Lean canvas – How to avoid costly mistakes when planning a business?

It is said that fresh faced entrepreneurs can be divided into two distinct groups. The first one is made up of people who begin their work the moment they get an idea. The other one includes people who start by opening a word document and channelling their vision into a multi page business plan.

I’ve been observing both groups for years and know what traps lie before them in the coming weeks. One group utilizes all their energy and time turning their vision into a ready product as quickly as possible. The other uses the same energy and drive to prepare a comprehensive, polished document detailing all the goals, analyzes and plans for the future. The first group is unaware that in no time their ideas will hit the wall that is the open market, which will force them to rebuild, modify or remove already implemented solutions. The second takes too much time during the theoretical and planning phases. At any given moment they risk losing their chance to a more efficient competitor. In short, the first group risks wasting all of their time and money, while the second, creating a business that exists only on paper.  In both cases the misguided actions taken after coming up with an idea move the businesses further and further away from a successful launch. There is of course a third strategy that I want to talk to you about.
 

Lean canvas – the clever business plan

Some time ago the Lean approach made waves in the startup world. The Lean strategy, unlike the two described above, posits a radically more efficient approach to goals and costs, eliminating as much unnecessary elements as possible.”Lean” means the creation of a minimal working version of a business (minimum viable product, MVP), making it possible to test your idea in real market conditions with proper target groups, instead of polishing concepts, plans and solutions.
 

Why create a Lean Canvas?

The Lean Canvas template encourages the entrepreneur to reflect, helping to focus on what is most important. By getting rid of unnecessary elements means we are forced to look at the most crucial aspects of the business. Its a top down view of the business. It helps to see what is often lost in the enthusiasm of starting a new project.

 

• It saves time – both, time that would otherwise be wasted on writing a detailed business plan, as well as time that would be spent on building a solution that is incompatible with the markets needs.

• It helps the founders assess the risk associated with the project and decide if they want to go ahead with it.

• It leads to optimizing various aspects of the business, minimizing the danger of making critically erroneous decisions.

• It exposes the projects weak points and points to sources of potential problems.

• Helps to write down hypotheses that need to be tested.

• It helps in arriving at a product-market fit in the early stages of development.

• It is a good starting point for creating an elevator pitch, for the times when you have to quickly (1 minute!) and effectively describe your ideas key points.

• It can be a valuable tool for a potential investor. It clearly presents the ideas key elements, helps assess its business potential and facilitates communication. Like a litmus test of the founders approach, it shows their ability to manage a business and proves that they did their homework and are ready to continue working on the project.
   

How to fill out a Lean Canvas template?

Therefore, Lean Canvas is a simplified business plan that makes it possible to quickly present the most important aspects of a project. The goal is to assess a new ideas potential in the preliminary stages and come up with a plan of action for going forward. Remember that the key word is “preliminary”. The research should be quick and effective, not exceeding more than a few work hours. Don’t be alarmed when you feel the need to modify previously filled fields in the template. That is the point of this whole process, to see what was overlooked. Remember that at this stage you are working with hypotheses rather than concrete data. In time they will be replaced with conclusions supported by research and experience. Treat Lean Canvas as constant process of reflection on your business whose effects will continue to evolve along with your project.

At this point it’s an established practice to fill out the template in a particular order:

1.  Problem: what need does your product or service address? What issues does it solve? The optimal number of provided issues is 1, while 3 is the maximum. Make sure that they are properly defined, solvable and important to a specified target group.

2.  Alternatives: how have people fulfilled this need up to this point?  What are alternative methods to solving the issue? What are the solutions provided by your competition? There are for example many alternative solutions to a problem like “I am hungry, but I forgot my lunch at home”. Among just a few are: ordering takeout, buying a candy bar from the office vending machine, using a catering service, going out for lunch. Is your solution able to compete with one these?

3.  Customer segments: what groups does the issue affect? Who could have a need that your product or service fulfils? What segments (sub groups) can you distinguish? For example, if your target demographic is other businesses, how big are they(one person, small, mid sized, corporations?), where are they located, which sector do they work in.  If you are targeting individual customers, what are their demographic and behavioural characteristics. At this points it would be quite beneficial to step away from the desk and go meet actual people. Talk to them! Do they really see the issue the same as you? What bothers them the most? What is most important? Will they be willing to pay for your product? How large is the group in your geographic region?

4. Early adopters: this point expands on the previous one. Early adopters are enthusiasts, your first clients, pioneers open to new solutions. Who would be the first to jump at the opportunity to use your product or an early version of it? Learn this and you will have made the first step in preparing a strategy for promotion and entering the market.

5. UVP: unique value proposition. What value does your product or service bring to the table? This should be a single sentence describing what you are doing, for who and what problem you are solving. For example: a mobile app aimed at drivers, helping them choose the fastest route with the least speed cameras. This field will require you to have a good understating of the target groups needs, in other words a good grasp on point 3. How your potential customers view a problem, what is important to them, what solutions they see as optimal, will impact how your product will be positioned and what your communications strategy will be.

6. High level concept: it is good practice to use a well known and established company or service as a reference point when explaining your ideas to potential investors. This point is all about helping you present your idea in the most concise and clear way using popular businesses or products as part of an analogue. For example: Uber for pilots, Facebook for animal lovers, Instagram for videos, etc. It is important to use example outside of your business sector or target demographic. These analogies should not be used in marketing, rather in early internal communication with investors, co founders, your team or business partners.

7. Solution: in what way does the service/product solve the aforementioned problem and how does it provide the user with the previously discussed value? What, exactly, is your business about? What you do really want to make – a mobile app, online store, portal, service or a physical product? In this point describe the most important elements and functionalities. Despite what many entrepreneurs think this isn’t the most important point of Lean Canvas. The truth is that you should refrain from filling out this part before getting answers to questions highlighted in previous points. The solution proposed by your company should reflect actual market needs – empirically proven, verified by real users. That is why your product does not have to be fully developed – why MVP, the minimum viable product, is enough. A product that solves a basic need; a simplified version of your business needed to test your concept. Only after making the MVP available to potential clients, collecting their feedback and reaching appropriate conclusion can you make the decision to expand your offers basic functionalities. There is also the chance that after receiving this data you will want to go back and redefine your initial idea. This is the essence of the Lean approach – why spend time polishing an unverified idea, waste time and resources doing things that are currently unnecessary?

8. Channels: channels of reaching clients. How do you want to promote your product and how do you plan on finding users willing to pay for it? Browser ads, promotion during industry events, Facebook, content marketing, working with bloggers, direct sales, sponsored articles in the press, radio, TV, pamphlets? Think about where – online and offline – you can find your potential customers; write down all the possible ways to promote your business both free and paid for. Next, choose the ones you believe have the most potential and start testing their effectiveness. Start by setting a modest budget and observe how it converts, meaning how many registered users, received sales inquires or other indicators of a campaigns effectiveness you get. Analyse which avenues yield the best results at the lowest cost and plan your marketing strategy accordingly.

9. Revenue streams: how do you want to make a profit on your venture? What business model do you want to implement? Subscriptions, licensing, provisions, selling ad space, e-commerce, other? This and the next points are tentative – you don’t have to create a spreadsheet right away, although a simplified one would be very useful. Come up with a rough monthly estimate of what your chosen business model, taking into account your target demographic and established pricing, is able to generate. The time for advanced maths will be after initial validation of your idea.

10.Cost structure: all elements whose creation and upkeep generates cost. Preparing a website(application, store), hosting, office, hiring a team, marketing, bookkeeping, hardware etc. Similarly to the previous point, rough estimates will be enough. The point is to create an initial diagnosis of a situation in which the cost far exceed the projected revenues by several orders of magnitude and redesign the business by going back to previous elements of the template and optimizing remaining parameters (simplifying the product, changing the target group to a bigger one or one more willing to pay, finding a better business model, etc.). Eventually – thanks to this point of the Lean Canvas approach you will be able to back out of unfavourable projects.

11.Key metrics: key measures (statistics), which will allow you to rate the potential and growth dynamics of a business. The number of users, trial accounts, contracts signed, subscriptions purchased, products sold, etc. Consider how you can effectively track and analyse them; set the values and time thresholds at which you will take specific actions like when you will consider additional investment or when to fold and back out of a project completely.

12.Unfair advantage: unfair advantages, difficult to copy or catch up to.  Specialist knowledge, access to valuable contact information not available to anyone else, unique comprehensive databases of potential clients, patents, exclusive distribution deals.
 

What sort of mistakes does Lean Canvas protect you from?

In summary, a properly filled out Lean Canvas should answer a few key business queries:

• What I really want to do?

• Has anyone else done it before?

• Can I do it better?

• Do I know how to make money on it?

• Who is this product for – is the target group large enough?

• Do I know how to promote this? How to communicate the product to sell it?

• How much will this cost? Do I have the necessary financing to create and support the project? Do I know how to get it?

In essence it allows you to avoid the biggest traps when developing your own business. Traps such as:

• building a product that is more technologically complex than it needs to be

• building a product no one needs

• building a product for a target group that is too small

• building a product for a target group that can’t or is not willing to pay for it

• building a product, whose creation and operating costs exceed potential profit

 

Example? Without precisely identifying the needs and values of the target group, without building the MVP and conducting preliminary tests you risk committing the most common startup mistake: improvement of the technology behind a product (even before it hits the market), which doesn’t address the users issues. You are wasting your time, money, the your programmer’s effort and potentially any chance for success, because with every passing week the chances of your competition releasing a similar product taking with them your potential clients, increases.

Conversely,what good will your perfectly targeted product be, if the target group is too small to cover the everyday operating costs even when assuming a maximum conversion rate.

In turn, without defining channels of communication and ways to reach clients you won’t get any users. It is a cliché - but the idea that “a good product sells itself” is one of the most common mistakes startups make. Without marketing there are no users, without users there is no testing and without testing you won’t polish the product to a state where users will be willing to pay for it. Waiting with promotion until a startup magically begins to grow and make money will lead you nowhere.

So it goes. If you do your homework at the beginning you will limit the risk of situations such as the ones mentioned above to a reasonable minimum.
 

What’s next?

Lean Canvas is just the warm up. As I said in the beginning, filling out the template only in the beginning is not enough. Treat Lean Canvas as a process, updating it once in a while in tune with project's progress. How often? That depends on how quickly the project changes and grows. Certainly it would be a great idea to bring the file with the model with you, especially when attending a meeting with founders, the team, investors or consultations with a mentor.

It's a mistake to treat canvas as just another file that has to be attached to the investment process. It’s a fact that many investment funds will ask you to prepare canvas right from the start or require one in order to continue the talks. Occasionally I will hear entrepreneurs complain about all the paperwork, I mean “the idea defends itself, preparing the documents is just a waste of time”. That’s not how it works. Putting aside the benefits in terms of communication with investors and business partners, you  also fill out the canvas for yourself. So that you can better understand the business, its goals and most importantly how to go about implementing your ideas. This isn’t an European Union Subsidy form that no one will look twice at after receiving the funds. The canvas will only be a waste of time if you don’t include it as a part of your business reality.

It is important to remember that building a lean canvas for your enterprise does not mean you can forget about all the other documents. Simply put, there will be enough time for those after you decide what you want to do and make a preliminary assessment of elements such as risk, prospects, and requirements.