The Evolution of Startup Methodology: Making the Right Thing Right, "in the Right Place"

• The Shift in the "Places" Suited to Startups
  • 1.1 Around 2009 - B2C
  • 1.2 Around 2012 – B2B Horizontal
  • 1.3 Around 2015 – B2B Vertical
  • 1.4 Around 2018 – B2B Enterprise
• When the Place Changes, the Way of Searching Changes
• Summary

Having shared Lean Startup methodology, especially the hypothesis-testing kind, with aspiring founders, what I came to feel was this: "Unless this methodology is applied with careful thought, it is more likely to produce small businesses than fast-growing startups."

That said, I also think this methodology was very effective for producing startups rather than small businesses "at a certain point in the 2010s." It was a moment when various conditions happened to line up.

However, as the areas suited to startups have changed year by year, I have also come to feel that this methodology alone is no longer enough.

I would like to organize my thoughts by looking back on this a little.

The Shift in the "Places" Suited to Startups

In the 2010s, many people involved in startups had their eyes on the software industry. The characteristics of this industry at that time included:

• Low initial investment
• Rapidly growing markets

Behind this was the convergence of several things: lower initial infrastructure costs thanks to the cloud, the spread of smartphones, the emergence of low-cost distribution channels such as the web and app stores, and new low-cost promotion channels such as social media.

Many of the costs from development through deployment fell, and new markets were also rapidly emerging, so new opportunities were being created.

Moreover, this was a market that, at the time, was one that large companies found hard to target, in the sense that "it's small now, but it might grow fast." In other words, there were opportunities that startups were uniquely positioned to pursue.

Even within the software industry, though, I would like to look at how things changed, summarizing the flow roughly in three-year intervals.

1.1 Around 2009 - B2C

In 2008 the App Store opened, and the market for smartphone apps took off all at once. The iPhone was basically something consumers owned, and apps too first appeared in the B2C domain.

The B2C domain is (as it still is today) highly uncertain, and it is hard to know what will hit. You can aim to some extent, but things emerge probabilistically.

In a domain with high uncertainty, where you cannot tell where the "winning ticket" is hiding, the exploratory methodology of Lean Startup seems likely to work well.

Another good point of software businesses is that even if your customers or market change somewhat during exploration, much of your software development skill can be carried over. If you are an engineer founder and have enough money to support yourself (that is, if you have just enough for living expenses), you can learn a little about a somewhat different domain and try again and again.

Furthermore, by repeatedly testing hypotheses against an opportunity, you can correct your course and optimize your product more and more for that opportunity. As you went through that trial and error, if the market grew, your own business automatically grew too, so you could also reap the fruits of market growth.

With these conditions in place, I think the Lean Startup methodology worked with exceptional effect around 2010.

In fact, in 2013, the year the term "unicorn" was coined, it is said that B2C unicorns accounted for 80% of the total valuation.

1.2 Around 2012 – B2B Horizontal

After B2C, B2B software, so-called SaaS, gradually became popular.

At first, I think many were horizontal SaaS products aimed at the SMB segment and at startups. These were areas such as HR, accounting, ad management, and analytics tools.

In this area too, exploration using Lean Startup was effective. Industry knowledge was of course required, but software engineering skill was relatively more important, and if you could find a problem solvable with the technology of the time, you could offer your solution widely via the cloud.

The subscription business model, with its high revenue predictability, can also be said to have been an advantage.

1.3 Around 2015 – B2B Vertical

As opportunities in horizontal SaaS were explored and harvested, the destination of exploration shifted to industry-specific, so-called vertical SaaS.

At this point, industry knowledge gradually becomes relatively more important, and at the same time, choosing which market to enter and sales come to carry a large weight in rapid growth.

Still, the Lean Startup style of exploration remained effective here, and as long as you chose your market appropriately, the methodology was usable.

But building a business in a small market will not produce rapid growth. With the Lean Startup methodology you can grasp an "early success," and it seems effective, but to aim for rapid growth you need one more twist.

In other words, the importance of business strategy for rapid growth increased.

1.4 Around 2018 – B2B Enterprise

Then, in the latter half of the 2010s, attention within B2B turned to the enterprise segment.

With enterprise, the minimum viable quality required of the product inevitably rises, sales cycles grow longer, and knowledge of enterprise sales becomes necessary.

As a result, the funding needed at the outset grows larger, and finance, hiring, and the like become more important. The basics of "finding the customer's problem" in the early stage do not change, and the Lean Startup methodology can still be used, but the weight shifts toward overall capability and toward building the business strategically.

In fact, whereas in 2013 80% of unicorns were B2C startups, today B2B companies account for 80%.

So far I have looked, in broad strokes, at the changes of the 2010s. Dividing them into three-year periods is arbitrary, but I do not think it is far off the mark.

What can be said from this is that the markets suited to startups change, and the appropriate methodology changes each time.

At a time when everyone's eyes were naturally turned to the "growing markets" that startups need, the Lean Startup methodology best suited to those markets was being used, so I think Lean Startup contributed greatly to startup success.

On the other hand, if you take on the challenge with Lean Startup alone, you end up optimizing your opportunity and product without thinking much about the market, and unless you happen to be in a market that "happens to be on track for rapid growth," the chance of ending up with a small business is quite high. That, I think, is the problem with an approach that relies on Lean Startup alone.

When the Place Changes, the Way of Searching Changes

Every few years the area of rapid growth changes, and the appropriate methodology differs by area. Although some ways of thinking are fairly common, such as hypothesis testing and sales, it is probably also necessary to keep unlearning methodologies that succeeded in the past.

Related to this is a parable called "looking for your keys under the streetlight." Let me quote it from Wikipedia.

There was a man searching for something under a streetlight in a park. A passerby asked him what he was looking for. The man said he had lost his house key and was searching for it. The passerby felt sorry for him and searched with him for a while, but the key was not found. The passerby then asked the man, "Did you really lose your key here?" The man replied calmly, "No, I lost the key over there in the dark, but it's too dark to see anything there, so I'm looking here where the light shines."

Source: Looking for keys under the streetlight - Wikipedia

When Lean Startup was in vogue, it was a rare era in which many people involved did not need to ask "Are we exploring in the right place?", or in which their eyes naturally turned to IT, an area with "low initial investment" and a "growing market." If you applied the methodology properly, you could reach a reasonably appropriate answer, and the market itself grew rapidly.

But if the place you explore changes, the startup methodology changes too. And, of course, what matters is not the methodology itself but exploring in the right place.

For startups, for which rapid growth is the supreme imperative, as we have seen, the "appropriate place" changes every three to five years.

Moreover, a place that attracts attention in the world is not necessarily appropriate "for startups." It is very difficult (though I would not say impossible) for a startup to win in a place where large companies spend several trillion yen every year on research and development and application development. If you were to take it on, you would need a completely different approach.

In that context, I think methodologies like company creation, or rather an investment style, are drawing renewed attention. Behind this is the fact that the place being explored has shifted somewhat.

That said, company creation has long existed in the biotech field. Whether company creation is effective also depends on timing and domain. It may be effective where demand is somewhat visible, of the "if we can build it, it will sell" kind, such as drug discovery and some areas of climate tech, but I suspect other areas need different methodologies.

Summary

For the special and highly constrained form of entrepreneurship known as the "high-growth startup," which receives investment from venture capital, I think what this comes down to is that the favorable markets and domains differ with the period, and the appropriate methodology differs with the market and domain.

If you had a lottery you could draw as many times as you liked, then drawing again and again, quickly, would eventually turn up a winning ticket, so a large number of attempts leads to success. Similarly, you can build products at low cost over and over, release them into the world, and find opportunities while getting customers' reactions.

However, in areas where that is not the case, a different approach would be better.

Besides, it is unavoidable that by the time a methodology has been formalized and spread, it tends to be a little out of date. I think it is better not to reject everything about past methodologies, but it seems we need to make the effort to discern which methodologies, even among the formalized ones, can be used "now," and then to find anew, each time, the methodology suited to our own business.

In the field of IT,

• Make the right thing (build the appropriate thing)
• Make the thing right (build the thing appropriately)

these two ways of thinking are sometimes contrasted with emphasis.¹

To simplify considerably, "making the thing right" connects to project management, and "making the right thing" connects to product management.

Integrating these, it is also put as:

• Make the right thing right (build the appropriate thing appropriately)

"Making the right thing" requires exploration to find out "what is appropriate," and the methodology for that exploration has been formalized in forms such as Lean Startup.

However, as we have seen, the exploration methodology suited to a place differs from place to place. In the present era, after the software industry has seen a certain degree of prosperity, I think we need to consider "where is the right place, and what is the right methodology for making the right thing in that place?"

We must think about where the "right place" is. Lean Startup is a methodology well suited to finding answers to questions, but the methodology for finding answers to those questions changes depending on where "the place for posing the question" is in the first place.

That is why,

• Make the right thing right at the right time in the right place (build the appropriate thing appropriately, at the appropriate time, in the appropriate place)

is something we need to keep in mind as we proceed, which is in a sense self-evident. That is what I came to think.

Still, to repeat myself, I would stress in closing that I think hypothesis-testing methodologies like Lean Startup remain effective for entrepreneurship in general, and that they are a way of thinking worth knowing as a foundation.

Footnotes

1. It is also rendered as "build the correct thing correctly," but because the word "correct" tends to carry a somewhat normative meaning, I have translated "right" as "appropriate." ↩