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Business Plan vs. Lean Startup

22 August 2014

An important question for startup founders at the time of their business idea is which process they want to follow in developing, producing and marketing their product: Is it better to write a business and product development plan and to strictly execute it or to develop the product on a step-by-step basis following the feedback of potential users?

The terms „business plan vs. lean development“ bundle the different aspects of this question. While the first term describes what is usually the first step for building up the business, the second term stands for – at least in the Berlin Startup scene – nearly a movement. Its promoters argue that without user tests it is actually impossible to predict whether the users really like and use the new product. A business plan might convince the founders and their financiers but tells us nothing about whether its premised figures regarding target groups and sales are correct. In contrast, the more the product idea and its prototypes are tested the lesser the risk of a later market fail. Such a development and production method, which is vividly described in the bestseller „The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses“ by the Silicon Valley entrepreneur Eric Ries, hence intends to avoid unnecessary waste of time, money and energy in the development and production process of innovative products.

The advantages of lean production methods become apparent not only in the law clinic within our research project „Innovation and Entrepreneurship“, but also in my own startup Mauerschau. The most frequently asked questions in the law clinic are, for example, those about appropriate contracts for customers and/or users as well as about the appropriate legal structure for the startup company. However, given the often very early stage of a startup’s development, an analysis of the business model at this point often leads to the result that the founders cannot yet draft the corresponding contracts. As long as the founders do not yet know which concrete product to market, whether they are pursuing for-profit or non-profit business aims, or which of the founders is responsible for which tasks and who will get what kind of profit or company shares, the efforts for drafting the corresponding contracts would be more effective if done at a later stage.

The lean production method also bears, of course, certain risks and meets various constraints. For example, the startup founders want to limit legal liabilities with respect to the product marketing by means of contracts with the customers and/or end users or by transferring the legal responsibility to the company as separate legal entity. However, whether and when the founders can form such an entity often depends on the type of funding. The Exist program, for instance, requires that the founders have not yet formed their company before submitting the funding application. In contrast, the Medienboard Berlin-Brandenburg explicitly requires that the applicants have already founded their company. External factors thus often determine just how lean founders can develop their new product.

In the case of my own startup funded by the Medienboard, the requirement of forming the legal entity before the funding led to the situation that I had to form the company alone. Nobody within the team had worked together before, so we could not say whether we wanted to stay together after the successful completion of the project. In view of the fact that two team members ended up leaving the project before its completion, this was indeed a prudent decision. However, being a single owner of the company also has certain disadvantages. For example, the members of the team performed their work not as part of their duty as co-founders but as contractors obliged to deliver a certain amount of work. With respect to the software, this basically led to the specification of the design and technical functions of our mobile app before we started the development. On the photo above, you can see our pre-designed technical architecture of the app which we followed step-by-step in the production process. Our development process only became lean within the beta test, that is, after we had programmed the functions that seemed important to us. At that point we had not tested whether our potential users would really like or even use all of these functions. Given the feedback from the test we did indeed scrap several functions of the application. If we had tested earlier, we could have avoided the effort that we spent on these.

Licenses by third parties are another example for how external factors determine the degree of lean development. The term „third parties“ refers here to external parties not to the team members whose intellectual property on the programming code and media content is bundled within the company. Given that we use videos from archives of the former Western and Eastern German film and television industries, we had to negotiate the corresponding license fees with them. Some archives charge up to 500 € per second for their film material – a price that would have immediately ruined us. One reason for the high prices is the estimation which was originally done with respect to the film and television audiences. There, the prices had to be determined in accordance with a flat-rate value because the audience figures could only be estimated on the basis of a relatively small number of units and only be precisely calculated with a disproportionate increase of costs. With respect to the high production budgets and the estimated audiences, 500 € per second has become the usual fee for film and television licenses. However, such prices are illusionary with respect to content productions for New Media with very low production budgets. This is especially the case since the startup founders cannot presume the reactions of their customers and/or end users to the innovative product. In fact, a flat-rate for the usage of the archive material in New Media is not even necessary because each download or stream is fully traceable at low to no costs. The Internet therefore enables a minimization of the risk for both the archive as well as the startup founders: The archive knows exactly how many people watch its footage and the startup does not have to bear the risk of too highly pre-estimated prices.

Besides the type of funding and contracting with team members and/or third parties, there are many other factors that have a bearing on how lean startups are able to develop and produce their products. Last but not least, I would like to mention data protection law and its effects on innovation processes, the subject of my doctoral research in the law clinic. The principle of purpose limitation obliges private entities collecting personal data to determine the purpose of its later usage already at the moment of collection. This requirement is based on a theoretical model of society, and the economy in particular (a so-called cybernetic model), which implies that economic activity can be completely planned. This approach is quite contradictory, given the current state of knowledge, to the reality of startups, which often have to explore and proceed on a step-by-step basis and therefore don’t know what their final product, let alone their business model will look like at the moment they collect their first data.

In conclusion, external factors partly determine the answer to the question whether startup founders should comprehensively plan and execute or follow a lean production process. Founders might perceive the remaining choice as uncertainty about the outcome of their startup’s innovation processes which they should explore step-by-step with the help of user testing. Planning can help founders, at least, to mentally structure themselves and be prepared for some of the possible outcomes that come with the processes of innovation.

This post is part of a weekly series of articles by doctoral candidates of the Alexander von Humboldt Institute for Internet and Society. It does not necessarily represent the view of the Institute itself. For more information about the topics of these articles and associated research projects, please contact presse@hiig.de.

This post represents the view of the author and does not necessarily represent the view of the institute itself. For more information about the topics of these articles and associated research projects, please contact info@hiig.de.

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