The Startup Theory: Mastering the Lean Canvas

Call us a product studio or a mobile app development company, the truth is we’ve accumulated years of experience working with startups and devising custom startup strategies. That’s why we’ve decided to create a five-part series dedicated to startups, and we’ve dubbed it The Startup Theory. We’re going to go through all the most important aspects that entrepreneurs should be aware of, to help you navigate your startup journey smoothly.

In the first part of our series, we’ll take a closer look at what useful strategic planning entails. The business model brings together all the major components of the business’ capacity to create, deliver and capture value. Today’s material will be exploring a few tools that help fellow entrepreneurs define and keep track of their business models. The Lean Canvas, the startup-focused version of the Business Model Canvas, is going to be the main focus here.

For a startup, be it focused on mobile or not, building a product is often not the most difficult task. Instead, it’s wrapping up a business around a product. Making sure that it sits within a comprehensive business model and making it sustainable. This incremental thinking is what makes a business model successful in the long run, but it’s usually a daunting task even for the most experienced founder. That is why we have decided to embark on a learning trip with all of you reading this series. Here we go.

Your business on a canvas

As the renowned business theorist, author and consultant Alexander Osterwalder put it, “a business model describes the rationale of how an organization creates, delivers, and captures value”. It is a synthesised view of the entire business and should be the fundamental basis of all strategic business decisions. When you have an updated document with your business model, it allows you to never lose sight of what your business is all about. It might be tricky at times, especially in the ever-changing world we are living in today. But as it’s going to be a document always guiding your decision making, it should be a document you should always work to keep up to date.

Before Osterwalder & Co., a business model meant many things, depending on whom you asked. What the Swiss theorist did was to find a brilliant framework that would hold the definition proposed above together, in an amazingly simple and consistent manner. This framework was the Business Model Canvas (or BMC).

The BMC is a strategic management tool comprising 9 fundamental building blocks that, Osterwalder thinks, every business out there sits upon. Each such block has its own box on the canvas and there is an ‘organic’ relationship between them, visible also in the structure of the canvas itself. Using the BMC can help us define and really put our business into perspective, by placing focus on what the most relevant bits of a business are. Using the BMC, we will be able to generate not only good but well-suited ideas; design the flows we want our business to undertake, and describe what the most relevant key performance indicators are within our business.

Filling all of this out might be overwhelming at first, especially if you’re new to the business world – also known as a startup. Let’s define that a little bit further, shall we? How about this definition from Dave McClure: “A startup is a company that is confused about 1) what its product is, 2) who its customers are, and 3) how to make money. As soon as it figures out all three things, it ceases to be a startup and then becomes a real business. Except for most times, that doesn’t happen”.

The lean startup canvas

Your initial goal is to improve the likely success rate of your venture while reducing the risk of failure. To this end, your startup needs something like the business model canvas, although you might not be there just yet. You are just now creating your image, your stance, your name in the world. However, the answer to your question is not far off: what you need is to design a lean canvas for your business. The Lean Canvas is like the business model canvas’ little brother and it’ll definitely do the trick.

The Lean Canvas, proposed by Ash Maurya in his book Running Lean, is a business model hypothesis, testing, and validation tool. It’s a simple yet powerful tool, perfect for a startup: it’ll help everyone envision who you are in your field of work and your chosen market. As Maurya describes it, his main objective in designing this tool “was making it as actionable as possible while staying entrepreneur-focused.” “My approach to making the canvas actionable was capturing that which was most uncertain, or more accurately, that which was most risky,” Maurya further explains.

A 9-box lean canvas template

First off we have to know what our audiences or customer segments are, and what problems our solutions will solve for them. That is why we’ll start filling in the lean canvas from the two outer sides of the canvas: the problem and the customer segments.

1. Problem

List one to three top problems your targeted customer segments have and describe them briefly. We cannot stress enough how important these two boxes are, and how our entire focus in the very early stages of a startup should be on defining and validating these two components. On the one hand, they confirm the existence of the market we’ve set our sights on, while on the other hand, they certify that our solution is relevant to the said market.

Gather as much data as you possibly can about your preferred customer base and find out what they’re all about, hence what problems they might be facing. Make sure you do everything in your power to properly assess the problems at hand, as inventing nonexistent problems is a trait many entrepreneurs seem to have. This will save you from making the wrong investments, be they related to time, money, or effort.

2. Customer segments

Now that you know what needs solutions, it’s time to assess who will use those solutions. Take a closer look at the people you had in mind when defining the problems in the previous section. You should look really close and get really specific when defining the customer segments. The logic goes like this: a market is made up of a few segments, while each segment is made up of a few user or customer profiles.

All these elements should ideally be defined in terms of characteristics that allow us to reach our customer base via some channels, but also in numerical and monetary terms (market size and market value). Get down to it and narrow down the essential characteristics of each of your customer segments. What sets them apart? First off, you’ll want to define who your early adopters will be, as those will be your first market and you depend on their adoption. Make sure your segmentation is as detailed as possible.

3. Unique Value Proposition (aka UVP)

Let’s head over to the heart of our lean canvas: the unique value proposition. It’s “a single, clear compelling message that states why you are different and worth buying,” as stated by Steve Blank in The Four Steps to the Epiphany. Don’t worry about getting it perfect straight away, as you will need to test it nonetheless. You can just create a good enough message that talks about the value your solutions create for the targeted audience, and then set up a test environment. Get the testing rolling and see if your audience resonates well to the message. The UVP is usually your user’s first interaction with your product, and it’s one of the things that will either make or break that relationship.

If the problem you are trying to solve is indeed worth solving, you’re halfway there. Now all you have to do is formulate the UVP accordingly: make sure the difference you’re trying to point out is indeed valuable and desirable for your customer segments and make it convincing. Communicate boldly and specifically what you’re all about – your early adopters are the ones who need to get the message right, loud and clear. Your UVP should be a statement of what the exact benefit is for your customer, by using your product. Let them know what things will look like after you’ve solved their problem.

4. Solution

The solution is all about how you will solve the problems you found relevant for your targeted audiences. They can be in the form of a specific product, a set of services, or any other combination of the two. A word of caution here: try to avoid spending all your energy, money and focus on the solution before you’ve validated that the problems you tackle are real, that they are relevant, and have a big enough market to allow you to build a business by solving them.

This is a mistake we’ve seen more often than not, especially in the case of first time-founders: reducing their business and their business model to the solution, without making sure there is a real need for any kind of solution. Focusing too much on your solution too early can bankrupt you in no time, so delay this aspect of your journey.

As a startup, you often start with building an MVP – a Minimum Viable Product – as a first solution. An MVP is a proxy of the bigger solution, conveying the core value you are able to produce and putting it in front of your core audience (most likely a group of early adopters). It holds the answers to the fundamental questions of your business: what it’s about, who it’s for and how it’s going to solve the user’s needs.

5. Channels

The product you want your user to use or buy is the essence of this entire deal. But there will be no deal at all unless you figure out how to reach your customers. There is no such thing as free channels; if it’s not money you’re investing, it’s time and effort and ideas. Marketing budgets will be somewhat hard to justify in this early stage of your venture. Still, there is no way around it. If people won’t hear about your products and/or services, there is no way your solution will get to the right people. It won’t get any funding and it won’t bring in any revenue. Think of how you could efficiently use outbound messaging, indirect or referral channels.

6. Revenue streams

In one way or another, your business will have to generate revenue. In some cases, you’ll charge your users directly for using the product, while in other cases, you will take money from advertisers for allowing them to promote their offers to your public, or you’ll just play the middleman and charge a commission on each transaction a two-sided market generates. Irrespective of the monetising model, the Revenue box should show how you intend to generate money and what the revenue potential might be.

7. Cost structure

On the other hand, operating a business inevitably means having costs. Understanding what those costs are and how they link to the business operations will allow you to focus on the right KPIs in order to survive as a business and then have better chances to build a profitable venture. This is a critical aspect to consider in your journey, as running out of money is the number one cause of startup failure.

8. Key metrics

As the old story goes, if you don’t measure it, you cannot control it and you won’t know if you actually got to where you wanted. This box is all about the implicit and explicit objectives you lay out in your startup and what you will measure by using what specific metrics.

Depending on the development stage of your business, the risk factors and what you need to accomplish, these metrics will vary accordingly and change places in a hierarchy. But having a clear set of metrics that are clearly and actionably linked to the reality of your business is fundamental. Without them, most of the time you will not know if you are on the right track and whether you should speed up or push the breaks.

9. Unfair advantage

You know how the saying goes: save the best for last. You may leave this box blank for now, but don’t lose sight of it. Discovering your utmost competitive advantage is no easy task, for sure. But this blank space in your lean canvas should really challenge you to always try and better yourself, always be aware of what your competition’s up to and stay on the lookout for what makes you stand out in the crowd. It’s something you have that can’t be easily recreated, bought or copied by others. What makes your team the best team out there to solve the problems you went after? The Unfair Advantage will clarify itself up once you’ve got good answers to these questions.

How to use the lean canvas

Before we wrap this up, we have a few more tips & tricks on how to efficiently use the lean canvas.

Sketch your initial canvases quickly with the info you have on hand. Keep in mind that you should always optimize. But for now, all you have are hypotheses that you need to carefully analyze in order to optimize in time.
Sketch several canvases – there’s a reason for using the plural here.

A fantastically useful way to think about your business model is as an ongoing draft, never as a finished product. So, start with a first draft of your Lean Canvas, as shaky as it might be. Then, after some market feedback, update it to a second draft, and so on. Keeping a different version of the canvas for each major update (so, not overwriting it) will allow you to clearly see progress or pivots (changes in direction for one or more components of your business model) and learn. Whatever steps you make in building your startup – learn. And use the order shown in the image below to fill the lean canvas out.

The lean canvas is meant to be an organic, ever-evolving document, that you should optimize in time, over and over again. Your initial guesses might be right, just as well as they might be wrong. Don’t let this get you down, it’s how things work. Do your best in estimating and make sure you test everything you write down in your canvas.

Think in the now. Base your predictions on your current situation and on the things you know right now. Don’t work too hard on predicting the future. Chances of you doing that correctly are rather slim. Instead, work hard on correctly examining the way things turn out with what you’ve assumed in your current plan. We can’t stress this out enough: always develop on the data you get from your actions.