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What Does It Mean to Be a Lean Startup?

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2015-01-06-DavidEhrenberg.jpgAuthor David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with day-to-day transactional accounting, CFO service, tax, and valuation services and support. He's a financial expert and startup mentor whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.

Read or listen to Eric Ries and Steve Blank, the first espousers of The Lean Startup, and the philosophy seems pretty straightforward: building a company involves following a systematic process that harnesses customer feedback to rapidly transform your idea into a viable product that addresses a specific problem.

Lean Startup Steps

By now the elements of the approach are also pretty well understood. Namely:

  • Start with the problem you're trying to solve.
  • Quickly develop a "minimum viable product."
  • Validate customer acceptance through continuous testing and pivoting as necessary.
  • Incorporate market input into a "build-measure-learn" feedback loop.

Of course, the linchpin of this framework is figuring out what's not working, then retooling or even completely shifting direction if you need to, quickly and efficiently. The appeal is obvious, but what does organizing and running your startup in this way really mean? More directly, how does it carry over into how you handle your accounting, HR, business and organizational planning activities?

Lean Startup: Business Planning

A whole industry has grown up around the idea that business plans are now no longer necessary. This view is dead wrong, in part because it stems from the wrong premise.

A business plan isn't a straitjacket, keeping you from moving quickly and seamlessly iterating. It's a working document that you should think of and utilize as your startup road map. Another thing: creating a business plan isn't something you should be doing in isolation, as some lean startup advocates describe the process. In fact, in order for it to be effective you need to be out there locating and talking to potential advisors, mentors, customers and team members as well as actively researching and kicking the tires in terms of your assumptions.

Using your business plan effectively -- as a tool to capture and validate your assumptions, quantify your potential markets, and devise a clear initial plan of attack -- will allow you to continuously rework your assumptions and turn them into actionable results.

Lean Startup: HR

Some of the things you need to include in your business plan are:

  • Estimates of your resource requirements
  • How big your team needs to be and when
  • How to meet those needs given your expectations around cost, projected budgets and forecasts.

This is a perfect fit with the lean startup practices of keeping your team lean while you work on building a minimum viable product. You should then test it, modifying it based on customer feedback before you start to scale.

Outsourcing is one of the most logical answers to meeting this challenge. It's one of the best ways to keep your cost structure low and your internal resources concentrated on developing your business. I really recommend it at least initially for back office, compliance and other non-core functions. Outsourcing doesn't mean handing over a function then forgetting about it. But it does mean bringing in functional experts to manage non-core functions so that you're free to concentrate on building your business.

You can also keep a lid on costs by using contractors and freelancers (make sure though that you are appropriately categorizing them and in compliance with tax and reporting).

Following a lean startup model means that when you do hire, you need to focus on affordability and potential versus seeking out the most experienced (read expensive) candidate. Be slow to hire. Bring on permanent staff only when you need to and when you can be reasonably sure that the ROI will be there.

Lean Startup: Accounting

This is where I have the biggest quibbles with lean startup principles. I get that some of the metrics needed to evaluate startups will be different from those of already developed companies. And yeah, profitability measures aren't applicable at this point. But in addition to rigorously monitoring cash, coming up with and regularly tracking the metrics that make sense for your industry and stage, you need to meet some basic informational requirements concerning startup performance -- both for your business' sake and the benefit of your investors. You can't simply ignore or forego income statements, balance sheets and other key financial documents and analysis because they're not convenient or flattering.

The purpose isn't to bog you down with a bunch of procedures that slow you down, but to provide credibility, comparability and transparency. It's also to give you (and your potential investors) clear guidance on both your current position and where you're headed.

Which lean startup principles have you implemented in building your startup?

Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program.

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