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Entrepreneurs of conventional businesses are required to develop a 5-year business plan.

Typically, traditional enterprises follow a conventional, resource-intensive, and costly method involving thorough reflection, planning, and implementation with little customer interaction and feedback. To persuade potential investors that the approach is a viable investment, careful consideration of comprehensive financial projections is required during the planning phase.

After receiving financing from venture capital firms, conventional entrepreneurs develop products in isolation, spending countless man hours while maintaining confidentiality to prevent rivals from duplicating the offering.

Each of their traditional stages of product development occurs in a sequential order and lasts for several months. They rely on intuition rather than consumer feedback and notice too late that the offer they launched a while ago is not acquiring traction.

The Lean Startup methodology, on the other hand, prevents businesses from wasting valuable resources and man hours on consumer-repellent concepts or prototypes. Eric Ries coined the term "lean startup" in his book titled "The Lean Startup." The methodology is based on Toyota's Lean Manufacturing philosophy, which emphasizes optimum utilization of resources and waste reduction.

The fundamental concept of the Lean Startup methodology is that when entrepreneurs concentrate on continuously developing products to meet the needs of early customers, they minimize market risks, avoid substantial initial project financing, expensive new product releases, and even bankruptcy.

Lean businesses forgo elaborate business plans and laborious planning. Based on consumer feedback, they evaluate unproven hypotheses, refine, and improve the product.

The goals of employing the Lean Startup methodology are to eliminate wasteful practices and superfluous expenditures, acquire continuous consumer feedback, refine the product based on feedback, and forsake a flawed concept without wasting a great deal of money.

The Lean Startup methodology is implemented using a four-stage iterative cycle referred to as the Lean Startup Cycle. The four phases consist of:

1. Map Ideas Using the Business Model Canvas
2. Develop and Test Your Hypotheses
3. Create a Minimum Viable Product (MVP)
4. Learn, Validate, and Improve

Let's investigate in greater detail the first two phases of the Lean Startup Cycle.

Stage 1: Map Ideas Using the Business Model Canvas

During the first phase of the cycle, entrepreneurs must innovate new and existing Business Models using the Business Model Canvas.  The Business Model Canvas graphically depicts on a single page the nine essential building blocks or elements of Innovation that every startup must analyze critically.

The nine building elements are customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partners, and cost.  Executives must make assumptions, pose inquiries, and discover answers regarding each component.

Stage 2: Develop and Test Your Hypotheses

The second stage entails conceiving, testing, adjusting, or abandoning hypotheses based on the insights obtained from a comprehensive Business Model Canvas evaluation.  Founders decode concepts into Business Model hypotheses and test their customer demand assumptions.

There are three categories of risk associated with hypotheses: desirability, viability, and practicability.

• Desirability: The goal is to determine whether or not the consumer desires the product. Example of a testable hypothesis: "Children aged 9 to 15 will find this product appealing."
• Viability: This category of hypotheses evaluates the risks associated with the Business Model's viability. The goal is to ensure that the product addresses consumer issues and that it is beneficial to find a solution.
• Feasibility: This section assesses the hazards associated with the startup's capacity to develop and deliver products, crucial capabilities, and necessary skills. Example of a testable hypothesis: "We can develop X number of products within two months."

Interested in learning more about the steps of the approach to Financial Forecasting? You can download an editable PowerPoint presentation on Lean Startup Methodology here on the Flevy documents marketplace.

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