Aristotle's Approach to Startups

How an ancient practice keeps entrepreneurs from deluding themselves and their investors 

Thousands gathered this week in San Francisco at the Lean Startup Conference to hear industry luminaries share their expertise on how to launch successful startups. Conference hosts blogged about how innovative “Lean Startup” methods can reduce risk by rejecting the traditional path of extensive business planning and huge upfront investments. Instead, today’s top entrepreneurs formulate and test hypotheses, adjusting their new offerings quickly and cost-effectively with fast development cycles. 

That’s right, the heart of today’s hottest management trend is a 2,500-year-old idea that you first learned in grade school. It’s the scientific method, one of Aristotle’s lasting contributions to humankind. He promoted the radical idea that new knowledge can be gained from empirical study of the natural world. Throughout the ages, Ibn al-Haytham, Roger Bacon, Descartes, and many others went on to perfect the concept. (1) Eventually, a 19th Century scientist and philosopher named William Whewell defined the five-step method commonly used today: formulation of a question, a hypothesis, a prediction, experimentation, and analysis of data to confirm or reject the hypothesis. (2) 

Lean Startup is the scientific method 

Today’s Lean Startup approach employs the scientific method to answer essential questions about new products, business models, and early market demand. Rather than generating lengthy market research reports, entrepreneurs list their hypotheses on a one-page “business model canvas.” Then, applying agile development techniques, founders work closely with customers to quickly test hypotheses and refine product features, pricing, marketing, and delivery. Following this path helps entrepreneurs prove that their products, key business processes, and economics all work on a small scale before they seek funding for rapid expansion.  

This approach is not just for startups. Big companies General Electric, Toyota, and Comcast all use Lean start-up practices to develop new products and services with small teams, (3) an intrepreneurial practice that helps them avoid the bureaucracy inherent in large organizations. Many leading firms run ongoing, low-cost experiments, and then learn all they can from them, only committing massive money and resources when and if the business ideas demonstrate traction. Jim Collins, author of Good to Great and Great by Choice, calls this “firing bullets, then cannonballs.” He says following this critical discipline can help companies outperform financial benchmarks by a factor of ten or more over the long term. (4) 

Angel investors and venture capitalists can also benefit from Lean Startup methods. It’s estimated that as many as 90% of new high-tech ventures fail, (5) meaning investors typically waste billions every year on ideas that go nowhere. The new approach limits risk for investors because it helps them methodically validate ideas using someone else’s (the founders’) boot-strapped funds. Financiers then avoid investing in ideas that arise from hopes and dreams alone, and substitute them with scientifically proven models based soundly on “dollars in and dollars out.” 

Pass the pie in the sky

Perhaps the scientific method’s greatest contribution to startups is helping entrepreneurs overcome their own human shortcomings. All people suffer a cornucopia of flawed thinking—Wikipedia lists no less than 92 decision-making, belief, and behavioral biases.

Unfortunately, entrepreneurs tend to be in a class by themselves when it comes to bias. Being an entrepreneur often involves a steadfast belief in an idea that will be bigger than Google, regardless of what anyone else thinks. While that level of confidence is admirable, even infectious, it’s almost always self-deluding. Whether applied in the physical sciences or in business, the scientific method helps minimize bias and errant conclusions through repeated experiments, rigorous peer reviews, and credible evidence. In the end, objective reality always trumps subjective belief. 

After a history of bad decisions and so much money wasted on dead ends, entrepreneurial approaches are changing. Increasingly, investor’s say “Prove it” when entrepreneurs claim to have the Next Big Thing. Thanks to the scientific method, the Lean Startup approach can do exactly that.

Excel-lens is a publication of Service Excellence Partners. Our unique approach helps founders at early stage companies better scale operations and manage growth. Contact us today.

Sources:

1. De Lacy O'Leary (1949), How Greek Science Passed to the Arabs, London: Routledge & Kegan Paul Ltd., ISBN 0-7100-1903-3
2. History of Inductive Science (1837), and in Philosophy of Inductive Science (1840) 
3. Lean Start-up Conference program, http://leanstartup.co/full-program 
4. Jim Collins and Morten T. Hansen (2011), Great by Choice: Uncertainty, Chaos and Luck—Why Some Thrive Despite Them All, USA: HarperCollins Publishers, ISBN 978-0-06-212099-1
5. Max Marmer, Bjoern Lasse Herrmann, Ertan Dogrultan, Ron Berman. Start-Up Genome Report Extra. s.l. : Stanford University, 2012.

Scaling Up? Think Hamburgers.

Your new venture is catching fire and you need to ramp up operations quickly to handle demand. Where should you look for pointers? Try McDonald’s, Burger King or Wendy’s.

The Start-Up Genome Project analyzed thousands of high tech start-ups and found that successful companies progressed through four predictable phases. Dubbed the “Marmer Stages,” each involved a different set of objectives; Discovery was crafting and testing the idea, Validation was refining product features and generating initial orders, Efficiency was making customer acquisition and delivery processes repeatable, and Scale was ramping up and generating aggressive growth.¹ A successful mantra was “nail it, then scale it”—confirming that the product, marketing strategy, and business model all worked before stepping on the gas with big capital, staff, and infrastructure investments.

So what happens when the time comes for a start-up to scale in a big way? Suddenly the game changes from “tinkering” to “ramping,” generating volume quickly to establish market position and cash flow. It may sound silly to high tech entrepreneurs, but fast food franchises offer unique insights—they’ve made scaling up a science. Intel CEO Andy Grove looked closely at McDonald’s. In the late 1970’s, he believed Intel’s success depended on making their embryonic microprocessors as reliably as hamburgers, saying “We have to systematize things so we don’t crash our technology.” He kept a hamburger box on his desk with a mock logo, McIntel, to remind everyone of the strategy to grow with profitable scale.²

Franchisers offer four great lessons for quick and efficient early-stage expansion:

1.    Simplicity. Ordering “off-menu” may be fine for high-end restaurants, but fast food stores limit choice to what’s on the menu. Subway’s deli-style assembly and Burger King’s “Have it your way” only apply to a narrow range of options. Lesson: To scale, new companies must limit choices in the product offering. In the Validation stage, start-ups often “pivot,” experimenting with the product and pricing before they find something that sells. But every new version comes with added complexity, time, and hidden cost—documentation, training, software, accounting, and support. Pick your target; you can’t be all things to all people, so choose ONE profitable segment and stick to it. Rationalize your product line so that at least 80% of your sales come from just a few versions, and resist the temptation to add more. Product simplification is better for sales, too. Studies show too many choices confuses people, slows decision making and lowers satisfaction.³

2.    Standardization. In the fast food world, uniformity in supplies, equipment, training, software, and work processes promote consistency and quality, no matter where the franchise is located. Standardization also leads to economies of scale, which allows franchisers to improve performance and lower costs in their supply and distribution chains. Customers value predictability, which causes repeat visits, recurring revenue, and brand reinforcement. Lesson: As sales gain traction, consistency becomes essential to grow profitably and keep customers coming back. In the Efficiency stage, further refine product specifications, value propositions, and delivery processes, documenting best practices. Redesign if necessary to meet financial targets. Implement standard metrics and process checks to ensure consistency and quality. Consolidate anything that gives you purchasing leverage.

3.    Leadership. An industry expert states that if a franchise has a proven business concept with sound training and support, 40% of a franchisee’s success will come through their own hard work and talent.⁴ McDonald’s is renowned for careful selection and training of its franchise owners. Applicants must demonstrate past business success and financial resources (a new store typically requires a $1M+ investment). If they make the cut, they spend three days in a McDonald's restaurant, working and learning about the business. If they advance, franchisees must then spend a nine months at Hamburger University before opening a store.⁵ Lesson: Good leadership and development are essential for ramping up. Growing companies tend to promote from within and skimp on management training.  As a result, teams struggle and executives spend valuable time firefighting. In the Scale stage, look beyond top technical skills and choose leadership experience or attributes instead. Then, take sufficient time to develop the knowledge and skills required for good management.

4.    Strategic Management Systems. Opening new stores is a key business process for franchisers, meaning they take a systematic approach to planning, screening, contracting, implementing, and supporting new franchises. They deploy advanced Point of Sale (POS), staffing, and inventory management systems in each store to track real-time metrics, fill work schedules, and optimize supply chains. Visibility to rich data in turn facilitates learning and adjustment at corporate headquarters. Effective management and communication methods also promote execution across a distributed network. Many franchisers use regional or district managers to continually communicate, coordinate changes, and resolve issues with franchisees. Lesson: Entrepreneurs must develop mature management systems to support expansion during the Scale stage. Create a deployment plan and develop the right infrastructure. Define a small set of the most important metrics and implement systems to track, analyze, and report them. Develop enterprise-wide planning, execution, and review practices to align the increasingly complex organization, drive changes, and institute continuous learning and improvement. 

Start-ups are by nature quick-moving and creative, but adopting disciplines like those used by fast food franchises makes growth rapid and profitable. Making this transition is critical for early stage companies, and high volume operators can offer important lessons for every growing enterprise.

Footnotes:
1.    Compass blog: cracking the code of innovation, 2012. http://blog.startupcompass.co/tag/lean%20startup
2.    V. McElheny, 1977. “High Technology Jelly Bean Ace,” New York Times.
3.    B. Schwartz, 2005. The Paradox of Choice: Why More is Less, Harper Perennial, ISBN 0060005696.
4.    G. Nathan, 2012. “Best Practice in Franchisee Selection,” Franchise Relationships Institute. http://www.franchiserelationships.com/articles/BestPracticesinFranchiseeEvaluation.html
5.    L. Magloff, 2013. “What You Need to Open a McDonald’s,” Chron http://smallbusiness.chron.com/need-open-mcdonalds-10513.html