Have you heard of Lean LaunchPad? It is a new tool being taught at more than 200 universities to help startups really hone their business plans and may one day help avoid wasting investors’ money. It’s a game-changing concept that angels should know about now, even though it is new to the investor part of the startup scene.
I view Lean LaunchPad as a future way for angels to have better companies to invest in because they have vetted business models, reducing angel losses. The model may also eventually lead to new and better ways to vet investment opportunities. More on that later.
What is Lean LaunchPad?
Silicon Valley serial entrepreneur, author and educator Steve Blank created Lean LaunchPad in 2011. He based it on Alexander Osterwalder’s Business Model Canvas, a strategic management and entrepreneurial tool that allows users to describe, design, challenge, invent, and pivot their business model using nine business parameters. Blank took the tool a step further as a new way to teach people to do startups, providing a framework to test and develop business models, based on querying and learning from customers.
I recently interviewed Allan May, co-founder of the Life Science Angels and former chair of the Angel Resource Institute (ARI), who is an expert and trainer in this methodology. He says that business schools tend to teach the creation and execution of business models and that Blank is pushing them to move away from that direction - especially for startups. "Steve's insight is that a startup isn't executing a business model, it's searching for a business model," May says. "That's the difference between a startup and an established company. A startup is not a small version of a big company. A startup exists to find, vet, and prove a business model BEFORE raising early stage capital. An established company exists to implement a proven business model."
Lean LaunchPad is being quickly adopted by business schools and is now taught to future entrepreneurs at more than 200 universities worldwide. Lean Launchpad was first developed for tech companies and is being adapted for life sciences companies. It is also now being used by some government agencies that support entrepreneurship and innovation, such as the National Science Foundation and National Institutes of Health.
How Do Startups Implement Lean LaunchPad?
Startups and students take a 10-week course that provides guidelines and thought processes to test their ideas in the market. The Big Idea is that proving a business model is a process that requires Customer Discovery. “No business plan survives first contact with customers” says May, paraphrasing Blank. Entrepreneurs need to “get out of their building” to identify and interview potential customers to turn business model hypotheses into facts. The core insight is that most businesses fail because they cannot sell enough of their product to enough customers at a high enough price to create and sustain a viable business. Lean LaunchPad walks them through hypothesis testing for each of the nine business model canvas components, such as value proposition and customer relationships.
Most startup founders find that their original idea for a business misses the mark. The question is by how much. If the business model can be fixed, they pivot based on the facts and data they gathered from the process. If it can't be fixed, they quickly learn that a restart is required. May says, "People commonly find out there was indeed a need, an available technological solution, that can be built and works to solve the need – BUT – it turns out to cost five times what people will pay And you can't cost-reduce it enough to hit your target market, so you'll fail despite that you had the need and the solution right.
The concept exists at all valuations: We’ve seen Silicon Valley companies with $1 billion valuations fail because they were building products that not enough customers wanted.
How Lean LaunchPad Applies To Angels
While the concept is still new for investors, it is a great tool for angels to know about. Lean LaunchPad is a way for entrepreneurs to validate the business model before spending precious angel capital. We angels know that it's not uncommon to invest $100,000 in a company, only to have the founders come back and say that although their original plan didn't work, they now know what will work. And, by the way, they need more money to get the company to that level. If the entrepreneurs had instead used Lean LaunchPad to test their original hypothesis for the company before raising money, both the company and investors would be better off.
As May puts it, Lean LaunchPad brings the same level of evidence-based scientific testing as goes into the technological solution to the business model intended to commercialize the solution. This can change how angels ask questions and vet deals in the future. Since many angels understand the questions to ask about a science or technology, those who have Lean LaunchPad training will be informed enough to ask a new set of critical questions to better vet the business model. The training teaches how to identify which parts of the business model are guesses and which are facts, and how that conclusion was reached
For angels this could translate into a change in how funds are used with less money gobbled up in testing and more used for implementation. This shift alone could ultimately save angels money and will impact how we vet potential investments.
Want To Learn More?
Resources for angels on Lean LaunchPad are developing. May will lead a free webinar on this topic for Angel Capital Association (ACA) on February 25. And on April 15, Blank and May will be featured in a keynote at the 2015 ACA Summit.
Angels can also learn about Lean LaunchPad on their own at Udacity or at www.steveblank.com, particularly listening to Blank’s first two lectures on “How to Do a Startup.” I encourage all angels to learn more.
