Is leaner always better?

by Maya Farah

The concept of the lean startup has been on everyone’s mind for some time, and seems to be one of the key “entrepreneurship themes” HBS is focused on this year – from this LTV course, to Eric Ries’ talk, to the MVP competition.

We all obviously buy into it – I am even in the process of trying it out, as I am working on building a Minimum Viable Product for my own startup as we speak.

However, as we discuss new ventures each week, and interact with their founders and CEOs, I can’t help but wonder whether lean really is always the way to go. I was relieved to know I am not the only skeptical, when I came across an article written by Ben Horowitz in 2010, where he pitches the case for the fat startup.

My main concern with being lean is the following: while it definitely minimizes your downside – you are likely to fail cheaper and less often when you’re lean – it might also lower the maxima that you can achieve, for the following reasons:

1. You don’t give yourself enough runway – if you’re introducing a new product that you need to educate the market about (or even create a market for), you’re likely to get a lot of false negatives at the beginning. With a process of fast iteration, this might make entrepreneurs discard a lot of ideas that are viable in reality.
2. Too many tests slow down your progression – you launch too late, you scale up too slowly, you hesitate to hire a sales force, etc. and therefore give up market share or your first mover advantage. (a counter-argument to that is that on the aggregate, by replacing lengthy testing cycles by short ones, you end up launching faster and wasting less time)
3. You release sub-par products that are not good enough to generate demand – while an MVP is likely to provide you with insights 9 times over 10, some products need to be at more than a “minimum viable” stage to be released to testers and early adopters. Think Dropbox, when Drew Houston waited long enough to make sure the big glitches were ironed out before he committed to storing users’ data.
4. You can get stuck in what Horowitz calls startup purgatory – yes, you made sure that your Customer Acquisition Cost is less than a third of your Customer Lifetime Value, therefore your startup is viable and maybe cash flow positive. But you’re not likely to hit it big anytime soon, and you’re stuck in mediocre-land – at a time of your life where your opportunity cost is very high.

If you were investing in one of the big visionaries, the Steve Jobs of this world, would you advise them to be lean in their product development? Most probably not. You would want them to step on the gas and capture as big a part of the pie as possible.

However, chances are, based on startup figures, that you’re actually going to be in the 90% who do not achieve home runs, which means that, statistically, leaner is better for you.

Therefore, when deciding on which end of the lean spectrum you would want to be, some criteria to consider are opportunity related:

• Are you starting a business in a market growing super fast? (high opportunity cost of starting slow). Are you trying to create a market that doesn’t exist? How fast is the existing/potential competition likely to move?
• What will your success most likely depend on? Perfect product, customer reach, other?

But others are more personal:

•  Are you a first time entrepreneur? Do you still have a much higher failure risk/cost and therefore need to minimize your downside?
• How much can you trust your intuition? Have you been in the industry/function you are building a business in for a long time? (And have you therefore recognized and internalized a lot of the trends and needs in an accurate way?)
• What are your personal objectives? Are you more afraid of failing or of being stuck in an average venture? Are you going for a positive average, or for a homerun-or-nothing?

Which leads me to my last question: Do lean CEOs know when to hit the gas?

Observing some of the “leaner” CEOs who came to class, I was always impressed with their ability to take their company off the ground so seamlessly, but also skeptical about their aptitude to scale it up once the model is proven. In fact, I personally think there might be a positive correlation between a CEO’s score on the Lean Scale and his/her probability of being replaced by the VCs when the company takes off. One more thing to consider as we are refining our entrepreneurial DNA…