The lean start-up approach is a hypothesis-driven approach to evaluating entrepreneurial opportunities and launching new businesses that reduces risk and startup costs.
New business ventures can have significant start-up costs in investments in equipment, leases etc. Even though we may have done extensive prior research in our business idea, it’s still difficult to predict whether a business will succeed or not until you’ve made these substantial investments. In the social enterprise sector, even more than in the traditional for-profit sector, it can be difficult to secure the capital needed in order to try out new businesses. The less risky and expensive we can make new endeavors, the better.
The lean start-up approach is the idea of using piloting and prototyping to reduce inherent risks of starting a business. Once we determine that we want to launch a social enterprise and determine the business idea to launch, instead of spending time writing a full business plan or making full capital investments, how can we launch pilot to test this idea on the market and figure out what parts of the model we want to change, and whether or not we want to continue with the idea after this first pilot phase.
Lean Start-Up Approach
It has the following attributes:
- Business vision is translated into falsifiable hypotheses
- Encourages testing over elaborate planning
- Values customer feedback over intuition
- Uses iterative methods over devoting significant resources in upfront planning
This methodology involves the launch of pilots and prototypes prior to full launch of a business or a product. Originally used for new product development, it can be applied to a variety of situations such as business planning, employee job fit, or job placements. When done successfully it has several benefits:
- Reduce waste: avoid making products or offering services that consumers do not want.
- Minimize development time: incorporate feedback earlier in the product cycle and iterative accordingly.
- Reduce start-up costs: prevent unnecessary costs by better understanding business need. This is particularly important for businesses with high upfront investment requirements.
- Eliminate surprises: test key hypotheses in the business plan early, such that managers can identify unanticipated challenges.
1. Define a key hypothesis/assumption in the business model that needs to be tested.
- Test “Leap of Faith Assumptions,” or those critical to viability
- Treat the prototyping process as an experiment
2. Develop and launch a low-cost prototype (“Minimum Viable Product”).
- Focus on building a simple version to test ‘leap of faith’ assumptions
3. Start charging customers for products or services from day one.
- Charging leads to accurate data about customer demand, needs, and reveals surprises
- Potential to use tools like Kickstarter/ Indiegogo to launch product or service
4. Set operating metric targets (lower-volume) and track results.
- Track qualitative metrics (do people like/dislike the product, general feedback)
- Track quantitative metrics (number of users, customers, revenue, etc.)
Lean Start-up Social Enterprises
Employment social enterprises should test employee job fit during the pilot phase. Employment-focused social enterprises must avoid starting businesses that are not appropriate for the target population they are working to serve. Management often discovers unanticipated operational and logistical challenges at the launch of a business. As a result, it is possible to mistakenly think a business is good fit for the target population. Before conducting detailed feasibility analysis(e.g., market, competition), an employment social enterprise can create a low-cost pilot to determine whether a job is suited for the target population. If this business is not suited for the target population, then that should be a deal breaker. It is important to also consider safety and liability during the pilot.
There will be situations where social enterprises cannot conduct a pilot/prototype. For example, it will be difficult to launch a pilot in industries that are heavily regulated and require licensing such as pest control. If a pilot is not feasible, social enterprises should conduct highly specific customer interviews. Accordingly, it is important to place an increased emphasis on the quantity and depth of these interviews.
When conducting interviews, design the questions to serve as a proxy for a pilot. For example, an interviewer could ask about:
- Sales: Would you sign a contract today to begin purchasing services from our company? If not, why? What are the tradeoffs you are debating (e.g., switching costs, pricing)? What are your concerns with switching suppliers?
- Quantity: How many units would you purchase at this price today? What could we offer that would cause you to purchase more units (propose ideas; product variations/pricing)?
- Competition: Who is your current supplier of these goods/services? How many units do you purchase each day/week/month/year? How much are you currently paying for these goods/services? How would you describe the quality of your experience with this business? What would you need to feel comfortable switching suppliers?
- Product feedback: Is this the exact service offering you are looking to purchase? What features should we add? Are there any features that you do not need?
- Making connections: Do you know other potential customers that I should be speaking with? Are there others industry experts/suppliers that I should speak to?
Throughout the pilot or prototype process, businesses should measure results, incorporate learnings, and adapt products accordingly. Decide on the ~5 variables most critical to success of the enterprise and track them on a weekly basis. For example, your social enterprise could track:
- Revenue by product / service line
- Quantity of products sold
- Measureable customer satisfaction
- # of hours worked by employees
- Employee satisfaction
Crucial metrics should be tracked weekly so that managers can make decisions based on real-time data – financial statements are not sufficient as they are provided monthly.
Continue, Pivot, or Close?
At the end of the pilot period, the social enterprise should determine whether to launch the business or develop criteria to “pivot” or change an underperforming business. Managers of underperforming social enterprises need to decide whether they should:
- Continue the current path,
- ‘Pivot’ and pursue a new path, or
- Close the business
Unlike private sector businesses that can simply shut down, employment-focused social enterprises must also focus on the target population. However social enterprises can ‘pivot’ and be successful. For example, a social enterprise in REDF’s former portfolio decided to pivot away from one-time projects because they were not profitable; instead, the company now focuses exclusively on contractual projects.
Leadership of the social enterprise should set specific criteria metrics that –if not met –require a pivot in the business strategy. Social enterprises should start with the enterprise’s venture criteria, specifically:
- Number of jobs slots created for the target population
- DBL profitability metrics (Is the business breaking even on business costs?)
- Opportunity for advancement in the career; length of employment for person
Social enterprises often take time to reach scale, so the change criteria must include a specific time frame. There is no best practice for this time frame, as businesses in certain industries reach breakeven and scale employment faster; this must be a judgment decision made by management (e.g., if the business does not have 30 employees in 2 years, we need to pivot).