective management method for organizing the startup business model test process instead of an existing company’s tools and management techniques.
The name The Lean Startup was inspired by the lean manufacturing revolution developed at Toyota.
Lean Startup is about quickly learning what your customers want. It’s about continuously testing what you think your customers might want, adapting to the results, and doing so before the money runs out.
A Minimum Viable Product (MVP) is the main component of the lean startup methodology.
MVP is an image or a brief version of the product. It contains only the most essential specifications necessary for the actual product. It is considered a means of discussion between the customer and the company.
MVP is a quick way to get the customer’s reaction to the original product before producing it to reduce costs and ensure the product-market fit. See this article for more information about the MVP.
Also, for more information about lean Startup, you can read “THE LEAN STARTUP” book by Eric Ries.
How a Startup works using the Lean startup methodology
Many authors and writers offer their insight into the lean Startup to illustrate how a startup works. So, do not get confused if you find differences among the resources. We will show you the most professional methods we have discovered through our ongoing research in this field.
Here, we will introduce the most famous and professional Lean startup methodology offered by Steve Blank. This methodology consists of three main components:
- Business model canvas
- Customer Devolvement method
- Agile engineer
In the following paragraphs, we will show you these components in more depth. Let’s begin.
Business model canvas
In the 1990s, the term ‘business model’ became a common term in business. In fact, at that time, there was no standard framework for the business model, and much confusion and ambiguity was surrounding the term.
In 2010, Alexander Osterwalder published his book “Business Model Generation” in which he provided a visual tool, called the business model canvas, which was sorely needed. This tool consists of 9 blocks used to describe the business model. This tool provides a standard framework for a business model that can be used in discussions.
Here is the Google Doc Template of the Business Model Canvas
This tool has become an essential tool for building and running a Startup Company. Refer to the “How To Describe Your Business Model” article for more detail about the Business model canvas.
Customer Development method
As we already know, a startup is a temporary company in search of a business model. The Customer Development method is the process to organize the search process for the business model.
Steve Blank said about the Customer Development method in his book The Startup Owner’s Manual Guide.
The core of Customer Development is simple: Products developed by founders who get out in front of customers early and often win.
Customer Development’s fast cycle times and inherent cash conservation give all entrepreneurs more chances to pivot, iterate and succeed before the bank account runs dry.
Customer Development changes almost every aspect of startup behavior, performance, metrics, and, more often than not, success potential.
In the following sections, we will show you the Customer Development Rules and Customer Development Steps to illustrate the differences from traditional management methods.
Steve Blank is the inventor and author of the Customer Development method. Through searching for a topic, we found that the best representation of the rules and steps for the Customer Development method is what Steve wrote in his book “The Startup Owner’s Manual Guide“.
So, The “Customer Development steps” and “Customer Development rules” paragraphs excerpt from what Steve Blank wrote in his earlier mentioned book.
Customer development steps
The customer development method consists of four steps. These steps are Customer discovery, Customer validation, Customer creation, and Company building. These steps are easy to understand.
The first two steps of the process outline the “search” for the business model. Steps 3 and 4 “execute” the business model that has been developed, tested, and proven in steps one and two—more details about these steps in the following sections.
Customer discovery: First captures the founders’ vision and turns it into a series of business model hypotheses. Then it develops a plan to test customer reactions to those hypotheses and turn them into facts.
Customer validation: Tests whether the resulting business model is repeatable and scalable. If not, you return to customer discovery.
Customer creation: Customer creation is the start of execution. It builds end-user demand and drives it into the sales channel to scale the business.
Company building: Transitions the organization from a startup to a company focused on executing a validated model.
These are the steps of the Customer Development method. Also, when implementing these steps, consider using the rules for the business development method that we will show you in the next paragraph.
We suggest attending the Free Training course How to Build a Startup for more details on this subject and related topics.
Customer Development rules
Rule No.1: There are no facts inside your building, so get outside. Facts live outside the building, where future customers live and work.
There Are No Facts Inside Your Building, So get outside
Steve Blank
Exiting the building means gaining a deep understanding of customer needs and combining that knowledge with product development gradually and repeatedly.
Rule No. 2: Pair customer development with Agile development. Customer development is useless unless the product development organization can iterate the product with speed and agility.
Rule No.3: Failure is an integral part of the search. If you are afraid to fail in a startup, you are destined to do so.
Rule No.4: Make continuous iterations and pivots. The strategy of embracing failure in Customer Development demands frequent, agile iteration and pivots. A pivot is a substantive change in one or more of the nine boxes of the business model canvas.
Rule No.5: No business plan survives first contact with customers, so use a Business Model Canvas. The difference between a static business plan and a dynamic model could be the difference between flameout and success.
No Business Plan Survives First Contact With Customers
Setve Blank
Rule No.6: Design experiments and tests to validate your hypotheses.
Initially, the hypothesis is just a fancy word for “guess.” To turn hypotheses into facts, founders need to get out of the building and test them in front of customers.
Testing and learning require you to be thoughtful about constructing and designing your tests. We call this “designing the experiments.” Customer Development experiments are short, simple, objective pass/fail tests.
Rule No.7: Agree on the market type. It changes everything.
Generally, the market type fits in one of these types: existing markets, new markets, re-segmenting an existing market, or cloning an existing business model.
Rule No.8: Startup metrics differ from those in existing companies. Make sure decisions are fact-based, not faith-based.
Rule No.9: Fast decision-making, cycle time, speed, and tempo. Speed matters at startups where the only absolute certainty is that the bank balance declines every day.
While Rule No.4 addresses iterations and pivots, it doesn’t specify how long they should take. Unequivocally, the faster, the better, since the faster these “learn, build, pivot” or “iterate, build” cycles happen, the greater the odds of finding a scalable business model with the cash on hand. If cycles happen too slowly, the Startup runs out of cash and dies.
Rule No.10: It’s all about passion. A startup without driven, passionate people is dead the day it opens its doors. “Startup people” are different. They think differently.
Rule No.11: Startup job titles are very different from a large company’s.
In an existing company, job titles reflect the way tasks are organized to execute a known business model. For example, the “Sales” title in an existing company means there’s a sales team repeatedly selling a known product to a well-understood group of customers, using a standard corporate presentation with an existing price list and standard terms, conditions, and contract. The “Sales” title in an existing company is all about execution around a series of knowns.
Compared with big companies, startups need executives whose skills are 180 degrees different. Startups demand execs who are comfortable with uncertainty, chaos, and change—with presentations and offers changing daily, the product often changes, with probing and gaining insights from failure rather than high-fiving a success.
Rule No. 12: Preserve all cash until needed. Then spend.
The goal of Customer Development is not to avoid spending money but to preserve cash while searching for a repeatable and scalable business model. Once found, spend like there’s no tomorrow.
Rule No.13: Communicate and share learning. An integral part of Customer Development’s “learning and discovery” philosophy is sharing everything learned outside the building with employees, co-founders, and even investors.
Rule No.14: Customer development success begins with buy-in.
These are the 14 rules of the Customer Development method.
Generally, Customer Development is damn hard work. You can’t fake it. You can’t just do the slides or “do” the process on the weekend. It’s a full-time, full-body-contact sport. It’s a long-term commitment to changing the way a startup is built. But it’s also proven to increase the chances of startup success.
Agile engineer
Agile engineering refers to rapid deployment, iterative development, and continuous discovery processes.
Customer Development is useless unless the product development organization can iterate the product with speed and agility.
The combination of Customer Development and agile engineering dramatically increases the prospects for the success of a new product and company while reducing the need for cash in advance and eliminates wasted time, energy, money, and effort.
Winners do not follow traditional product management processes. Instead, they combine agile engineering with Customer Development to build, test, and search for a business model, iteratively and frequently.
Conclusion
Startups are not small versions of large companies. So, a startup works using different tools and methods.
A startup is a temporary company searching for a business model, while the existing company runs a well-known business model.
A startup works using the Lean Startup methodology. This methodology consists of three main components or tools:
- Business model canvas
- Customer devolvement method
- Agile engineer
The lean startup methodology’s fast cycle times and inherent cash conservation gives entrepreneurs more chances to pivot, iterate, and succeed before the bank account runs dry.
We suggest attending the Free Training course How to Build a Startup for more details on this subject and related topics.
