Fail Fast or Win Big: The Start-Up Plan for Starting Now (2015)

CHAPTER TWO

The New Way: The LeanModel Framework

Every generation has its unique elements fostering entrepreneurship. Today it’s the many new tools and resources that make it much easier than it used to be to create a company relatively quickly with little investment risk. Cloud-based tools like Shopify or Big Commerce let you build an e-commerce website in less than a week to test a product or service in a targeted marketplace for about $35 a month. Appbuilding tools allow you to rapidly build a mobile application and test it with consumers.

“You don’t learn to walk by following rules.
You learn by doing and falling over.”

—Richard Branson, founder, Virgin Group

Farmers’ markets, independent stores, food trucks, and new types of kiosks and vending machines allow you to rapidly test your idea with a reduction in risk. New crowdfunding platforms allow you to raise capital with little personal risk. It’s not about taking your time and overanalyzing opportunities. It’s about moving fast.

In addition, the needs of three very different generational groups—baby boomers, gen X, and millennials—are shaping several marketplaces and creating growth in multiple industries, while members of those generations are realizing that how their business lives were supposed to go is no longer the case. Baby boomers have extended their retirement (forced or not) and are looking for ways to leverage their skills and experience. Gen Xers are deep enough into their careers to know that building a “solid career” just does not hold any special meaning anymore. “Follow your passion” is becoming more attractive as a possibility. And millennials, who can’t imagine a world where people worked at the same place for 40 years, let alone 40 months, want everything yesterday. These are people primed to take advantage of the new entrepreneurial tools, and the last piece of the puzzle is a simple shift to the mentality of the LeanModel Framework. The investment world is primed for this mentality, too.

I teach several entrepreneurship courses at San Diego State University, one of which is related to developing a business plan/business model for an idea to undergraduate students. In 2009, I was watching the “entrepreneur” marketplace (venture capitalists, angel investors, and entrepreneurs) and could feel that the traditional model of creating a company, which included a detailed business plan, was just becoming irrelevant. It’s not that the “planning process” of writing a business plan is not valuable—it is. It’s just that time, in the start-up learning and obtaining customer feedback, is precious. You’ll spend months or even more than a year to write a plan that no one really wants to read anyway. Investors, or even future partners, just want the opportunity in a nutshell.

At Sequoia Capital, one of the most successful venture capital firms in Silicon Valley, they are asking prospective entrepreneurs to limit their presentations and focus on the most critical information needed to understand the opportunity they are proposing, using a slide format (which ideally limits what an individual can put on a set of slides). In their words, “We like business plans that present a lot of information in as few words as possible. [Our] business plan format is a presentation, with 15-20 slides, is all that’s needed.”

Here is Sequoia Capital’s business plan format, their requirements for their slide presentation, so they get what they believe is important to them:

Company Purpose

Problem and Solution

Why Now?

Market Size

Competition

Product

Business Model

Revenue Model

Team and Financials

That’s a whole lot less than a traditional business plan.

Brad Feld, an entrepreneur and venture capitalist, offers his point of view on the value of business plans: “By 1997, when I started investing as a venture capital investor, I was no longer reading business plans. And I don’t think I have since then. They have become a historical artifact.” This sentiment is echoed by industry professionals and entrepreneurs.

A LEANMODEL FRAMEWORK: THE FUTURE

So, instead of spending months writing a business plan and then looking for investors, who may not give you any money anyway, adopt the LeanModel Framework. The LeanModel Framework is made up of four integrated components: Lean Resources, Business Model, Rapid Prototyping, and Customer Truth. See Figure 2.1.

Figure 2.1 LeanModel Framework

Let’s take each of these elements in turn:

• Lean Resources: Empower a mentality that believes less is more; look to get your company started in the leanest way possible by leveraging everything that you can.

• Business Model: Take the time to really understand your marketplace, current trends, and your target customer segment, then craft a business model that not only makes common sense but it makes money.

• Rapid Prototyping: If you believe in using lean resources to move fast, then with the same mentality, create a minimum viable product or service that you can test with the marketplace as rapidly as possible.

• Customer Truth: Although selecting the right target customer segment is critical, listening to and gathering feedback from your potential customers is crucial. Feedback from customers is what will often give you the insight needed to iterate, pivot, or abandon your idea.

This is the new entrepreneurship model that today’s entrepreneurs need to embrace in order to move faster and take advantage of an opportunity. Thus, you’ll do more with less by creating a solid business model, rapidly creating a prototype of your product or service to test with customers, using fewer resources, and perhaps utilizing crowdfunding to raise the money you need to move quickly into the marketplace. You’ll get customer feedback, make adjustments based on real information instead of projections, and continue to run forward.

If the LeanModel Framework is the rocket ship for entrepreneurs, in Chapter Seven I give you the fuel: crowdfunding. For now, though, let’s look at how you might surface an opportunity worth chasing.

ENTREPRENEURS, BE CURIOUS

As a potential entrepreneur, you need to be manically curious about a potential product or service—curious to the point you will investigate and research its potential customers, the trends surrounding it, and the marketplace for it. Here’s how to get started, based on the experiences of others; this advice will help you gather better information that may actually get you started:

1. Understand the actual marketplace. If you have an idea for, let’s say, the pet industry, then go visit a pet store and take careful note of the products and services currently offered. Look at online e-commerce pet-care websites and see what their key attributes are.

2. Talk to the customers. You can spend all day online or go to the local university library and do research, but there is nothing like talking to customers to get insights. Stand outside of a store and conduct a survey. Visit a dog park or boarding kennel. Learn something about what people want and aren’t finding.

3. Visit your competitors. If possible, visit your potential competitors and see how they run their businesses. If you have the time, go work for a competitor and learn even more. Look at not only what to do but also what not to do as it relates to customers or the business model.

4. Understand the key trends. Pay attention to what is really going on that would affect your marketplace or your customers. In addition to getting key insights via research or trend tracking, consider attending related events or trade shows to learn even more.

5. Test your idea. Find a way to test your idea for a product or service even if it’s just a prototype or early product. You want to start a food-truck business? Create a taco stand and test your products with real customers. You want to open up a dog kennel? Start a dog-sitting or dog-walking business and learn even more. Have a better idea for new sunglasses with 100 percent recycled materials? Use a local or offshore manufacturer and order 500 pairs. Sell the glasses to local boutiques or create a website and try to sell them online, using key word terms for the search engines to pick your product and direct it to attract the right customers. Learn and adjust.

There are a host of companies that moved into marketplaces and starting selling products to determine if their marketplaces and/or target customers were ready and willing to try something else to meet their needs. Car2Go, a by-the-hour car-sharing service started with a market test in Austin, Texas. When that proved successful, the key managers considered what would be the next city to test-market. They conducted research and reviewed several potential marketplaces. Despite all the research, there was no conclusive data that pointed to one city over another. So they decided to test San Diego, California, on a very small scale. When that proved successful, they grew the operation in San Diego and have now launched in other markets.

In other words, the research will only tell you so much. You have to test to see if your “marketplace timing” is right for a new product or service and if you have targeted the right customer segment. If not, you adjust or abandon the idea. Or, if you are on to something, then you figure out ways to accelerate it. Regardless of your situation, you move faster. You don’t have time to write a 30-page business plan. You create a business model on your potential product or service and you go validate it.

THE BUSINESS PLAN IS DEAD; LONG LIVE THE BUSINESS MODEL

About four years ago, an entrepreneurship professor approached me and asked me if I had heard of a new book that he had recently come across, and he had begun using in his social entrepreneurship course. I hadn’t. The book was titled Business Model Generation, by Alex Osterwalder and Yves Pigneur. He handed me a copy and told me there was a tool inside called a “business model canvas” that did a great job of helping an entrepreneur to rapidly develop a business model prototype that could be tested quickly with target customers.

“How quickly?” I asked.

He replied, “I have my students creating a business model around an opportunity, getting feedback from 100 potential customers, and iterating the business model in about six weeks.” I immediately read the book (learn more at www.businessmodelgeneration.com).

The nagging feeling I had about business plans had just met the reality of a new tool that could rapidly define an opportunity via nine critical business model elements—all on just one page. Traditional business plan or a one-page business model tool? Which one seems simpler to use? Which one can you modify on the fly with customer feedback? Look, some experts would argue, it’s just a simple tool. But this simple tool is just what entrepreneurs need to focus on their product or service, and get them to move faster to see if they have something that could win big.

This type of tool allows entrepreneurs to get started quickly, and then if they need to explain the opportunity to, say, Sequoia Capital, they can explain what they learned, describe the size of the opportunity, project the size of the market, relate what lessons have been learned to date, and exclaim how they will make money. All in about 10 to 15 slides.

DOES YOUR BUSINESS HAVE A BUSINESS MODEL?

Many entrepreneurs I meet simply do not take the time to really think through and consider the inner-workings of a start-up opportunity from a business model perspective. This is a critical part of the LeanModel Framework, however. I will cover the business model and its major components in more detail in the next chapter, but here is a summary of the key elements for you to consider as you shape and iterate a business model for your own start-up.

• Key Target Customer Segments: This defines the one or multiple target segments you are targeting with your product or service offering.

• Value Proposition: This describes the unique value you are delivering to your customers with your product or service. It’s the response to the question: “What problems of our customers are we helping to solve?”

• Distribution Channels: You determine your key distribution channels that will deliver your product or service to your potential customers (i.e., online direct, retail, ecommerce partners, etc.).

• Customer Relationships: You should be thinking about how to engage with your customers, and how to carry out a longterm relationship with them. If you are dealing with more than one customer segment, you might find a very different type of relationship is required for each. The key question is “What do you want customers to say or feel about your product or service?”

• Revenue Streams: You need to identify exactly how you will drive revenue from your product or service (i.e., online sales, retail sales, indirect through partners, licensing, etc.).

• Key Resources: This describes the most important assets required to make a business model work and is key in the functioning of all other aspects of the model. What is it you need to actually start and run the business?

• Key Activities: These are activities that are crucial in making the business work. You might need to accomplish certain tasks, hire a key person, sign a critical contract, and so on.

• Key Partnerships: These describe one’s network of suppliers and partners that exist to allow a business to function properly. These could be a key manufacturing supplier, a key distributor, a key technology company, and the like.

• Cost Structure: This defines costs that are both direct (related directly to the product or service) and indirect (related to the operations of the business like employees, rent, and any other overhead costs).

In addition to understanding that the world has changed forever and that speed to market is critical, it’s important to embrace all the elements of the LeanModel Framework (lean resources, business model, rapid prototyping, and customer truth) so as to take advantage of an opportunity and to move fast and perhaps build an amazing company.

Welcome to your future.

ENTREPRENEUR INSIGHT

About 18 months ago, I was approached by Duncan, an entrepreneur who had just started his third mobile company. He had an idea for a new application that he felt would tap into the mindset and behavior of 14- to 20-year-olds. He had done extensive research, knew the marketplace, and had noted all the key trends. He just did not want to spend $250,000 to build the application (both iPhone and Android versions) without interacting with customers.

How do you test a mobile application when it’s not built yet? I encouraged Duncan to design the mobile app in HTML (like a website) to mimic key features and to test the application with students on campus using iPads. By offering an iPad giveaway promotion, he encouraged about 300 students to “play” with the application.

Based on student feedback, Duncan completely changed the features, functionality, and design of the application. Now produced and distributed, it is well on track to do over 2 million downloads in the first year.

KEY TAKEAWAY

You are not in the business of writing business plans. You need to adopt a LeanModel Framework mentality and be willing to learn enough about your opportunity so that you can test your product or service in the marketplace. Rather than spending five to seven months writing a business plan, test something.