What is the ‘lean startup’ concept?
Before diving into smart saving suggestions to consider when setting up your startup, it’s important to consider a lean methodology.
The ‘lean startup’ concept, first proposed by Eric Reis in 2008 (followed by his bestselling book in 2011, offers entrepreneurs – in businesses of all sizes – a way to test their vision continuously, to adapt, and then adjust before it’s too late. Central to the lean startup methodology is the assumption that when startup businesses invest their time into cyclically developing and refining products or services to meet the needs of early customers, the company can reduce market risks and sidestep the need for large amounts of initial project funding and expensive product launches and financial failures. Those committed to a lean startup approach believe constant feedback yields better results.
There are three key principles to the ‘lean startup’ method. Click on the dropdowns below to reveal more.
A business model canvas
A five-year business plan that forecasts income, profit and cash flow is very much based on the assumption that it’s possible to figure out most of the unknowns of a business in advance, before you raise money and actually execute the idea. In contrast, the first key principle of the lean startup method is to summarise your hypotheses in a framework called a business model canvas – a diagram of how a company creates value for itself and its customers.
“Business plans rarely survive first contact with customers,” comments Steve Blank, in his article for the Harvard Business Review – Why the Lean Start-up Changes Everything. “No one besides venture capitalists and the late Soviet Union requires five-year plans to forecast complete unknowns. These plans are generally fiction, and dreaming them up is almost always a waste of time. Startups are not smaller versions of large companies. They do not unfold in accordance with master plans. The ones that ultimately succeed go quickly from failure to failure, all the while adapting, iterating on, and improving their initial ideas as they continually learn from customers.”
As a Silicon Valley entrepreneur, Blank is recognised for developing the customer development method, one of three key parts of a lean startup, which recognises that startups are not smaller versions of larger companies but require their own set of processes and tools to be successful.
While a convincing business plan is important for obtaining investment, this insular approach is based on little-to-no customer input. Once investment is achieved, a substantial amount of time and money is invested to prepare a product for launch. Only then, will you receive substantial feedback from your customers. And, Blank continues, “too often, after months or even years of development, entrepreneurs learn the hard way that customers do not need or want most of the product’s features.”
Working alongside customer development, agile development eliminates wasted time and resources by developing the product iteratively and incrementally. It’s the process by which startups create the minimum viable products they test.
Combining customer development and agile practices lies at the heart of a ‘lean startup’. Listing, learning and developing your product as you go will reduce risk by ensuring your business solves real customer problems, rather than assumed pain points. This approach can also flag whether your target market is misjudged. There might be an entirely unconsidered audience that will embrace your solution even more. The high cost of getting your first customer and even the higher cost of getting your product wrong, can be significantly reduced by the lean methodology.
Depending on your type of business, leasing equipment is a great way to save money. Avoiding hefty investment in equipment (such as business vehicles) releases funds for essential activities during its early years, for example, customer acquisition activities such as sales, marketing, and customer experience. While owning your own equipment might save money in the long term, there will be no long-term option for your business if you can’t establish a customer base early on.
Leasing Vs Buying: Key questions to ask yourself
- Will this piece of equipment always be required by my business? Could my product change following customer feedback? A new business strategy?
- Does this piece of equipment significantly improve the quality of my product?
- Does it speed up the production/delivery process?
- Can the above only be achieved with a state-of-the-art model, or can a more affordable alternative offer the same results?
- Would I be responsible for maintenance?
- Would my equipment require upgrading down the line? Would this be via modifying current equipment, or require complete replacement?
- Am I aware of the different tax implications of leased and owned equipment?
While ownership tends to have a cheaper overall cost, younger businesses that are focused on growth are likely to be better suited to a ‘try before you buy’ lease approach. Always evaluate the equipment in question and your requirements of it – if it’s essential to your business and won’t require frequent replacing then buying outright is worth consideration. You will also be in control of how, when, and who fixes it should it go down and your production is at a standstill. Every business is different – ensure you’re clear on your figures before making any long-term investment decisions.
Second hand equipment
Previously owned office equipment can provide a budget-friendly option for startups. Office furniture, computers, printers, etc, can be purchased for a fraction of the price. However, with the saving can come significant risks. Used equipment is sold as-is, typically it hasn’t been inspected and doesn’t come with a warranty. You won’t know its history, how well it’s been maintained or any previous problems. Refurbished equipment is a less risky option as it’s inspected and reconditioned to ensure it’s up to the seller’s standards before it is offered for sale. It might come with a limited warranty or offer the option to purchase a warranty with it. You could even receive a full report of its condition, depending on what item it is. While less risky, you should still find out exactly what’s involved in the refurbishing or reconditioning process.
There are also strict legal responsibilities around re-supplied products. You might not know if they’re being adhered to by the person you purchase from. This can be a risky choice, especially if your equipment could pose a health and safety risk to yourself and others.
(For those considering buying new machinery for use at work, you can access the government’s short guide to the law and your responsibilities. A quick Google will also direct you further to helpful resources specific to your business requirements.)
For any startup business, marketing is crucial in order to raise awareness of your business and acquire new customers/generate sales. However, marketing costs can quickly add up if you’re not savvy with how you invest your funds (one of the reasons you need to have a well-planned marketing budget). Luckily, there are plenty of low cost ways you can market your business… here are some of the most notable areas where you can keep costs low whilst still delivering results:
DIY website builders like Squarespace and Wix are a cheap and easy way to build your online presence, whilst Shopify is a great solution if you’re launching an e-commerce business. Using an out-of-the-box option can also be a lot more cost-effective to manage in the long-run as you’ll be able to implement changes yourself – without having to bring in expensive developers or web agencies to update the design or content.
Whilst there are plenty of readymade templates you can utilise so your website looks slick and professional, the downside is that may not have the custom functionality or unique look/feel that you want. However, in the early days of your business you’ll want the ability to go-to-market quickly and be more agile. On this point, it may be worth looking into whether your business could sell its products on marketplace websites such as eBay and Amazon.
Using digital marketing channels to promote your business is generally lower-cost but also allows you to more closely evaluate performance. That means you can quickly identify which activities are generating the best results and move your budget accordingly and/or rejig your campaigns. If you can see, for example, that Google Ads (paid search) is the source for the majority of your sales it makes sense to spend money on this channel. Equally, you can reduce wastage by only targeting specific audiences who you know are likely to buy your products. This is especially relevant to social media advertising where you can promote your business on people’s feeds based on their profiling information or, even better, by retargeting people who’ve been to your website.
Email marketing can be an effective and inexpensive way to drive sales and leads, grow brand engagement, increase customer loyalty, promote events, grow your fanbase and conduct research. You’ll need to consider what strategies you’ll undertake in order to grow your email database, but once you’ve grown your subscriber list it represents one of the cheapest ways to get your brand in front of people regularly. Plus, there are a number of low-cost email marketing software options – with the likes of Mailchimp and HubSpot also offering free plans.