Why web entrepreneurs are leaning towards lean startup

Tue Nov 20, 2012 2:05pm EST

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Do you remember Flooz.com? Like lots of websites spawned in the late '90s, it aimed big and spent bigger. "Flooz" was a virtual currency you could use at any retailer who'd accept it, but the company squandered lots of real currency in the process—at least $35 million—before going bankrupt in 2001, after 19 months. In a world of web winners and losers, it merited its own notorious category: a "floozer," you might say.

Today, a flameout like Flooz would be unlikely to replicate in the fast-expanding world of lean startup. While the name reeks of business jargon and even sounds misleading, lean startup groups have been magnets for 21st Century tech pioneers—though the philosophy is not without its critics. Some web pundits, such as U.K. startup funding blogger Nick Pelling, say that the lean startup ethos of testing a business idea on a consumer base before deciding to develop them "lacks cojones, or 'bravery' if you wish."

Still, the exploding numbers indicate lean startup has arrived, and to stay. The Chicago Lean Startup Circle has seen membership explode by a staggering 1800 percent in three years, to 2,800 plus people. There's been similar growth in Los Angeles (where the local lean startup circle has grown to 2,868 since its founding in 2010) and San Francisco (with 3,581 members since its founding in 2009).

Todd Wyder, co-executive director Chicago Lean Startup Circle, says the ideology gets would-be web moguls to test businesses in low-risk scenarios, and proceed only if consumers approve or suggest changes that steer them in the right direction. It also saves you lots of cash and heartbreak, says Wyder, recalling a recent thank-you note from a digital entrepreneur who hadn't quite stumbled on the next Google. Yet thanks to lean startup, it didn't turn into the next Flooz, either.

"It turned out his idea had no merit," Wyder says. "But he told me that without lean startup, he would've cashed in his entire 401(k)."

Lean startup does not mean "bootstrap operation," where companies start with little or no money. Instead, the concept, pioneered by Eric Reis, a Silicon Valley entrepreneur and venture capitalist, is based on lean manufacturing, a Japanese approach to cutting waste in developing new products. Reis was also a student of Steve Blank, a Silicon Valley serial entrepreneur who preached "customer development" to build websites based on verifiable data as opposed to bravado or gut instinct.

With lean startup, the blueprint couldn't be simpler: Build a splash page with little or no investment to introduce the public to a website that probably doesn't exist yet, but still has a big idea behind it.

No business plan? No problem: You listen to what potential clients tell you as opposed to consultants. If a flood of folks expresses positive interest, then you can set to work finding coders, designers and key players to construct the site.

"The primary principle behind the lean startup is to quickly and efficiently get to a viable product," says Matt Downs, the managing director of Sandbox Industries, a website development and investment firm with offices in San Francisco and Chicago. "The approach works well within the Internet economy: It's cheap to develop and cheap to test. But it also works well offline."

As an example, Downs cites Marbles the Brain Store, a website for brain-enhancing games and products. It also has brick-and-mortar stores in nine states, including Illinois, California and Maryland. Sandbox is an investor, but its initial cash outlay was surprisingly small.

"Instead of launching an entire retail store selling brain games, we started with a $50,000 kiosk in a mall," says Downs, who sits on the Marbles board of directors. "We had minimal product selection and inexperienced ‘brain coaches' trying to sell. Did it work? Yes, in that we learned there was a market and people seemed intrigued by the brain coaches; it's just that the kiosk was the wrong medium."

Using consumer feedback, Marbles changed its approach—a lean startup tactic known as "pivoting." Look at the Marbles site and you'll notice they offer free shipping on all orders, a perk consumers love. And a 1000 sq. ft. storefront also proved popular, as "we were able to control the entire store environment," Downs says. "We also recruited more experienced brain coaches. The combination worked very well."

That doesn't mean lean startup fits every new business, though. "Generally it works well with consumer businesses where market feedback is readily available," Downs says. "The approach is less effective with life science businesses or anything that requires significant capital expenditure up front to create a viable product."

Then there's Applico founder Alex Moazed, who followed the lean model with fabulous results. Using just a credit card, the 24 year old started Applico as a junior at Babson College. Now he has offices in New York City, Boston and Santa Monica, California, serving Fortune 500 companies as a mobile application developer. Since 2009, Applico has grown from one employee to 100, with revenues of $7.5 million in 2012.

"Our success has stemmed from our ability to continuously iterate and innovate the company's business model, get it to market quickly, and constantly learn from our clients," Moazed says. "I believe in running it lean."

(The author is a Reuters contributor)

(Editing by John Peabody, Ryan McCarthy and Brian Tracey)

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