How to build a lean startup

Say you want to start a bottled water company. You could get started by spending months, years even, sourcing the perfect water, designing killer labels, experimenting with different bottle shapes and materials, finding a bottling facility, researching pricing and finding distributors. By then, you’d be out tens of thousands of dollars before the first bottle hit the shelves. No biggie, right? But then would come the waiting game of finding out: Did the venture pay off? Did you pick the right design, price point, mineral content? Only time will tell.

Or—instead of all that—you could just create a one-page website (sites like Landerapp.com make it easy) and splash a simple mockup of your product on it. You pick a reasonable selling price: enough to cover production costs and make, say, a 50-cent profit per bottle. Then invest $100 or so in Google AdWords (the little blurbs of ad copy that show up alongside search results.) And that’s it.

Over the next week, you sit back and watch the numbers. If, say, the ads end up driving a total of 1000 people to your site, 100 of whom click the buy button, you’re in trouble. You’ve spent $100 on ads and only made $50 in return. For a few bucks, you’ve learned that your business plan needs to be seriously tweaked. (You wouldn’t need to actually fulfill those buy orders—Prospective customers might get an error message saying product isn’t yet available.)

Which approach makes more sense to you? The former startup strategy (or lack thereof) is the way far too many people approach entrepreneurship. The latter strategy—which I wish I could take credit for—is an expression of lean startup philosophy. The concept was first shared by Silicon Valley entrepreneur Eric Ries in 2008 and expanded on in his 2011 best seller The Lean Startup.

I built my own company around lean startup principles, which emphasize, above all, the importance of gauging customer demand and startup viability early on, before laying out lots of money. Ries had learned these lessons firsthand. From 2001-2004, he worked as a software engineer with There.com, a 3D virtual online social network that cost $40 million over five years to bring to market. Never heard of There.com? Upon release, the site failed to attract users and quickly faded into obscurity.

To Ries, the problem was crystal clear, a case of “working forward from the technology instead of working backward from the business results.” Translation: Far too many entrepreneurs try to impose their vision on the world, rather than listening carefully—and responding nimbly—to what the world really wants. To address this, Ries went on to outline a series of principles designed to eliminate waste and increase value during the product development phase. In the startup community, and at Hootsuite, these have become virtual commandments:

Lean Startup Hack #1
The spaghetti principle: Understanding minimum viable product
Central to lean startup philosophy is the premise that it’s OK to release a work in progress, or—to borrow an overused tech phrase—throw spaghetti at the wall and see what sticks. The idea is to get a basic, functioning version of your offering—a minimum viable product—out there as quickly as possible, then gather feedback and tweak it accordingly. This was the approach we took with Hootsuite when we were getting off the ground in 2008. The tool we initially hacked together was, well, pretty basic. It allowed users to log into multiple social media accounts from one web page and people at companies to easily share access to accounts. It worked but it wasn’t pretty. But just months after release, we had tens of thousands of users.

Once we knew we were onto something, I dedicated one-third of our 21-person team to the project. We went to work fixing the user interface, souping up features, developing marketing plans, strategizing about how to expand our user base and exploring financing options. But, importantly, all this happened only after we had proof that Hootsuite was viable.

Lean Startup Hack #2
Build-measure-learn: Creating a feedback loop
Another key element of the lean startup ethos is continuously gathering and responding to data and feedback from customers. One of the first things we did at Hootsuite was set up a dedicated forum where users could propose and vote for changes to our product. Based on early suggestions, we developed an Android app, added new social networks, beefed up security for corporate users, changed fonts and background colors and modified hundreds of other elements big and small. Changes went live as fast as we could write new code. (Just a quick sidenote: This process continues today. After a profanity-laced outcry recently about our user interface, we revamped things from the ground up.)

As we implemented new features, we obsessively tracked the impact on user sign-ups and attrition. Features that created a net gain in users we kept. The rest, we ditched. This “build-measure-learn loop”—repeated endlessly—is a major tenet of lean startup methodology.

Lean Startup Hack #3
Crunching the numbers: Data-driven decision making
When the critical time came to start monetizing Hootsuite in 2010, we used a similar data-driven approach. Our research suggested a freemium model was best way forward: Basic users could keep using our app for free; more advanced users who wanted special features would pay. But there were lots of questions: what features should we charge for; how much should we charge; should we have multiple pricing tiers; etc. So we dug into our database. We discovered that 5 percent of our users managed four or more social networks with Hootsuite. On paper, it made a lot sense to build our paywall around that criteria, charging just these “power users” and leaving the rest of our base unaffected. But would our customers revolt?

To play it safe, we decided to test things out first on brand-new sign ups. After a few nervous months, we concluded that having a paywall did nothing to slow the rate at which we added users. Armed with that data, we rolled out the paid plan to our existing base. While there was some resistance, the results were overwhelmingly positive. Many of our corporate clients actually expressed relief. Prices were fair and they now knew we had a sound business model and would be around for the long haul to support their efforts.

More than five years on, the tool we hacked together in our office is used by more than 10 million people globally and supported by a staff of over 700. It’s evolved continuously from its first iteration, which would be barely recognizable to many of today’s users. And that’s the way it should be. We could have spent those five years, and untold millions of dollars, slowly developing the perfect social media tool in secret before springing it on the world—and it might have been a complete flop. Instead we went live early, we measured customer demand and we adapted, over and over (and over) again. The lean startup approach is hardly rocket science but, applied rigorously, it can turn a good business into a great one and help a non-starter pivot to viability.

This article is published in collaboration with LinkedIn. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Ryan Holmes is CEO at Hootsuite

Image: Workers from the financial sector walk on a tram track. REUTERS/Bobby Yip