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Testing business model assumptions in an early stage startup using lean principles: A reflexive case study examining the application of lean startup approaches applied retroactively. PDF Free Download

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Testing business model assumptions in an early stage startup using lean principles: A reflexive

case study examining the application of lean startup approaches applied retroactively.

Peter Calow

Bachelor of Arts, Creative Industries, Ryerson University 2020

A major research project presented to Ryerson University

In partial fulfilment of the

requirements for the degree of

Master of Digital Media

in the program of

Digital Media

Toronto, Ontario, Canada, 2021 ©

Peter Calow, 2021 ©

Authors Declaration

I hereby declare that I am the sole author of this MRP. This is a true copy of the MRP,

including any required final revisions.

I authorize Ryerson University to lend this MRP to other institutions or individuals for the

purpose of scholarly research.

I further authorize Ryerson University to reproduce this MRP by photocopying or by other

means, in total or in part, at the request of other institutions or individuals for the purpose of

scholarly research.

I understand that my MRP may be made electronically available to the public.

iii

Abstract

Lean startup approaches have been widely adopted by entrepreneurs worldwide in recent years,

yet little is known about the effectiveness of such strategies when applied to startups

retroactively; that is, when a startup has already launched a product without using such methods

to guide and grow their venture.

This study aims to explore the suitability of Lean Startup Approaches (LSAs) for existing

startups that were founded and developed without incorporating such approaches and assessing

the empirical costs and benefits of doing so. In order to explore this question a case study was

conducted with PeopleHawk - a SaaS startup based in the United Kingdom.

In the case of PeopleHawk, the benefits derived from integrating LSAs include: the ability to

identify when to pivot their business model; possessing a systemized process for gathering,

distilling, and integrating primary data from future users; and ultimately co-creating, with future

users, a product that they need and are willing to pay for. Another benefit of implementing such

LSAs retroactively, in PeopleHawk’s case, was that they already had a functioning platform.

This allowed potential users to experience the platform immediately, in turn expediting the time

of customer discovery and MVP development.

The costs of integrating such LSAs include: the amount of time spent internally establishing a

new common language, practices, and processes; and the time it takes to recruit, interview, and

connect with a substantial number of participants. These are sunk costs that ultimately prove

wasted when the company achieves a greater understanding of the customer, opportunity, and

necessary value proposition.

In conclusion, there is still significant value derived from adopting LSA strategies, despite

consuming a significant amount of time. Moreover, the insights uncovered contribute heavily to

validating their business model and growth trajectory.

Keywords: Lean start-up; Customer development; Twenty-first century entrepreneurship; Lean

production

Acknowledgements

I would like to express my appreciation to Prof. Bradley Poulos for his time and guidance

through the duration of this research project. His commitment and input is greatly valued. Thank

you.

I would also like to extend gratitude to my second reader, Katlynn Sverko. And I would like to

send my love to my parents, Garth and Hilary, and my sister, Emma for always being there.

Lastly, I’d like to thank the co-founders of PeopleHawk, Paul Kinney and Alistair Craig, for

making this project possible, along with all the participants who helped contribute to this

research paper in their own way. Without this support network, this project would not have been

possible. Thank you.

Table of contents

Authors Declaration……..……..……..……..……..……..……..……..……..……..……..……ii

Abstract……..……..……..……..……..……..……..……..……..……..……..……..………….iii

Acknowledgements……..……..……..……..……..……..……..……..……..……..……..…….v

Table Of Contents……..……..……..……..……..……..……..……..……..……..……..……...vi

List Of Tables……..……..……..……..……..……..……..……..……..……..……..………….viii

List of Illustrations……..……..……..……..……..……..……..……..……..……..……..……..ix

List of Appendices……..……..……..……..……..……..……..……..……..……..……..……..x

Thesis Statement……..……..……..……..……..……..……..……..……..……..……..……….1

Contributions……..……..……..……..……..……..……..……..……..……..……..……..…….2

Introduction……..……..……..……..……..……..……..……..……..……..……..……..……...3

Literature Review……..……..……..……..……..……..……..……..……..……..……..……....5

What is Entrepreneurship……..……..……..……..……..……..……..……..……..……5

What is a Start-Up……..……..……..……..……..……..……..……..……..……..…….6

Fundamentals of a Business: The Model……..……..……..……..……..……..………..7

Business Model Map: Business Model Canvas……..……..……..……..……..………..8

Business Model Map: Value Proposition Canvas……..……..……..……..……..……...9

Business Model Map: Lean Canvas……..……..……..……..……..……..……..………9

Comparing Business Model Canvas and Lean Canvas……..……..……..……..………10

Stages of a Start-Up……..……..……..……..……..……..……..……..……..…………10

Why do Startups Fail……..……..……..……..……..……..……..……..……..………..14

Popularized Lean Start-Up Approaches: The Lean Startup……..……..……..…………14

Popularized Lean Start-Up Approaches: Customer Development……..……..………...16

Popularized Lean Start-Up Approaches: Value Proposition Design……..……..………17

Critiques of Lean Start-Up Approaches……..……..……..……………………………..19

What Makes a Successful Start-Up……..……..………………………………………...21

Case study: PeopleHawk……..……..……..……..……..……..……..……..……..……..……...21

Methodology……..……..……..……..……..……..……..……..……..……..……..……21

Population and Sample……..……..……..……..……..……..……..……..……..……....22

Procedure……..……..……..……..……..……..……..……..……..……..……..……….22

Results……..……..……..……..……..……..……..……..……..……..……..………….24

Hypothesis: Lean Canvas……..……..……..……..……..……..……..…………24

Hypothesis: Customer Profile……..……..……..……..……..………………….26

Hypothesis: Value Map……..……..……..……..……..……..……..……..…….28

Hypothesis: High to Low Risk……..……..……..……..……..……..……..……28

Lean Canvas……..……..……..……..……..……..……..……..………..28

Value Proposition Canvas……..……..……..……..……..……..……….29

Testing and Learning Cards……..……..……..……..……..……..……..………29

Validated: Lean Canvas……..……..……..……..……..……..……..……..……37

Validated: Customer Profile……..……..……..……..……..……..……..……...38

Validated: Value Map……..……..……..……..……..……..……..……..……...39

Analysis……..……..……..……..……..……..……..……..……..……..……..………...40

Product Insights……..……..……..……..……..……..……..……..……..……..40

Personality and Cognitive abilities report……..……..……..……..…….40

Product Relative to Customer Journey……..……..……..……..………..41

vii

User Interface and User Experience……..……..……..……..……..……41

Drop Downs……..……..……..……..……..……..……..………42

Star Ratings……..……..……..……..……..……..……..……….42

Typography and Aesthetics……..……..……..……..……..…….42

Unique Insight: Templates, Self-Generated Assets and Prompting……..43

Privacy and Algorithm……..……..……..……..………………………..43

User Insights……..……..……..……..……..……..……..……..……..……..……..……43

Existing solution insights……..……..……..……..……..……..……..……..……..……44

Conclusions……..……..……..……..……..……..……..……..……..……..……..…………….46

Limitations of Findings……..……..……..……..……..……..……..……..……..……..……….46

Bibliography……..……..……..……..……..……..……..……..……..……..……..…………....47

viii

List Of Tables

Table 1……..……..……..……..……..……..……..……..……..…………...……..……..……..24

Table 2……..……..……..……..……..……..……..……..……..…………...……..……..……..26

Table 3……..……..……..……..……..……..……..……..……..…………...……..……..……..28

Table 4……..……..……..……..……..……..……..……..……..…………...……..……..……..29

Table 5……..……..……..……..……..……..……..……..……..…………...……..……..……..30

Table 6……..……..……..……..……..……..……..……..……..…………...……..……..……..31

Table 7……..……..……..……..……..……..……..……..……..…………...……..……..……..33

Table 8……..……..……..……..……..……..……..……..……..…………...……..……..……..34

Table 9……..……..……..……..……..……..……..……..……..…………...……..……..……..35

Table 10……..……..……..……..……..……..……..……..……..…………...……..……..……36

Table 11……..……..……..……..……..……..……..……..……..…………...……..……..……37

Table 12……..……..……..……..……..……..……..……..……..…………...……..……..……38

Table 13……..……..……..……..……..……..……..……..……..…………...……..……..……39

List Of Illustrations

Figure 1……..……..……..……..……..……..……..……..……..…………...……..……..…….52

List Of Appendices

Appx. 1……..……..……..……..……..……..……..……..……..…………...……..……..…….53

Appx. 2……..……..……..……..……..……..……..……..……..…………...……..……..…….53

Appx. 3……..……..……..……..……..……..……..……..……..…………...……..……..…….53

Appx. 4……..……..……..……..……..……..……..……..……..…………...……..……..…….54

Appx. 5……..……..……..……..……..……..……..……..……..…………...……..……..…….54

Appx. 6……..……..……..……..……..……..……..……..……..…………...……..……..…….54

Appx. 7……..……..……..……..……..……..……..……..……..…………...……..……..…….55

Appx. 8……..……..……..……..……..……..……..……..……..…………...……..……..…….55

Appx. 9……..……..……..……..……..……..……..……..……..…………...……..……..…….56

Appx. 10……..……..……..……..……..……..……..……..……..…………...……..……..…...56

Appx. 11……..……..……..……..……..……..……..……..……..…………...……..……..…...57

Appx. 12……..……..……..……..……..……..……..……..……..…………...……..……..…...57

Appx. 13……..……..……..……..……..……..……..……..……..…………...……..……..…...58

Appx. 14……..……..……..……..……..……..……..……..……..…………...……..……..…...58

Thesis Statement

The innovations in entrepreneurship theory and education transformed the lives of entrepreneurs

beginning their ventures. However, many popularized startup methodologies and principles, such

as Reis’s Lean Startup, Osterwalder’s Value Proposition Design and Steve Blank’s Customer

Development framework, are predicated on the assumption that founders are adopting these

strategies from the beginning of their venture. It is my belief that, even if these principles are

applied retroactively, they are still applicable and still significantly benefit the startup and/or

founders despite their late application.

Contributions

A study investigating the relationship between popularized startup approaches and their

suitability to startups at different stages of development is important for several reasons. First it

will uncover empirical findings and insights about why, or why not, founders within this criteria

chose to leverage LSAs, as well as clarifying the costs and benefits of doing so. Second, it will

provide clarity for entrepreneurs in this situation as to how to best utilize startup concepts for

their stage of development as well as provide opportunities for further concepts to be developed.

Third, a lot of research has been done on startups, their reasons for success/failure, integration in

different countries/economic climates as well as academic critique primarily on the thought

leaders within this space - Eric Reis and Steve Blank. However, none of these perspectives have

targeted startups that have already launched without using such popularized methods, hence this

research positions itself as a contributor to the academic field of entrepreneurship.

Introduction

The research problem that this research project aims to explore is whether or not Lean

Startup Approaches (LSAs) are suitable for existing startups that were founded and developed

without incorporating LSAs and have still not achieved product market fit. In other words, are

mainstream LSAs applicable to startups retroactively, and what are the costs and benefits of

doing so in practice? There have been numerous studies that explore the implementation of lean

startup practices within large organizations, critiques of specific LSAs from an academic

standpoint, as well as empirical studies exploring the practical implications and logistical issues

of these approaches from founders and entrepreneurs who began their venture with such

principles. None, however, have focused exclusively on how entrepreneurs are to assess and

integrate modern entrepreneurship practices into their venture given that they have already

'launched' a product or service – that is, built a product and invested in resources. The research

questions, therefore, that are being addressed in this research paper are:

(1) Are lean start up practices still effective when implemented within a startup

retroactively?

(2) What are the benefits/costs of integrating lean start up approaches

retroactively?

The purpose of this research study is to aggregate popular LSAs by way of reviewing

relevant literature and exercising their methods by partnering with a Software As A Service

(SaaS) startup based in the UK that fits the previously stated criteria. The dependent variable are

the LSAs that have been popularized over the past decade. The independent variable is the stage

at which such approaches are implemented. The examination of existing studies and literature in

the form of a literary review is important to this study as it showcases the myriad of definitions,

methodologies, and 'blanket' strategies that are often found within mainstream LSAs and often

blindly adopted by first time founders. Such LSAs have been implemented with PeopleHawk,

the partnering startup for this study, over a total of six months collecting 57 survey responses

from potential customers aged 18-30, twenty virtual interviews, product testing sessions and

feedback interviews, combined to empirically assess the barriers and implications, before

answering the question: are LSAs effective for a startup that has already launched a product or

service, and what are the primary costs and benefits associated with doing so?

PeopleHawk is made up of two full time co-founders. It has been in existence for twelve

months and has developed a sophisticated technology platform that offers candidates looking for

jobs a platform containing a personal profile with cognitive insights, personality insights, and

visual mediums to better convey who they are and what they are capable of as professionals.

Additionally, PeopleHawk aims to serve hiring managers by providing them with said candidate

psychographic/demographic data. It also provides technology affordances within the platform

that aim to expedite the recruitment and hiring process.

For the purposes of this research paper, candidates - one of the two potential customer

segments - have been prioritized due to the availability of participants within my personal

network and willingness to participate in this research study.

Literature review

What is Entrepreneurship?

Prior to deconstructing the notion of what a startup is and what strategies have been

popularized, as well as their critiques, it is important to understand the cognitive approaches

entrepreneurs adopt (knowingly or unknowingly) to navigate such high-risk ventures. Ghezzi

(2018) outlines several entrepreneurial theories such as effectuation, bricolage, and discovery.

Alvarez and Barney (2007) are accredited with their contribution of the discovery and creation

theories towards entrepreneurship, stating that while discovery theory adopts a lens that

“[entrepreneurial] opportunities exist independently of the entrepreneurs” (p. 13), creation theory

takes the stance that “[entrepreneurial] opportunities are created by the actions, reactions and

enactment of entrepreneurs exploring ways to create value within an uncertain context” (p. 15).

Similarly, Sarasvathy (2001) offers two theories within the field of entrepreneurship: causation is

the “processes [that] take a particular effect as given and focus on selecting between means to

create that effect” (p. 245) whereas effectuation is “a set of means as given and focus on

selecting between possible effects that can be created with that set of means” (p. 245). Baker and

Nelson (2005) build upon this effectuation logic with their developments on insights on

bricolage. Bricolage, in their conceptualization, is defined as “making do by applying

combinations of the resources at hand to new problems and opportunities” (p. 333). In short,

Baker and Nelson (2005) state that entrepreneurial bricolage inclines founders to ‘make do’ with

what they have by using the available resources and applying these resources to new problems

and opportunities that may arise.

The degree of entrepreneurial education of founders also plays a significant role in each

founder’s success. Kiss (2015) studied the impact of having entrepreneurial education and its

correlation to startup success, concluding that “having an education on the subject of startup

development and entrepreneurship sets up the entrepreneur in a position to succeed” (p. 17).

Along the same lines, Matlay (2008) also conducted a study on the impact of entrepreneurship

education and entrepreneurial outcomes from 1997-2006. This study concluded that:

“Entrepreneurship education had a positive impact upon entrepreneurial outcomes related

to the career aspirations of the 64 graduates in the research sample...None of the graduates

became unemployed or acquired employee status...for a large proportion of the sample, there was

a relatively speedy progression from self‐employed status to micro‐ and small business

ownership…These [participating] graduate entrepreneurs showed a low rate of turbulence and no

failures. This in itself could be interpreted as a successful entrepreneurial outcome, and can

partially be attributed to entrepreneurship education attended during their third year at

university”. (p. 50).

What is a Startup?

As Bortolini, Cortimiglia, Danilevicz, and Ghezzi (2018) note in their comprehensive

historical review of the Lean Startup, there is no one single, universally accepted definition of

“startup”, having synthesized statements from key authors within the Lean Startup ecosystem.

Ghezzi (2019) reiterates Eisenmann's statement in which Eisenmann proclaims that “startups are

ventures created to launch new products in the market” (Bortolini et al., 2018, p. 21), while Ries

(2011) defines startups as “ventures designed to create a new product or service under market

conditions of great uncertainty” (p. 34). Blank (2007) defines a startup as “...a temporary

organization in search of a scalable, repeatable, profitable business model” (para. 3) understands

that the main objective of a startup should be to find a repeatable and scalable business model[1].

Marmer, Herrmann, Dogrultan, and Berman (2012) offer an aggregated definition of the two

thought leaders. At the high level, they argue, startups share key two characteristics: they are

“entities designing products or services for future customers that have not established a

repeatable and scalable business model” and they “operate with limited resources, monetary,

human or otherwise, and operate in extreme uncertainty” (p. 14). Moreover, while it is ideal that

a startup should “adhere to lean startup principles, it is not a deciding factor in defining a

startup.” (Marmer et al., 2012, p. 16).

Fundamentals of a Business: The Model

Felin, Gambardella, Stern, and Zenger (2019) argue that the widely distributed definitions

of business models are too broad, heterogeneous, and often demand too much detail to be

actionable or useful for founders and internal startup teams. Felin et al., (2019) exemplify this

point by stating that “business model definitions mention everything from ‘customers’ to

‘employees’ to ‘cognition’ to ‘transactions’ to ‘interconnected activities’ to ‘resources’ to

‘capabilities’ to ‘technology’ to ‘architecture’ and ‘interdependencies’ to ‘stakeholders’ and

‘suppliers’ to ‘structure,’ ‘governance,’ ‘incentives,’ ‘networks,’” (p. 4).

Further to this point and building on previous research (e.g. Bortolini et al., 2018), Teece

(2010), a celebrated 21st century economist, states that a business model “defines how a firm

creates and delivers value to its customers…while capturing a share of it so as to be

economically and financially sustainable” (p. 173). Similarly, Chesbrough and Rosenbloom

(2002) say that the initial business model of a company is a “hypothesis or vague idea of how to

deliver value to the customer...[it] is a device that demonstrates the connection between

technological development and the creation of economic value” (p. 530). In contrast Magretta

(2002) argues that “[a] business model should be a representation of how the company operates,

told through a story” (p. 4). In essence, the notion of what a business model is can be broadly

understood from the definitions above; however, none of the definitions provide a clear and

actionable definition for entrepreneurs and/or internal stakeholders. While there are certainly

other dimensions of a startup that founders must direct their attention to, the business model is an

essential component for all of the team within the startup to understand with clarity because it

acts as the foundation as to what activities the founder/team ought to focus on, who the various

stakeholders are, and how the product or service delivers value to the end consumer. That said,

and as reiterated by the most prominent thought leaders within the LSA space, the business

model is encouraged to change based on learnings derived from hypothesis testing with

future/potential customers. Therefore, having a clear definition that is simple, and actionable for

internal stakeholders is important for the productivity and growth of the startup. In the following

pages, various business model ‘maps’ that have been popularized or praised by major

contributors to the mainstream startup literature.

Business Model Map: (1) Business Model Canvas

Alex Osterwalder, co-founder of stratagyzer.com, previously coined the business model

canvas (BMC) in his earlier publication, Business Model Generation (2010). The BMC depicts

nine different headings of which a given assumption, or hypothesis can fall under: (1) key

partners, (2) key activities, (3) key resources, (4) customer relationships, (5) channels, (6)

revenue streams, (7) cost structure (8) value propositions and (9) customer segments. Value

proposition design (2014) focuses on two of these nine pillars - the value proposition and

customer segments. Notably, these two assets of the BMC are the suggested starting points for

entrepreneurs to concentrate their efforts on, according to Osterwalder et al., (2014). That is, to

understand the pains, gains, and jobs to be done by their potential customers, and craft value

propositions that appeal to them, prior to then designing and testing prototypes.

Business Model Map: (2) Value Proposition Canvas

Osterwalder (2014) introduces the concept of the value proposition canvas consisting of

customer profiling map described as “an innovation of the traditional psycho demographic

profiles” (p. 25), and the Value Map which outlines the entrepreneur’s hypothesized pain

relievers, gain creators, and products and services in tandem to the Customer Profile and outlined

pains, gains, and jobs. As previously mentioned, the customer profiling map lives within the

customer segment pillar of the BMC and pertains to what the customer(s) is trying to achieve, as

well as their underlying motives, their objectives, and what is holding them back, which

Osterwalder consequently groups into the headings of pains, gains and jobs to be done. Within

each of the three headings Osterwalder et al. (2014) break down several subcategories of pains,

gains and jobs. For example, ‘Pains’ can be broken down into undesired outcomes (functional,

social or emotional), obstacles and risks, before prompting the reader to then rank each

hypothesis from most to least important (Osterwalder et al., 2014)

Business Model Map: (3) Lean Canvas

Ash Mauyra in Running Lean (2014) introduces the concept of the Lean Canvas (LC), a

one page diagram to get down business ideas simply and clearly. The lean canvas is made for

startup entrepreneurs specifically, and asks them to first form their hypotheses and then input

them onto the nine pillars of the business model, namely: (1) problem; (2) customer segments:

(3) unique value proposition, a single message that communicates why a product/service is

unique to solve the customers problem proposed solution; (4) solution; (5) key metrics; (6) cost

structure; (7) channels, distribution, communication or otherwise. Channels within the context of

the LC represent the entrepreneur’s ideas as to how and where they will target customers and

relevant stakeholders; (8) revenue streams; and (9) unfair advantage, something that cannot be

easily copied or bought that gives your business a competitive advantage (Maurya, 2014).

Comparing Business Model Canvas and Lean Canvas

As previously stated, the BMC maps out nine individual headings which act as building

blocks to assemble a potential business model. It is important to note that Osterwalder’s cited

contributions are not startup specific - they may be implemented both in new and mature

businesses. The Lean Canvas, presented previously by Ash Muarya in Running Lean (2014),

proposes a more problem focused approach and is specifically tailored to accommodate

entrepreneurs and startup ventures. There are two key differences worth noting for the purposes

of this paper; (1) approach - while the BMC outlines key partners, sources of financing, customer

relations etc. the Lean Canvas focuses first on the problem and proposed solution, followed by

the channels, costs and sources of revenue derived from the potential solution; and (2)

application - the BMC encourages creativity, exploratory collaboration and critical analysis of

such activities, the Lean Canvas is positioned more so as a step by step, problem solution process

entrepreneurs can follow. Since the value proposition canvas can be embedded within both the

BMC and LC, there is no comparison to be made.

Stages of a Start-Up

There are different viewpoints one can take when assessing the stage within which a

given startup is operating. From an investor’s perspective, and among the mainstream media,

startup can be viewed as being at one or more stages of development. Pre-seed alludes to the

initial period of founders ideating and testing ideas. Typically, financing at this stage comes from

family and/or friends. Generally speaking though, founders tend to be the investors in a pre-seed

funding situation (Reiff & Mansa, 2021). Seed Funding is the first official financing round for

the startup which is aimed at fueling the entity's product development and market research and is

usually attained through venture capital firms, angel investors or incubator/accelerator centers, in

exchange for equity (Reiff & Mansa, 2021). Series A funding is again justified when a startup

has successfully established a customer base and has to focus on efficiency of the existing

product(s) and services. The average Series A funding as of 2020 is $15.6 million (Reiff &

Mansa, 2021). Series B Funding, the startup has found a winning product and/or service is

actively scaling up their talent acquisition efforts, business development efforts and overall brand

reach (Reiff & Mansa, 2021). Series C funding comes when a now scaled company can diversify

their product offerings and implement monopolistic strategies within their marketplace, this is

also the stage at which companies consider an Initial Public Offering or IPO, to sell shares of

their company on the public stock market or begin entertaining acquisition offers.

That said, Dibner (2018), author for Angular Ventures, argues that “[a startups stage] of

development should be assessed according to qualitative fundamentals and not by some

quantitative measure of dollars raised or age” (para. 3). Dibner (2018) argues that there are only

three stages an investor should view startups from: the first being early venture, defined by an

effort to de-risk the question of whether or not the company could scale by founders lining up

evidence and traction it needs to justify the Series A: building product, deploying product with

early customers demonstrating product/market fit; the second Series A, Dilber (2018) argues, is

typically around the 18–24 month period and requires the startup to make a complex transition:

from a company with a great offering that could scale to a company with a great offering that is

rapidly and predictably scaling; and the third is the growth stage, in which the former startup,

now company has built a framework of growth and can has evidence that is working. In practice,

this includes scaling on sales staff, scaled deployment of product or service, and support team is

in place (Dibner, 2018).

From a founder’s perspective though, the traditional keywords that often get thrown

around by advisors, investors, etc., are problem solution fit (PS), product market fit (PM), and

business model fit. Osterwalder and colleagues (2014) describes PS fit as when you have

“evidence that customers care about certain jobs, pains and gains, and have a complimentary

value proposition that addresses those jobs pains and gains” (p. 67) and PM fit as “having

evidence that your products and services, pain relievers and gain creators are actually creating

customer value and getting traction in the market” (p. 69).

The problem within the startup literature though is that many of these stages of growth

are poorly defined and lack a common language/definitions. This tends to lead to friction

internally within the startup and in turn delay or confusion regarding important strategic

decisions. While there have been efforts to mitigate this grey area by authors, it has arguably

been captured best by Marc Andreessen, venture capitalist and previous co-founder of Netscape,

when he wrote in a 2007 blog post: “You can always feel when product/market fit is not

happening. The customers aren't quite getting value out of the product, word of mouth isn't

spreading, usage isn't growing that fast, press reviews are kind of ‘blah,’ the sales cycle takes too

long, and lots of deals never close", "You can always feel product/market fit when it is

happening. The customers are buying the product just as fast as you can make it — or usage is

growing just as fast as you can add more servers” (Seilbel, n.d.).To Andreessen’s point, startups

are rarely successful if they are not “10 X better” than existing alternatives. The value

proposition and offering to the customer cannot be incrementally better, but exponentially (10 x)

better. Interestingly, here is one interesting entrepreneur who has attempted to systematically

measure product market fit, Sam Ellis, who ran early growth in the early days of Dropbox,

LogMeIn, and Eventbrite and later coined the term “growth hacker” (Ellis, 2019). Ellis had

found a leading indicator: just ask users “how would you feel if you could no longer use the

product?” and measure the percent who answer “very disappointed.” Ellis found that the magic

number was 40%. Companies that struggled to find growth almost always had less than 40% of

users respond “very disappointed,” whereas companies with strong traction almost always

exceeded that threshold. A helpful example comes from Hiten Shah, who posed Ellis’ question to

731 Slack users in a 2015 open research project. 51% of these users responded that they would

be very disappointed without Slack, revealing that the product had indeed reached

product/market fit when it had around half a million paying users (Ellis, 2019).

There is also a danger, as stated by publications from Startup incubators such as Y

combinator that founders fixate on moving, incrementally, the numbers on a spreadsheet to

embellish their progress solely for external optics. This highlights the need Reis clearly states

within the lean startup, yes have a core metric but not to use vanity metrics such as web page

views, registered users and other non-actionable metrics. Notably, Marmer et al., (2012)

exemplifies an arguably more practical assessment of judging startup progress. The authors

argue that progress should be measured based on milestones and thresholds that vary based on

the type of startup. An example for a milestone is building a minimum viable product, an

example for a threshold is certain rate of retention (Marmer et al., 2012). Additionally in Marmer

et al’s study of 3200 internet startups the authors propose an alternative paradigm to view startup

stages and growth which are product centric rather than company centric, namely Marmer et al

outline four key stages: (1) Discovery, (2) Validation, (3) Efficiency and (4) Scale (Marmer et

al, 2012). The authors also argue that a startup’s growth, or lack thereof, can be evaluated based

on their actual stage, measured by customer response to a product, user growth,

activation/retention rate etc. and its behavioural stage comprised of its activities within the

following dimensions of the startup - customer, product, team, business model and financials.

The authors state based on their extensive findings that 74% of internet startups fail due to

premature scaling (Marmer et al., 2012) meaning when a startup’s behavioral dimension is at a

stage larger than its actual stage (Marmer et al., 2012)

Why Do Start-Ups Fail?

As previously mentioned, by definition startups lack resources and capital, and operate in

extreme uncertainty in terms of its industry and customer adoption (if any). Again, within

Ghezzi’s article, he identifies Berbegal-Mirabent’s view arguing that a major cause of failure in

startups is the lack of a structured process to discover and understand their markets, identify their

customers and validate their hypotheses in the early stages of design (Ghezzi, 2018). Thus, as

Tence notes (2010), the success of an organization comes from the ability to adapt its business

model dynamically and effectively over the long term.

Popularized Lean Startup Approaches (LSAs)

The Lean Startup:

Reis (2011), proposes a business model validation (BMV) methodology based on rapid

iterations (Ghezzi , 2018), coined lean startup (LS). The literature surrounding LS though,

consistently points to a lack of theoretical background by academic authors respectively.

The notion of “Lean” originates from Lean manufacturing and Toyota Production System. The

premise of such previous lean methodologies mirrors that of Reis by way of seeking to reduce

waste by creating minimum prototypes of functionalities in products and seeking customer

feedback to evolve (Ghezzi, 2018). Looking back even farther, Levi-Strauss, as Ghezzi states,

(1966) coined entrepreneurial bricolage as “making do by applying combinations of the

resources at hand to new problems and opportunities”, in hindsight, positioning himself as a key

contributor for the evolution of lean practices.

While the roots of Reis’s LS can be traced back to activities such as lean manufacturing

and theories such as entrepreneurial bricolage, LS introduced concepts that were tailored to the

startup journey, in a way that was directly speaking to founders. The two novel concepts

introduced by Reis are; Minimum Viable Products (MVPs), artefacts used for the fast and

quantitative market testing of a product or product feature - and pivots where certain BM

elements are changed in response to failed hypothesis tests (Ghezzi, 2017). Reis also coined the

Build Measure Lean (BML) feedback loop with regards to product development, however, such

process can be traced back to an iteration of Plan Do Check Act (PDCA), credited to Deming in

the 1950, according to Ghezzi (2018)

At a high level, the LS process as depicted by Reis follows a process of (1) constructing a

startup’s vision: also known as ideation. (2) Formulating the business model and hypotheses:

According to Blank and Dorf (2012) a hypothesis is a formalization of explicit or implicit

assumptions about one or more dimensions of the business model, initially considered uncertain

or doubtful. (3) Building experiments: a scientific approach to gather evidence falsifying or

validating business model hypotheses. (4) Measuring results of said experiments and (5)

Learning: perhaps most importantly, is the speed at which entrepreneurs can learn and confront

truths with previously defined hypotheses to make decisions about the business model. Ries

(2011) refers to this outcome as validated learning. Such learnings determine one of four

possibilities; pivoting, iterating, escalating or giving up. Pivoting is defined by Blank and Dorf as

“changing one or more dimensions of the business model in order to formulate a new hypothesis

and test it through new experiments”. Similarly, they define Iterating as a less radical change

than pivoting.

Customer Development

In parallel, Blank and Dorf offer their customer development framework which depicts

two clear stages of a startup’s development, namely, the ‘search’ phase comprising customer

development and customer validation, and the ‘execute’ phase comprising customer creation and

company building activities (Blank, 2015). Customer development (Blank & Dorf, 2020) is

where entrepreneurs assemble and create their hypotheses surrounding the nine pillars on the

business model canvas and interviewing the intended customer segment to gain empirical

feedback - put simply this state is where one must objectively prove whether or not people have

the same problem you hypothesized. Running alongside this field work is the customer

validation stage in which startup teams develop prototypes and rapidly test them with potential

customers as part of the Build Measure Learn (BML) loop. Additionally they will be running a

myriad of experiments and interpret the insights by updating their business model canvas weekly

and tracking which hypotheses are true and which turned out to be fallacies. The next phase

coined by Blank and Dort is Customer Creation and Company Building as part of the execution

phase, in Blank’s own works this is only once you’ve gotten evidence that you have a

sustainable, scalable business model and reiterates the harsh truth that entrepreneurs will likely

pivot back and forth between customer discovery, and customer validation for months until they

achieve a degree of product market fit backed with primary customer feedback. Notably, the

notion of ‘pivoting’ is viewed as a positive rather than a negative in the case of startups. Pivoting

is simply part of the iteration process, as Blank states, “Pivots need to happen quickly, rapidly

and often” (Blank, 2010)

Value Proposition Design

Value Proposition Design by Alex Osterwalder et al, positions itself as a practical book

to help entrepreneurs and intrapreneurs alike to better understand their potential (or existing)

customer segments and value propositions. As previously mentioned, Osterwalder introduces the

concepts of the Value Proposition Canvas and the Value Map. Having populated both canvases,

Customer Profile and Value Map, readers are then instructed to begin validating their most

important hypotheses (or not), in an attempt to achieve (1) Problem Solution fit, which

Osterwalder believes is when you have “evidence that customers care about certain jobs, pains

and gains, and have a complimentary value proposition that addresses those jobs pains and

gains” (Osterwalder et al., 2014) and then (2) Product Market fit, defined again by “having

evidence that your products and services, pain relievers and gain creators are actually creating

customer value and getting traction in the market”. While Value Proposition Design primarily

focuses on contextualizing and providing strategies to understand your customer segments and

validate said value propositions, the final chapter ‘Test’, provides a step by step overview as to

what to test first and how to go about it, as well as insights an entrepreneur should take into

consideration before, during and after the testing process. At a high level, Osterwalder depicts

the testing process to begin by first; extracting the hypotheses within the overall business model

canvas, value map and customer profile before prioritizing each hypothesis in order of risk

(highest to lowest). Osterwalder then suggests using his ‘Test Cards’, a template for outlining the

main parameters of the test - the hypothesis, the method of achieving validation (or proving a

hypothesis to be untrue), the key metric used to inform the result of the test and finally the

specific criteria for validating or invalidating said hypotheses. Osterwalder also offers readers a

‘Learning Card’, which is designed to capture insights in a structured, one page ‘card’ comprised

of the original hypothesis, followed by what was observed throughout the test, what significant

insights were gained and the activities that will follow given these new learnings.

Osterwalder concludes by providing a list of 10 experiments commonly used to validate

or invalidate hypotheses namely; (1) Ad tracking, in which entrepreneurs design an ad outlining

the assumed customer pain, gain or job and their solution in an effort to gauge interest prior to

building an MVP. (2) Unique link tracking, the process of creating a singular web page and

providing this link to prospective customers after speaking with them to gauge genuine interest.

(3) Minimum Viable Product (MVP), Osterwalder gives the examples of a brochure, a

storyboard or even simply a data sheet of all of your products potential features. (4) Illustrations,

storyboards and scenarios, this method of testing is a low cost way of giving the potential

customer a tangible visual representation of not just the product, but the hypothesized scenarios

the customer may use the product or service in. (5) Lifesize experiments, which involves

developing a more sophisticated, interactable MVP which positions itself to deliver greater

insights (6) Landing page, not dissimilar to ad tracking or unique link tracking, in that the test is

advertising the future product or service solution in the form of a single web page, followed by a

call to action to gauge user interest. (7) Split Testing, also known as A/B testing is a strategy to

refine product offerings by way of running two ads, with different value propositions, features,

media etc. (8) Innovation games, originally coined by Luke Hohmann (Value Proposition

Design, 2014) which involves customers in games that challenge them indirectly to validate the

entrepreneur’s BMC hypothesis. The first of which is ‘Buy a Feature’ in which customers

prioritize a list of predefined value propositions, customers get a budget of play money that they

can spend on each feature (Osterwalder et al., 2014). The second innovation game outlined by

Hohmann is ‘Product Box’ in which participants are asked to design a product box that

represents value propositions they would want to buy. The goal here is for entrepreneurs to grasp

what matters and what gets customers excited (Osterwalder et al., 2014). The last innovation

game is ‘Speed Boat’ which prompts participants to state their problems, obstacles and risks that

are holding them back from successfully performing their jobs to be done. (9) Mock sales,

similar to the landing page method, the mock sales strategy encourages entrepreneurs to set up

mock-up websites that can process payment as a way of evaluating customer interest.

Osterwalder depicts this method in more detail by illustrating three levels of commitment, and in

turn the degree of conviction a customer has toward a value proposition, as being first, having a

‘Buy Now’ button, a ‘Buy Now’ Button with a price beside it to understand how pricing affects

the value proposition, and finally, a ‘Buy Now’ button with a price and a payment collection

method directly below it, which Osterwalder argues is the strongest evidence entrepreneurs can

have to prove their value proposition is feasible and desirable in the eyes of the consumer. Lastly

Osterwalder depicts (10) Pre Sales, which can be achieved through crowdsourcing platforms

such as Kickstarter or Product Hunt, in which customers are aware that the product or service

doesn't yet exist but still show admiration and desire for the offering put forward.

Critiques of Lean Start-Up Approaches

Newbert et al (2020) examined the costs and benefits of the “get out of the building”

approach presented by Blank et al, stating that “while involving customers early will help

entrepreneurs create offerings customers are willing to pay for, it also results in potentially costly

delays in the launch of those offerings”, and that “while learning what customers want and need

is important to the entrepreneurial process, so too is the speed with which that knowledge is

obtained for at least two reasons; because entrepreneurial opportunities are fleeting and change

over time in substantive ways and because most entrepreneurs enter the startup process in a

resource-poor condition (Aldrich, 2000), the longer they persist without revenues, the less likely

they are to survive.” (Newbert et al., 2020). Newbert et al also note that these benefits and costs

are magnified when innovativeness is high, meaning, the more innovative a vision is, the longer

it will take to receive customer validation, while also making the need for customer validation

even greater.

Ghezzi (2019) conducted a study in which 227 digital startup founders were interviewed

to understand if they did indeed implement LSAs in their startup, of which 98% claimed they did

(Ghezzi, 2019) at what stage they adopted such principles as well as the main advantages and

disadvantages of implementing LSAs in their ventures. According to the author, 58% of the 277

founders implemented LSAs at the outset of their venture, the main reasoning for this was their

need to quickly achieve product market fit, followed by the need to avoid waste of resources

(Ghezzi, 2019). The main advantages the author reported included reducing time and cost for

startup testing, aligning business ideas to customer needs, verifying (and pivoting) business

model parameters and receiving rounds of financing. The main disadvantages included the time

and cost of defining and designing MVPs, identifying and engaging with early adopters and trial

users, defining testing priorities/design the experiments and missing other market opportunities

and threats. Interestingly the entire study group averaged a 2.8 on a 4.0 scale when asked how

satisfied they were with LSAs adoption citing that while there are benefits to be had, in practice

there are complexities to actually executing such methodologies (Ghezzi, 2019).

What Makes A Successful Startup

Marmer and colleagues (2012) gathered data on more than 3200 startups and found the

following insights: “startups that pivot once or twice raise 2.5x more money, have 3.6x better

user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2

times or not at all”. Interestingly, Marmer et al concluded that the most successful founders are

driven by impact rather than experience or money, and that on average, startups need two to

three times longer to validate their market and customers than the founders anticipated. Many

investors invest 2-3x more capital than necessary in startups in the discovery phase. They also

over-invest in solo founders and founding teams without technical co-founders despite indicators

that show that these teams have a much lower probability of success.

Case Study: PeopleHawk

Methodology

This study is concerned with the relationship between startup strategies, or LSA's, and their

application to startups that launched without using such principles. Its goal is to test whether or

not any value can be added with later application, and why. Additionally it will aim to gauge

customer validation for the value proposition PeopleHawk are proposing via digital experiments,

qualitative surveys and empirical testing with the existing platform from PeopleHawk. The

macro hypothesis for the overall project is, Peoplehawk should have taken a lean approach from

the initiation of their venture, yet despite the late application such LSAs when implemented will

still deliver significant value to the founders and company trajectory.

Population and Sample

The population of this study consists of a total of 70 'Candidates', made up of 58 survey

participants and 12 interviewees, 44% of whom were graduate students, 21% were

undergraduate, the remaining 34% were graduated students. The interviewee subjects were made

up of 2 undergraduate students, 2 recent graduates and 11 graduate students. A visual breakdown

of both participants has been broken down in Appendix 3. The participants were sampled

directly from Ryerson University alumni and existing students, attained through five years of

involvement with the faculty of communication and design, as well as various 'zones' (e.g.

Creative Innovation Studio) within Ryerson and participants from the Master of Digital Media

program itself, as they match the sample criteria. The selection process for the population sample

was anonymous, and involved stratification in order to have the sample reflect the customer

segments within the population. The characteristics used to stratify the population were

educational status, work experience and whether or not they have used online career platforms

such as LinkedIn and online job boards such as Indeed. Post graduate students were favored as

they are soon entering the workforce upon graduation and therefore posed as ideal test subjects

given PeopleHawk's hypothesized customer segment(s). All interviewees are expected to

graduate within 3 months. As a reminder, the research questions that are being addressed are: (1)

Can lean startup practices be implemented within a startup retroactively? (2) What are the

benefits/costs of integrating the Lean Startup approaches method retroactively?

Procedure

The process of answering these questions followed the process outlined below in chronological

order:

1. First, meet with Founders and established hypotheses on a Lean Canvas

2. Systematically chose the highest risk assumptions made - or as Reis refers to as, the “leap

of faith” assumptions (Reis, 2011)

3. Using Osterwalder's Value Proposition Canvas, a Customer Profile canvas in which their

needs, wants, pains and gains were hypothesized

4. Followed by formation of hypotheses within the value map outlining the assumed

potential value propositions offered from the startup consisting of hypothesized gain

creators', 'pain relievers' and an overview of the products or services used to produce such

pains and gains.

5. Systematically ranking the customer profile and value map hypotheses from most

relevant to least relevant.

6. Formed test cards stating the hypothesis, the method of testing, the metric being

measured and the criteria for concluding a hypothesis to be true (validated) or untrue

(invalidated)

7. Once test cards were formed, primary research began to test such assumptions with the

assumed customer segment - university students, recently graduated referred to as young

professionals, searching for jobs.

8. Following the primary testing, test cards were then used, per Osterwalder's Value

Proposition Design to:

1. Re-state the initial hypotheses

2. State the observed behaviors and responses given by participants, with data

reliability taken into account

3. Derive practical insights and learnings with correlation to hypothesis, and

subsequently, the value proposition map and lean canvas.

4. State consequent decisions and actions to be taken

Osterwalder states in the Strategyzer blog (2014), that while the launch of his previous

publication Business Model Generation was positive, it did not include any of the LSA's from

Reis or Blank, and lacked a systematic structure that could be followed by first time founders.

Moreover, Value Proposition Design posed itself as a valuable asset for this project as it is

positioned to provide an aggregated methodological set of practices including: Design Thinking,

Business Model Generation, Customer Development, and Lean Startup in a way that is simple to

understand and apply (Osterwalder et al., 2014). These additions within Value Proposition

Design build on the existing body of work by Steve Blank and Eric Ries and extend it, rather

than reinvent the wheel. For example, the Test Cards embody the same content and principles as

The Lean Startup by Reis, with regards to experiments and validating or invalidating

assumptions, but do so in a more illustrative and practical manner.

Results

Hypothesis: Lean Canvas

Table 1.

Problem(s):

Solution:

Unique

Value

Proposition

Unfair

advantage

Customer

segments

Lack of

transparency after

applying to a job:

Candidates have no

insight into

recruitment/hiring

process after

submitting their

resume and cover

letter

Digital presence:

No easy to set up

consolidated

platform for all

career assets

presented for and

accessible to

employers

Cold

communication:

Candidates get

recruitment

messages as spam

but still rely on

recruitment

agencies for job

reach

Digital Platform, with two

user groups: Candidates and

Hiring Managers.

Features:

Direct contact with employer

Personality tests and reports

Cognitive tests and reports

Easy to view career assets

Video pitch generated by

candidate

Peer reviews (video)

relevant job offerings

Privacy control

recruiters

Cognitive

and

personality

insights

Relationshi

ps within

big 4

accounting

and

consulting

firms

Undergradu

ate students

Graduate

students

Recently

graduated

students

Existing

Alternatives:

Cost structure:

Revenue

Streams:

Channels:

Early

adopters:

Lack of

transparency:

following up with

the hiring manager

via LinkedIn /

LinkedIn premium

or email if applied

directly.

Digital presence:

LinkedIn, personal

website, job boards

Cold

communication:

ignoring messages,

not actively using

LinkedIn.

Server costs

Salaries(?)

Web development cost

Monthly

subscription

Premium

features

Google

Facebook

Final year of

undergrad

degree

Little to no

professional

experience

Hypothesis: Customer Profile

Table 2.

Jobs to be done:

● Actively applying to opportunities

via job boards; Indeed, monster.ca,

university run Facebook /student

portals

● Be "networking" via LinkedIn get

noticed by employers

● Balance existing university work

with job search and application

process

● Tailor every resume and cover letter

to job description

● Research company/role prior to

applying for role

Pains:

● Engaging on LinkedIn feels fake

and forced, but a necessary evil

● LinkedIn only looks at experience

and achievements no assessment

made on personality, aspirations or

characteristics

● Don't know how to stand out on

LinkedIn or articulate themselves

effectively through career assets

● Not hearing back from hiring

managers after applying

● Fear of rejection/intimidation

● Lack of experience

● Being pushed to take on a role that's

not ideal in order to pay bills/have

work

● Negative emotions after applying to

tens of jobs and not hearing back

● Lack of professional network

Gains:

● Thoughtfully designed user interface

(e.g. Wealthsimple)

● experience

● Quick and engaging onboarding

experience

● Integrated gamificatication tactics

(rewards, progress tracking etc..)

● Application management

● More relevant jobs

recommendations compared to

indeed or LinkedIn

● Make candidate look professional

and competent

● Be free or low cost

Hypothesis: Value Map

Table 3.

Products and services:

● Professional templated profile

● Personality test and report

● Cognitive test and report

● Elevator pitch via video

● Digital interview (pre-recorded

with preset interview questions)

Pain relievers:

● Direct communication with hiring

managers

● No recruiter messages

● Application management feature

● Assistance in populating career

Testing business model assumptions in an early stage startup using lean principles: A reflexive case study examining the application of lean startup approaches applied retroactively. PDF Free Download

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