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How to design your Business Model as a Lean Startup

If you spend time exploring innovation frameworks, you know that configuration of such frameworks largely apply, assembly, and build upon previous work (hat off to science).

I have come to explore conformity of two emerging frameworks; the Business Model Ontology by Alex Osterwalder and the Lean Startup methodology by Eric Ries. The result, the Lean Startup and Business Model Canvas pattern is illustrated below.

Osterwalder's Business Model Ontology proposes a single reference model based on the similarities of a wide range of business model configurations. The business model canvas (used as basis for the illustration above) describes nine building blocks that form a high-concept business model.

Eric Ries coins the Lean Startup, a methodological approach for creating and managing startups using principles of Steven Blank's Customer Development  methodology alongside Agile Development methodologies.

The Lean Startup Business Model adopts key principles from the Lean Startup (i.e. agile development and customer development) with the building blocks of the Business Model Canvas. In his recent book, Business Model Generation, Osterwalder uses the notion of Design Patters alongside the ideas of Christopher Alexander and Tim O'Reilly among others to describe common configurations of business model components. Hence, the Lean Startup Business Model Pattern.

The Lean Startup Business Model Pattern aligns the pillars that constitutes the Lean Startup methodology; Customer Development and Agile Software Development as well as technology commoditization.

Illustrated above the business model canvas, one key tenet with the Lean Startup methodology is the Product-Market fit, which optimally results from Agile Product Development, the solution offered, to match with Customer Development, the problem that is solved for a customer.

The Customer Offering or Value Proposition component of the template can be understood with the Minimum Viable Product concept used with Lean Startup method (see also whole product or doughnut diagram in Crossing the Chasm). The Customer Segments in which the Minimum Viable Product is offered, typically is characterized by early adopters or lead users in the social system.

Eric Ries speaks of how free and open source software (FOSS) availability and user generated content reduce startup costs. This is typically allocated the Key Resources component. That is, technology leadership is a key resource to a Lean Startup. Similarly, open web hosting services are recognized with the Partner Network component. As is convenient search engine marketing with the Distributions Channels component. Social media supports the Customer Relationship component, enabling user-generated content, viral loops, and interaction with customers.

Data-driven approaches based on customer-centric metrics applies to Distribution Channels, but cab be considered a key activity as well. Among the Key Activities are agile software development methods and techniques, and use of metrics (e.g. Dave McClure's AARRR, Startup Metrics) to help a startup measure performance and adjust its direction accordingly.

Although “listening to customers” is considered a technique within the agile development methodologies, this is central not only to Customer Development, Agile Development and the Lean Startup – it is also central to Business Model Generation (Emphatic Design), Disruptive Innovation (Jobs-to-be-done), Lead User innovation, and Voice of the Customer among other customer-centric innovation frameworks.

The conformity of the frameworks is not straightforward though. One challenge is that the level of abstraction differs - think numerator and denominator. How to distinguish between tactics, process, strategy and concepts herein? According to Steven Blank’s Customer Development methodology (slide #29 in this presentation), Product Development and Customer Development can be viewed through the tactical lens, while the business model view could be viewed through the strategic lens. Osterwalder understands business models as a facilitator between business processes and strategy. Myself, I would start from the premise that strategy or goals often come as consequence of continuous learning in early stage ventures where resources are scarce and uncertainty is extreme.

Another challenge is how to make the pattern illustrate iterative development and internal feedback loops that are fundamental to the Lean Startup methodology. When working with models and methodologies there is a general challenge in uniting behavior (process) and structure; to what extent the two frameworks are integratable in terms of methodologies and notations.

Borrowing from areas such as software engineering and system dynamics, future work would envision a tool that aid in rapid entrepreneurial learning and aggregates key metrics in order mitigate risk in new-product introductions.

Further discussion should consider which principles from the Lean Startup methodology that should be included in the Business Model Pattern and where they belong. Coming up, I will address how a startup could use this pattern to validate their business model as a part of their lean methodology. Stay tuned.

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  1. From what I’ve learned of both of these frameworks so far, it seems that the Lean Startup process acts on the business model more than it maps to parts of it. Put another way, Lean Startup challenges and changes the business model through marketing-driven iteration once the initial proposition has been defined.

    For example, the idea of “pivoting” in Lean Startups can be expanded based on the sections of the Business Model Canvas. While Eric Ries explains how to pivot on customer segment, customer problem, or on a specific feature [1], you could conceivably pivot on other areas of the business model canvas, such as pivoting on key partners or distribution channel.

    I like the Lean Startup business model you’ve described on the canvas. It’s a helpful example of web-based Lean Startup at an early stage. Though, I think Lean Startups can be much more varied in scope, especially those that have matured beyond early adopters or ones that aren’t web-based.

    Thanks. I’ve also been thinking about how complimentary these two frameworks are. Your post does a great job of pulling these pieces together.

    There’s a lot of potential here – I think this combination is going to be a game-changer. I’m looking forward to the discussion!

    [1] http://www.startuplessonslearned.com/2009/06/pivot-dont-jump-to-new-vision.html

    • There sure is dynamics present in the Lean Startup method, in which I agree cannot necessarily be represented by categorized, static entities. In fact, this indicates that the method of iterative business model design itself becomes important.

      As the individual business model components are subject to change and evolve over iterations, and the venture matures, this would require interoperability of process (Lean Startup) and architecture (Business Model) accordingly.

      That the various components and its underlying tactics are reciprocally acting is a good point. Further, I think that the use of a simulation model to draw scenarios based on customer feedback and metrics could be useful in supporting entrepreneurial learning. Again, this takes us to; what are the dependencies.

      I recognize that the pattern primarily describes pre-chasm, web-based cases. For the better, this will have to be elaborated.

      Perhaps the other way around – the application of business model components to the different domain of the Lean Startup method – would be a fruitful exercise?

      Thanks Salim. I think that these inputs are useful and would require further attention.

  2. Great article – lots of good resources – I am going to have to come back to it because I don’t have time right now to read them all. Another really good resource on this topic is David Skok’s series of blog posts found at http://www.forentrepreneurs.com/business-models/. He goes into great detail on these topics and it is great to read from the point of view of a VC.

  3. Why not let your business model be determined by having a customer development process that includes a Product Launch pre- launch content sequence that eliminates the objections your customers have and allows for a dynamic way to adjust your product offering to the needs of your customers…

  4. The first step for any entrepreneur when creating a business is to determine which model will be used to produce a profit. A business model guides every product roll out, advertising campaign and investment made by a company. This kind of model is a kind of interesting one and might be a good resource to the entrepreneurs out there. Nice.