What's a Lean Startup & Is It Right for You?

What’s a Lean Startup, and Is It Right for You?; Maybe you've heard of a lean startup approach. But what is the methodology, and could it be right for your small business?

Lauren WardUpdated May 5, 2023

Share this article:

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.

A lean startup is a method of building and managing a new business by experimenting and testing, while developing products based on findings from those tests. In some cases, it can 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.Read on to learn more about what a lean startup is, and determine if this business model is the best option for your new company.

What is a Lean Startup?

A lean startup is a new business that aims to create a product or service where there’s already demand for it. 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 good example of a lean startup. The instant messaging platform actually started as a gaming company. The chat feature was developed simply as a way to quickly send internal office messaging within the company. 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. A highly successful initial public offering (IPO) soon followed.

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. A lean startup plan can also increase a business’s chances for survival. You start with your initial product but don’t expect that it’s necessarily 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 hit product and your company starts growing, you may be able to qualify for small business loans with attractive rates and terms. Or, you might look for investors to help grow your business. Alternatively, well-paced growth could allow a business to remain self-funded without taking on debt or investors.

Lean Startup vs. Traditional Business Model

When comparing a lean startup with a traditional business model, you’ll find a number of differences.

Plans 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 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.

Recommended: 10 Steps for Starting a Small Business

Phases of a Lean Startup

Most lean startups will go through 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.

Customer Development

Once you have your base model or minimum viable product (MBP), 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 are typically 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

Agile development is the phase when the changes are actually made. The focus is generally on incremental changes, so that significant amounts of time and money aren’t wasted on marketing a product that isn’t quite right. Agile development can make it easier to scale your business. 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, the lean startup method comes with both benefits and drawbacks.

Pros of a Lean Startup

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

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 complementary 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. These types of companies are often able to use customer feedback to constantly create updates and improve the user experience. But companies producing physical products may be able to use the lean startup model as well. A number of automakers have successfully used this approach. Before you start your company, you may want to think about how comfortable you might be with this approach, whether your staff will be able to respond nimbly to changes in direction, and how and where you’d get the feedback this approach would require.Recommended: How Seed Funding & Seed Money Works

The Takeaway

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.No matter where you are on your business journey, there may be a type of loan available to help you take it to the next level. If you’re interested in exploring your startup financing options, Lantern by SoFi can help. You can use our fast online search tool to get a personalized small business loan option in minutes.Let Lantern help you find the right financing solution for your new venture.

Frequently Asked Questions

What are the advantages of a lean startup?

What are the disadvantages of a lean startup?

Is the lean startup model right for my small business?

What are the requirements for a lean startup?

Photo credit: iStock/GaudiLab

LCSB0423045U

About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

Share this article: