How to design your Business Model as a Lean Startup

If you spend time exploring innovation methodologies and models, you know that configuration of such frameworks largely apply new ideas, assembly and build upon previous work (hat off to science). I have come to explore conformity of two emerging frameworks; the Business Model Ontology by Alex Osterwalder and the Lean Startup methodology by Eric Ries. The result, the Lean Startup and Business Model Canvas mashup is illustrated below.

With the Business Model Ontology Osterwalder proposes a single reference model based on the similarities of a wide range of business model configurations. With the business model canvas (used as basis for the illustration above) Osterwalder describes nine building blocks that form a meta-business model.

On methodology, Eric Ries coins the Lean Startup, a practical approach for creating and managing startups using principles of Steven Blank‘s Customer Development  methodology alongside Agile Development methodologies.

The Lean Startup Business Model Pattern adopts principles of the Lean Startup (i.e. agile development and customer development) with the building blocks of the Business Model Canvas. In his recent book, Business Model Generation, Osterwalder uses the notion of Design Patters alongside the ideas of Christopher Alexander and Tim O’Reilly among others, to describe common configurations of business model components. Hence, it could be considered a Lean Startup Business Model Pattern.

The Lean Startup Business Model Pattern aligns with three main pillars that constitutes the Lean Startup methodology; Customer Development, Agile Software Development and Technology Commoditization.

Illustrated above the template using arrows, one key tenet with the Lean Startup methodology is the understanding of Product-Market fit, which optimally results from Agile Product Development, the solution offered, to match with Customer Development, the problem that is solved for a customer.

The Customer Offering or Value Proposition component of the template can be understood with the Minimum Viable Product concept used with Lean Startup method (see also whole product or doughnut diagram in Crossing the Chasm). The Customer Segments in which the Minimum Viable Product is offered, typically is characterized by early adopters or lead users in the social system.

With the Technology Commodity Stack, one of the main principles with the Lean Startup, Eric Ries speaks of how free and open source software (FOSS) availability and user generated content reduce startup costs. This is typically recognized with the Key Resources component. That is, knowledge of and access to open source software is a key resource to a Lean Startup. Similarly, open web hosting services are recognized with the Partner Network component, and convenient search engine marketing with the Distributions Channels component. Social media could as an example be a aligned with the Customer Relationship component enabling user generated content and interaction with customers.

Data-driven approaches based on customer-centric metrics applies to Distribution Channels, but may be considered a key activity as well. Among the Key Activities of the pattern are Agile Software Fevelopment methods and techniques, and the use of Metrics (e.g. Dave McClure‘s AARRR, Startup Metrics) for a startup to measure performance and adjust its directions accordingly. Although “listening to customers” would be recognized as a technique with the Agile Development methodologies, this is central not only to the Customer Development, Agile Development and the Lean Startup methodologies – it is also central to the Business Model Generation (Emphatic Design), Disruptive Innovation (Jobs-to-be-done), Lead User innovation and Voice of the Customer among other customer-centric innovation frameworks.

The conformity of the frameworks is not straightforward though. One such problem is that the level of abstraction differs. Think numerator and denominator. How do we distinguish between tactics, process, strategy and concepts herein? According to Steven Blank’s Customer Development methodology (slide #29 in this presentation), Product Development and Customer Development can be viewed through the tactical lens, while the business model view could be viewed through the strategic lens. Osterwalder understands business models as a facilitator between business processes and strategy. Myself, I would start from the premise that strategy or goals often comes as consequence of continuous learning in early stage ventures where resources are scarce and uncertainty is extreme.

One challenge to consider is how the pattern might express iterative development and internal feedback loops that are fundamental to Lean Startup methodology. It is in my understanding that when working with models and methodologies there is a general challenge in uniting behavior (process) and structure. That is, to what extent are the two frameworks integratable in terms of methodologies and notations. Borrowing from areas such as software engineering and system dynamics, future work would envision a tool that aid in entrepreneurial learning and aggregates key metrics in order mitigate risk in new-product introductions.

For starters a fruitful discussion would consider what are the principles with the Lean Startup methodology that should be included in the Business Model Pattern and where they belong. Later, I will address how a startup would use the pattern to validate their business model as a part of their lean methodology. Stay tuned.

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