Lean lessons for startup success
Building a successful startup has never been easy. Despite all the headlines in recent years about ‘unicorn’ startups like Getir, Stripe or Klarna that quickly achieved valuations of over US$ 1 billion, the hard truth is that 9 out of every 10 startups fail. Even among venture capital-backed startups, with the additional resources, expertise and contacts this implies, only around 25% succeed.
It might not be a surprise to know that the top reason for a startup to fail is running out of cash. But the other main reasons causing startups to fail are not about the level of investment in the business. They focus more on the strategic and operational challenges of scaling a startup: lack of market, getting outcompeted and a flawed business model.
It’s with the aim of helping startups avoid these pitfalls and grow into successful businesses that Four Principles, the Lean management consultancy that operates as joint venture with Abdul Latif Jameel, is increasingly being asked to apply its expertise in Lean startup methodology to clients in the Middle East, Europe and further afield.
“Over the last couple of years, there’s been a lot of activity in venture building and startup financing in the Middle East, particularly in the UAE, with venture capitalists coming in looking for opportunities. This has led to increased demand for Lean startup advice and support around the best ways to build a startup to maximize the chances of success,” says Patrick Wiebusch, who along with Seif Shieshakly, co-founded Four Principles in 2010.
So how does Lean startup methodology differ from the traditional model? One of the biggest differences is the speed at which concepts are developed, tested, and revised, in response to consumer feedback. In a traditional startup model, the founder draws up a five-year business plan based on extensive market research into things like markets, customers, competitors, growth projections. They then spend a lot of time presenting the plan to potential investors and getting grilled on the details – again, a time-consuming process. If they are successful in attracting investment, the team begins work on the launch, usually in ‘stealth’ mode to prevent potential competitors from catching on. It’s only once the product is complete that it’s launched into the market and the rest of the business plan is implemented.
In today’s fast-moving commercial environment, however, this model seems increasingly outdated. One of the big problems with the traditional approach is that you have limited opportunity to run the concept by potential consumers or get feedback during the build-out period. The risk is that you spend months or even years developing a new product or service, only to find out it’s not what the market wants. This is where the Lean startup approach comes into play. With a Lean startup, the focus is on getting a minimal viable product (MVP) to market as quickly as possible, and then continually revising it and tweaking based on real operational experience and market feedback until you get it right.
“In the Lean startup method, the focus is on iteration,” explains Seif Shieshakly. “Why iteration? Because it’s about continuous short cycles of attempts to figure out what is working and what is not, revising, tweaking, improving until you get it right, as opposed to focusing more of your time on either wooing investors or developing a full-blown product that only sees the light of day at the very end of the development process.”
The heavy tech element in many modern startups makes them particularly suitable to the Lean startup approach, where software can be continually tested and revised based on real-time user feedback and data. Lean startup is not only for tech businesses, though. It can work just as effectively across most sectors, from fast-moving consumer goods to industrial pumps or food and drink outlets.
“A process is a process. Whether you’re performing heart surgery or manufacturing a pump or doing pest control, at the end of the day it’s a process. So Lean startup is not limited by a specific industry or a specific technology. That’s what’s great about it. Everyone can benefit,” says Seif.
Bob Mumgaard, CEO at Commonwealth Fusion Systems (CFS), in which JIMCO (the Jameel Investment Management Company) is an investor, says that CFS draws on Lean startup principles, albeit with a more limited scope, in developing its fusion technology. CFS is developing one of the world’s first commercial fusion energy systems. Mumgaard says that from the outset, their strategy was to publish their ideas early, get as much feedback from peers as possible, and to keep iterating and refining to achieve an MVP, rather than taking 5 or 10 years to build a fusion machine and only revealing it to the market at the end.
“Our strategy was taking the thing we understand the most and get that into the market as fast as possible. Then we can improve it later. We can make it better. We’ll have many, many years to make these things better once they’re proven to be useful,” says Mumgaard.
Patrick Wiebusch gives the example of a restaurant that regularly tweaks its menu based on customer feedback, compared to one that launches a whole new menu every six months, only to find that half its customers leave because their favorite dish has disappeared.
In Lean startup, failure is a good thing. It is seen as a natural consequence of risk-taking. By failing quickly and productively, companies learn what works and what doesn’t, so they can move on to the next option and are less likely to go bankrupt by sticking with the wrong idea.
“The logic is ‘fail fast; fail cheap’, so you can pivot and find the business model, the right service approach, and so on, that makes you faster, cheaper and more successful in the marketplace,” says Patrick.
Along with this, goes the idea of knowing when to cut your losses rather than throwing good money (or time, or resources) after bad ideas. No matter how much effort, money or both a company has put into test-driving a business plan, if the response shows the market isn’t interested, it’s back to the drawing board.
“When you follow the Lean startup approach, you need to leave your ego at the door. You can’t afford to get too attached to your initial plan or idea, even if you’ve been working on it for years,” comments Patrick. “If you truly want to innovate, you have to be totally open to new ideas, including those that may go against what you first thought.”
In essence, he says, the whole Lean management approach – not only the startup element – is about the application of common sense with a structured framework. But when you are starting up a new business and you’ve got dozens of stakeholders watching your every move who are used to doing things a certain way, it is not easy to push back and say you want to do it differently. Or if you are in an industry with defined processed and ways of working, the easy option is to just do what everyone has always done, not introduce a new approach.
“The Lean startup approach provides the application of common sense at every step. It’s the guiding framework that keeps pulling you back to the main question: does it create value from a consumer/customer perspective? And can I do it faster, better, with more quality and more features in a cheaper way?” says Patrick.
Disrupting the future
For larger organizations, the benefits of a Lean approach can be just as powerful, but the established structures, processes and bureaucracies in place can make it harder to implement. To help bigger clients overcome these hurdles, Four Principles has launched a ‘Disruption-as-a-Service’ (DaaS) offering, in conjunction with its European partner, Martian & Machine.
The DaaS service is a way for larger companies to use the Lean startup approach to build innovative, disruptive solutions within their own organizations. The DaaS approach helps companies establish an environment in which to launch and iterate new products and services with a focus on real delivery and immediate generation of market traction. The primary goal is to reach the MVP with the lowest investment of cost and time possible and enable dedicated venture building around it.
As Seif explains, “DaaS is a three-way collaboration between Four Principles as the process efficiency experts, Martian & Machine as the tech experts with vast experience of the iterative process, and the client with their product and market knowledge.”
The basic DaaS process comprises three phases:
- Phase 1 is developing and testing an idea to disrupt the market of the client, based on the idea of the ‘incumbent’s unfair advantage.’
- Phase 2 is creating a separate legal entity, developing the solution, and putting a value on it, with all three partners as shareholders.
- Once the MVP has been created, Phase 3 is moving the ‘incumbent advantage’ of the client into the startup, enabling it scale rapidly. At a certain point, the startup is then sold or the incumbent buys it themselves, with Four Principles and Martian & Machine exiting.
Seif cites the example of a room-booking service like Airbnb: “If you’re starting from scratch, it could take years to get enough room listings to be viable. But if you’re doing it on a DaaS basis as a global real estate company, you might be able to plug a million users into the platform immediately – that’s the incumbent advantage,” he says. “The idea is, how can we take the advantages of the client, who has been in the market for decades, and plug them in to the startup so it becomes a champion overnight.”
Sometimes, the client might already have a good idea of how they could disrupt their market and they need someone to come in and help them execute that idea – in effect going straight to Phase 2. Other times, the client knows they need to disrupt the market, but aren’t sure how to do it – these are the opportunities that Phase 1 is designed to help them identify.
The kind of disruption envisaged in DaaS is already common in many sectors, in particular those that are already heavily digitized, like banking and financial services, especially in Europe, North America and the Far East.
In regions like the Middle East and North Africa, the journey towards digital disruption is not so advanced, but it is quickly picking up speed, says Patrick. Levels of venture capital activity in UAE and Saudi Arabia over the past 18 months, for example, have reached their highest ever level. The UAE attracted US$ 1.17 billion from venture capitalists in 2021, with another US$ 500 million going to Saudi Arabia.
“Disruption is coming, ready or not. With Lean startup and DaaS, we are preparing our clients for the future. You have to brace for impact or start working out how to ride the disruption yourself and use these ideas and principles to build a stronger, more agile business,” says Patrick.
Recognizing the transformation
Four Principles is continuing to transform the efficiencies and thinking of businesses and business leaders across the Middle East. In April 2022, this led to Four Principles being recognized as the number one consulting firm for both Lean & Six Sigma and Process Management services by Consultancy-me.com, the Middle East’s leading online platform for the advisory and consulting industry.
The awards were based on a unique database of over 1 million data points spanning insights from clients, (i.e., buyers of consulting services), consultants and industry staff, job seekers and graduates, consultancy-me.com has ranked Four Principles as the top consulting firm for Process Management and Lean and Six Sigma services in the region.