Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
SPONSORED: Find a Qualified Financial Advisor
1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.
2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.
A lean startup is a customer-centric methodology that may help you launch your business or product more quickly and with lower costs. It’s based on answering an existing need and pivoting product design quickly based on customer feedback. Find out what a lean startup is and determine if this business model is the best option for your new company.
What is a lean startup?
The concept of the lean startup is often attributed to entrepreneur Eric Ries, whose book of the same name was published in 2011. A lean startup is a new business that aims to create a product or service where there’s already demand for a product. The lean startup process assumes that change is inevitable, which is why it doesn’t rely on a traditional business plan. Instead, the business is ready to constantly pivot as its product needs tweaking. Slack is a great example of the lean startup definition.
The intra-office chat platform actually started as a gaming company. The chat feature was used to connect offices. While the gaming subscription business didn’t get off the ground, the company started testing the chat feature with external groups. As the developers received feedback, they incorporated that input into the program and then released the chat program to an even larger group, continually improving and growing over time. In December of 2020, SalesForce acquired Slack for $27.7 billion. Dropbox is another company that has reportedly used this model.
Related: Learning to pay yourself first
How a lean startup works
The lean startup model is designed to reduce waste and streamline processes so that the business can become successful more quickly. A lean startup is also a way for startups to bootstrap early on rather than taking on expensive startup funding options. Not only can it be difficult to find small business loans for new businesses, but it’s also risky. According to the U.S. Bureau of Labor Statistics, small businesses opened in 2019 had a one-year survival rate or 78.1%—meaning that more than 20% failed in the first year.
A lean startup plan could increase a business’s chances for survival. Start with your initial product, but don’t expect that it’s the final model. As you get feedback from customers or test groups, you can make changes to improve the product. That way you know early on what customers like and don’t like without investing a huge amount of capital into inventory that may not end up being the final product you want. Once you land on a product and your company starts growing, you can begin exploring small business loans for startups if it makes sense for your company. Alternatively, well-paced growth could allow a business to remain self-funded without taking on debt or investors.
Lean startup vs. Traditional business model
There are a number of differences you’ll find when you’re comparing a lean startup with a traditional business model.
- Plans. The first is the type of planning that’s involved. A traditional business typically creates a multi-year business plan and tries to stick to it. A lean startup plan is much more flexible.
- Employee Skills. Additionally, a traditional business may focus on hiring employees with specific expertise to help execute the goals of its business plan. Lean startups, on the other hand, try to attract employees who can easily adapt to changing circumstances.
- Metrics. The two types of businesses may also use different metrics. A traditional business may focus on financials from the beginning, whereas a lean startup is likely to focus on measuring customer-based metrics like customer acquisition cost, customer churn rate, and lifetime customer value.
Phases of a lean startup
Most lean startups operate on three distinct phases. Each stage leads to the next to ideally reduce costs and effort.
Business model canvas
This is the lean startup’s version of a business plan. Instead of focusing on industry, market share, marketing strategy, and projected financials, this business model canvas creates a hypothesis based on the product. What does that look like? In a single chart, you sketch out the problem you’re trying to solve, the solution, and your company’s unique value proposition. You briefly define your customer segments, cost structure, and revenue stream. The idea is to create a roadmap with the understanding that change is bound to happen.
Once you have your base model or minimum viable product (MVP), the next lean startup stage is acquiring feedback from customers. This feedback may include (but is not limited to) the MVP itself. Other areas to ask about include pricing and distribution. After all, a business needs to operate well in all areas, not just production. Changes should be made after each round of feedback. The change may be something small, which is called an iteration. Or it could be a major change, in which case it’s considered a pivot.
Agile development is the phase when the changes are actually made. The focus should be on incremental changes so that significant amounts of time and money aren’t wasted on marketing a product that isn’t quite right. It’s also supposed to make it easier to scale. You only expand as improvements are made, not with a warehouse of inventory that doesn’t meet your customers’ needs.
Pros and cons of a lean startup
Like any business model, a lean startup has its particular benefits and drawbacks.
Pros of a lean startup
A lean startup has several benefits when you’re trying to create a new product.
- Enables you to quickly identify and create the best product for your customer
- Can save money and time compared to a more traditional business model
- Builds in customer feedback from the beginning
Cons of a lean startup
Lean startups are not without their potential negatives.
- Early feedback sessions may lead you to actually abandon an idea that could have been successful given more time
- Could delay your ability to earn revenue depending on how you approach those early feedback sessions (through either paid or complimentary products)
- May make it more difficult to get small business loans early in the process than it would be with a more traditional business model
Is a lean startup model right for my small business?
Some businesses are better suited for a lean startup methodology than others. Software and tech companies are often associated with this type of business model. After all, Slack and Dropbox are two of its most successful examples. Software companies can use customer feedback to constantly create updates and improve the user experience.
Companies producing physical products may be able to use the lean startup model as well. Several automakers such as Toyota have started employing this approach.
Before you start your company, you may want to think about how comfortable you might be with this model, whether your staff will be able to respond nimbly to changes in direction, and how and where you’d get the feedback this approach requires.
Lean startups provide a way to create a business or product that’s responsive to the wishes of your target audience from the get-go. They require your company to be nimble and responsive, but may enable you to create a successful product quickly. Whether you opt for a lean startup approach or a traditional one, it’s always smart to understand how to get a business loan.
Lantern by SoFi:
This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)
All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.
*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.
Student Loan Refinance:
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from MotoRefi. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC.
More from MediaFeed:
The pros & cons of short-term loans
Featured Image Credit: gpointstudio/istock.