According to the U.S. Labor Bureau of Statistics, roughly 50% of startups fail within the first five years of operation. That could be a decade worth of effort and a significant financial commitment down the drain in less than half that time. As a result, many entrepreneurs have looked towards employing the lean startup methodology.
It is a business strategy, presented by Eric Reis in 2008, that works on the principle of testing (an existing product) as you go instead of forming a complete business plan before execution. It focuses on developing products based on consumer feedback so they can be readily changed. But is this method the correct one for you to undertake?
Let us weigh the business approaches of lean and traditional startups to decode their operations.
Observing the responses of each on different matters is the key to understanding which startup is more suitable and probable for you.
Following a Business Strategy
What a Traditional Startup Would Do
They develop a business plan, which is a detailed guide to their business strategy. It involves highlighting the mission and vision of the venture. There will be a comprehensive description of the resources and finances, which has been ascertained through extensive market research on the industry. It holds the feasibility of the project, which is important for investors.
What a Lean Startup Would Do
They mimic a business model on a trial-and-error basis, better known as validated learning. By taking a Minimum Viable Product (MVP), they begin rapid cycles of testing the product and receiving feedback. Their focus is on producing a basic good that is ready for market launch and then receiving even more customer feedback from it.
Speed of Operation
How Fast a Traditional Startup Operates
Due to the comprehensive nature that a traditional startup owner employs while developing a business strategy, the speed of operations is generally slower. This means extended planning time, long development cycles, and a later (or sometimes delayed) fully developed final product. As a result, it takes longer for the product to reach the market.
How Fast a Lean Startup Operates
Lean startups are all about speed. They work on the process of iterative development and a swift (but well-thought-out) planning process. This leads to faster decision-making, which further speeds up the launch into the market. The sooner a product is on the market, the more they can learn from it through customer responses and alter it accordingly.
Organizational Structure of the Firm
How a Traditional Startup Is Organized
These have a clear layout of the organizational hierarchy, with each member completing an assigned role within a specific department. Most employees generally stay within the department. Crucial decisions are generally made by upper management, with some occasional input from other employees.
How a Lean Startup Is Organized
In a lean startup, there is a flat structure with no clear-cut hierarchy (apart from the major positions). This encourages collaboration between different members and creates multi-departmental teams. Unlike a traditional startup, all teams are open to providing input in the decision-making process (post-customer feedback) due to a decentralized company formation. This allows for quicker responses to market demands and a faster release of the changed product.
Response to Failure
How a Traditional Startup Responds
Traditional startups often generate heavy funds from different investors. These investments are upfront with the educated hope of the venture succeeding. Thus, a failure of the business plan and a rejection of the product by the consumers would present massive losses. So, they must make plans for recovery in such a scenario.
How a Lean Startup Responds
On the contrary, failure does not mean the end of the business for a lean startup. Instead, it is an opportunity to learn from the mistakes and pivot the strategy based on feedback. Lean startups are funded through crowdfunding and other means that require a lower initial investment. Thus, the recovery of losses is quicker.
Conclusion: Deciding the Right Methodology
A traditional startup takes time to develop before final execution. It comes with risks, but it also comes with the appropriate rewards. On the other hand, a lean startup is less risky, but the chances of business success depend entirely on consumer feedback, which could be negative from the get-go. Choosing the correct business approach after considering your business goals, tolerance for risk, market conditions, and the thirst for speediness.
