What's Wrong With the Lean Start-up

It sounds like straightforward enough advice to build a better business, but the approach has serious flaws.

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Talk about launching a new venture these days, and chances are someone will likely mention the principles of the lean start-up. A significant portion of Silicon Valley and the start-up community in general have wholeheartedly embraced them. The idea in a nutshell: The path to start-up success involves launching a minimum viable product, testing it, learning from it, and reworking it accordingly.

It sounds straight forward enough. But there are some deep flaws in this approach. As trendy and popular as "lean" is these days, launching lean can be a really, really bad idea.

The origins of lean

The lean idea stems from the Toyota Production System (TPS), which was first developed after WWII, and which continues to be refined.  The goal of the system is to reduce waste in the production process. Techniques such as kanban and eventually ISO-9000 emerged to improve efficiency and repeatability.

Lean start-up fans emphasize the analogy to ISO-9000. They claim that the lean start-up model can provide a roadmap to make the development of new products and companies standardized, efficient, and predictable.

As a former ISO-9000 auditor, and as a successful entrepreneur, I can tell you these two activities–launching new ventures and producing uniform products–have virtually nothing in common. I'm an engineer by training. I'm all for developing processes with predictable outcomes, but emulating the Toyota Production System is not the way to do it in the world of entrepreneurship.

TPS is designed to produce a system that can churn out millions of copies of a product with consistently high quality. How is that like entrepreneurship? Is the goal to churn out a million identical Instagrams? Obviously not. Each start-up needs to be different, to fulfill an unmet customer need, to create value.

Two tenets of the lean start-up concept have generated especially high levels of buzz. Both are deeply flawed:

1.  Minimum Viable Product

Lean start-up principles encourage entrepreneurs to introduce products quickly to the market and learn from customer feedback. It sounds smart on its face, because learning from customers is hugely important. But going to market with a lackluster product can be insane. Think about the iPod, the Google search engine, and Facebook. None of these products were the first competitor in the marketplace. Instead their developers learned from other, lackluster products. They improved upon the initial work of others, produced a better solution, and grew to dominate their markets.

Perhaps smart entrepreneurs should watch the efforts of lean entrepreneurs and then pull an Apple, Google, or Facebook on them.

 2.  Innovation accounting

Another key lean start-up principle is the idea that standard accounting practices are not helpful measures of progress in the dynamic days of an early-stage company. Instead, the thinking goes, start-ups should rely upon "innovation accounting," or more creative metrics. So instead of, say, measuring the number of customers a start-up has, you measure instead the "engagement" of those customers.

Innovation accounting sounds good–but accounting is accounting. Standard accounting simply needs to be interpreted differently for early-stage ventures, not ignored or deemed irrelevant.

Think about Groupon, for example–a prominent lean start-up case study if there ever was one. Groupon has managed to trip over profound accounting issues in its short history. First, the SEC required the company to change its accounting to conform to Generally Accepted Accounting Principles before going public. Making that change required Groupon to report even greater losses.

Then came Groupon's first quarterly earnings announcement.  Again, the company had to restate earnings (actually losses) twice, due to more accounting issues. And most recently Groupon took the highly unusual action of disbanding their director's audit committee. If Groupon is the role model for "innovation accounting," it's time to seriously reconsider this concept. Entrepreneurs certainly can use standard accounting tools successfully; they just need to understand how start-ups (and thus their GAAP accounting) differ from established enterprises.

The big picture

I applaud the effort to bring a degree of predictability to launching new ventures. It's a worthy goal. However, entrepreneurship and innovation are not paint-by-numbers activities. Company founders need to think—and be smarter—about their new ventures. And that does mean entrepreneurs must be resourceful, adaptable, and learn from what doesn't work. But trying to follow a system designed to produce a million identical, high-quality Corollas, Camrys, and Siennas makes very little sense.