20 februar 2016

Can Hardware Startups be Lean?

Do the Lean Startup principles developed in Silicon Valley’s software heavy environment also apply to European hardware startups?

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According to Erik Ries, author of The Lean Startup, a startup is an undertaking, the purpose of which is to create new products or services under circumstances characterized by extreme uncertainty. The Lean Startup mindset aim to deal with this insecurity by minimizing risks with the help of short learning curves, when a new product is introduced to the market. The main purpose is to develop a sustainable and scalable business model as quickly as possible and with as few resources as possible.

The Lean Startup mindset has much in common with other good startup models of which the most widespread is probably Steve Blank’s Customer Development, Alexander Osterwalder’s Business Model Canvas and Alberto Savoia’s Pretotyping. The primary common denominators among the before-mentioned are 1) that it does not pay off to remain in the planning and development stage for too long and 2) one’s business assumptions should be tested long before a product is finished and ready to be launched. As an entrepreneur, it is all about getting beyond desk reseach and out of the building as quickly as possible to test one’s assumptions in the real world.

“The greatest risk – and hence the greatest cause of failure is not in the development of the new product but in the development of customers and a proven financial model.” – Steve Blank

These principles have mainly been developed in Silicon Valley’s software heavy environment. The question is, whether these principles also apply to Danish hardware startups with the potential to create future industrial growth. Hardware startups typically differ from software startups by having a longer development phase and higher costs in relation to production, stock and distribution as well as scaling. Despite these differences, we, at Scion DTU, believe that it is possible to be Lean as a hardware startup. The common denominator, whether you are involved with software or hardware, is that you need to build business and you can test your business assumptions long before you complete the development of your product. By doing this, you ensure, early on in the process, the learning needed to develop a sustainable and scalable business model, which, according to Erik Ries, is the main purpose of being Lean.

At Scion DTU, we are speeding up this learning process through our four months’ accelerator program Danish Tech Challenge.

Before we embark upon the contents of the Danish Tech Challenge, let’s clarify the conditions startups should be aware of in order to develop a sustainable business.

Six basic conditions for a sustainable business

Let us have a further look at what the risks are for startups. What unknown variables do you have to explore and learn about in order to succeed? We believe there are six basic conditions that should be explored, as they represent the conditions for a sustainable business:

  1. Customers experience a real problem
  2. Customers want to pay for a solution
  3. Customers wish to purchase a solution from your business
  4. It is possible to solve the customer’s problem and your business can develop the solution
  5. Your business can both produce and deliver the solution
  6. The business can earn money on the solution (price > production and distribution costs)

A main point in the Lean Startup mindset is that the feedback concerning point 1-3 (and 6) has a decisive influence on how point 4 and 5 should be solved and whether it’s even worth trying. The problem is that 4-5 is often where we start. If you receive late feedback concerning point 1-3, the risk of expensive delays and lost resources in the form of time and money are much greater.  The point is that you cannot just focus on product development alone in the early phases. The principal idea is, that it is not necessary to develop a solution in order to decide whether you have located a problem worth solving.

“In my point of view, one has to run business development parallel to product development. There is nothing worse than having developed a product only to end up with the question; how do I sell it? If these two things do not run in parallel, one risks, after a year of development, to have a product that works but nobody wants!”

Tommy Andersen, angel investor and mentor in Danish Tech Challenge

Risk minimizing through learning

Whether you work with software or hardware, you have to spend time minimizing the risks associated with product development by testing the technology. But that is not sufficient and many startups use too much time early on planning for and developing the technical solution. A lot of unexpected challenges are typically discovered further down the value chain, when quality tests, regulatory approvals, production, distribution, sales and service become a reality. This is why startups need to minimize market risks by testing their business assumptions early in the process.

  • Can the supplier deliver on time?
  • Do the parts fit and are they easy to assemble?
  • Are you able to deliver when agents abroad sell your products to customers?

It is not a trivial challenge to go from one’s first prototype in 3D print, duct tape and cardboard to being ready for production and distribution.

The point is, that you should test assumptions in relation to your entire business model. Basically, it is all about risk minimizing through learning.

Danish Tech Challenge helps hardware startups become Lean

Many hardware entrepreneurs are exceptionally competent on a technical level but do not necessarily have the same natural competence level in relation to building a business. For most it takes quite some time to become aware of all the things necessary to construct a sound business.

With Danish Tech Challenge, Scion DTU and the Danish Industry Foundation have chosen to accelerate this learning process for hardware startups. In many ways fact Danish Tech Challenge is four-month long customer validation experiment. The twenty participants are offered all the professional inspiration, technical sparring, business development and networking that their schedule can take. During this process, the participants build relations to external professionals, who offer feedback on their case. They meet counsellors, mentors, experts and other entrepreneurs who all wish for them to succeed and as a result offer honest feedback. As a participant in Danish Tech Challenge, it is easier to establish partnerships with corporations, who may become potential development partners, sub suppliers, production partners or exit opportunities. It can be crucial for a startup to have such doors opened and it can very well accelerate a critical learning process.

Danish Tech Challenge participants 2015

It is definitely possible to be Lean as a hardware startup. As a matter of fact, one ought to be so, since many assumptions in one’s business model can be tested long before a product is finished. You can validate the market potential early on no matter if you are dealing with hardware or software. As a hardware startup, there are, however, special circumstances in your business model in regards to production and distribution, which you should be aware of and make sure to test. An accelerator program, like Danish Tech Challenge offers invaluable help for this very purpose.

Read more about Danish Tech Challenge here.