Venture Hacks

“As an investor and board member, it’s comforting for me to see a team using lean development. It gives me transparency on product development and engineering. I even see it reflected in the way the company manages its business objectives and goals.”

– Scott Raney, Redpoint Ventures

Summary: “Lean” is the most capital-efficient way to run a business. Lean is the never-ending process of eliminating waste: finding every activity that does not create value for the customer and eliminating it. The two greatest wastes are overproduction (making things the customer doesn’t want) and inventory (making things that aren’t used immediately).

Every entrepreneur must learn how to run a lean startup (some people say agile instead of lean — same thing). It’s the most capital-efficient way to run a business. It’s how you get to product/market fit. It’s how you do more with less money.

If you’re not lean, getting lean is probably the most effective thing you can do for your business. Smart investors and boards will soon be demanding lean. And smart startups will get lean while the other ones will get left behind.

Q. What’s a lean startup?

Lean startups eliminate waste: they eliminate every activity that is not necessary for creating customer value. If you eliminate enough waste, you can be fast, cheap, high quality, and effective—because more and more of your activities will be creating value for the customer.

In Toyota Production System, Taiichi Ohno (the father of lean) says,

“All we are doing is looking at the timeline… from the moment the customer gives us an order to the point that we collect the cash. And we are reducing that time line by removing the non-value-added wastes…

“True efficiency improvement comes when we produce zero waste and bring the percentage of work to 100 percent:

“Present capacity = work + waste.”

Toyota created lean and used it to grow from a small company to the world’s largest automaker. They simply find every activity that doesn’t create value for the customer and eliminate it.

Q. What’s waste?

The two greatest wastes are:

1. Overproduction: Things the customer doesn’t want. Cars the customer won’t buy. Features the customer doesn’t want. Software the customer won’t purchase.
2. Inventory: Parts that aren’t used immediately. Mufflers that aren’t in cars. Features that can’t ship because they’re buggy. Code that isn’t in customer hands. Architectures that aren’t coded. Requirements that aren’t coded, shipped, and useful. Most to-do lists.

In Extreme Programming Explained, Kent Beck (the father of Extreme Programming) says:

“Taiichi Ohno, the spiritual leader of [Toyota Production System], says the greatest waste is the waste of overproduction. If you make something and can’t sell it, the effort that went into making it is lost. If you make something internally in the line and don’t use it immediately, its information value evaporates. There are also storage costs: you have to haul it to a warehouse; track it while it is there; polish the rust off it when you take it back out again; and risk that you’ll never use it at all, in which case you have to pay to haul it away.

“Software development is full of the waste of overproduction: fat requirements documents that rapidly grow obsolete; elaborate architectures that are never used; code that goes months without being integrated, tested, and executed in a production environment; and documentation no one reads until it is irrelevant or misleading. While all of these activities are important to software development, we need to use their output immediately in order to get the feedback we need to eliminate waste.

“While individual machines may work more smoothly with lots of… inventory, the factory… as a whole doesn’t work as well. If you use a part immediately you get the value of the part itself as well as information about whether the upstream machine is working correctly… Parts aren’t just parts but also information…

“Requirements gathering, for instance, will not improve by having ever more elaborate requirements-gathering processes but by shortening the path between the production of requirements… and the deployment of the software specified… Requirements gathering isn’t a phase that produces a static document; but an activity producing detail, just before it is needed, throughout development.”

Q. How do you get lean?

Lean probably seems pretty abstract so far. Next up are a few posts describing specific ways to be lean and eliminate waste.

Thanks: To Fred Wilson for inspiring the title of this article with his post, Capital Efficiency Finds Its Moment.