Lean start-ups: Faster to market, fewer mouths to feed
The new trend is to start-ups with a handful of employees working out of very modest digs.
The start-up AirBase Systems has notched significant achievements in a short period of time. The company, founded in 2010, has developed a system that enables municipal bodies and residents to track on a map real-time levels of pollution where they live by means of a network of nanotechnology-based sensors. The company is currently selling the system on four continents and is pulling in revenues equivalent to the total monetary investment in the company - $500,000, which was raised from a private incubator. All of this is credited to the labors of only three employees - the company's three founders.
AirBase represents the current generation of start-ups, which are characterized by "lean" management. Due to fiscal constraints resulting from a crisis in the venture capital sector and thanks to technological advances, they are achieving substantial results in a short period of time, and at little investment. Lean start-ups are staying alive for a relatively long time and with few employees. If more hands are required, they will make use of outsourcing. They are financed from within (or with small external investments ). And they send products to market as soon as possible.
"For us, the main implication of our being a lean start-up is our reliance on subcontractors and consultants for everything not at the core of the company's operations. The structure of the market in Israel permits us access to experts in nearly every field, and at reasonable costs," says Irad Kuhnreich, CEO and founder of AirBase.
"In terms of our customers, lean management means that we do not have inventories or warehouses, and production is therefore carried out only on the basis of orders, and the lion's share of expenditures are covered by payment up front. It isn't always convenient for the customer, but it makes it possible for everyone to enjoy beneficial prices," Kuhnreich adds. Consequently, by employing a small team aided by experts and consultants, the company can ensure its clients a low price, and can penetrate a market with a product that costs approximately $2,000, while similar products in the market cost around $150,000.
Ofer Timor recently recommended his investments in early start-ups as a partner in the Inimiti Micro Venture Fund, following a hiatus of several years. At the start of the previous decade, he invested through Delta Ventures, a VC fund, in companies like Provigent and BroadLight. "It's a different world now. The number of people in the companies has shrunk, and tremendous progress has been made in the time it takes to go to market," says Timor. "In the 2000s, it would take between a year and a year and a half until the company came out with a salable product. The time lag has shrunk to one-fifth of that, and today, in just a few months you can ship quite complex applications."
Similarly, the average number of employees in a start-up has declined. "Today, you have a team of four or five people working on a product. At the start of the previous decade, anything less than 20 people was not even considered a company," adds Timor. The milestones by which companies are measured have changed, he says, and at present, with less money, the start-ups are achieving much more impressive results.
Notwithstanding the substantial advantage to entrepreneurs of efficient and economical management, it is not certain that the long-term effect on the economy is a positive one. An article that recently appeared in the New York Times reported that small start-ups - sometimes consisting of a single person - are causing the rate of job creation in the digital world to be lower than the rate of job loss in the traditional world. In other words, the circle of those enjoying the fruits of high-tech will be smaller, so long as the companies do not expand.
Lean and unmean
Nonetheless, lean start-ups are the hot trend in the high-tech world. The guru of the method is Eric Ries, who in 2011 published the book "The Lean Startup," which became a bestseller with over 90,000 copies sold. The Lean Startup philosophy holds that it is possible to build highly capital-efficient companies by listening and responding to the customer's requirements, which in turn enables companies to cut down development time and save resources. "Lean isn't about being cheap [but is about] being less wasteful and still doing things that are big," Ries told the Wall Street Journal.
Drew Houston, founder of Dropbox, the cloud-based storage company that adopted the Lean approach when it was established, related that after reading Ries' book, the company began to trickle out new features as soon as they were ready instead of waiting and launching a complete product. Another example of a start-up that stayed small is Instagram, which employed 13 workers when it was sold this year to Facebook for $1 billion. The company, which developed a photo-sharing application for iPhones, first listened to the needs of users and only then set out to develop the product for Android phones. Another example is the Israeli firm Face.com, which was recently sold to Facebook at a time when it had fewer than 10 employees.
The Lean Startup approach has turned into a global movement that has been adopted by entrepreneurs, and which was in part disseminated at entrepreneurial conventions and events. In Israel, a workshop about it was held only a few months ago. One of the most enthusiastic backers of the approach is Eden Shochat, a partner in the VC fund Genesis Partners.
Shochat states that the Israeli entrepreneurs have always adopted practices that characterize the Lean Startup - rapidly forging ahead, and switching direction once the need calls for it. And yet only in the past six months are we seeing entrepreneurs who have adopted the approach in a widespread manner. "Lean Startup says that at every stage you have to try to define the most significant thing that you don't know, or the greatest risk to the company's existence, and determine how you can reduce the risk by means of communication with your customers. In the second stage, once you already have a product, you talk with the customers about the product itself," says Shochat.
Shochat offers an example meant to explain how this works in practice: A company interested in offering travelers coupons will get started without setting up a new website and a system to back it up, which would cost between $100,000 and $400,000, and will instead create a well-designed Internet landing page that explains what the product is. The page would have a place where people could leave their e-mail addresses. Based on the number of people who register, the company could at low cost determine if there is in fact a need for the product and if people are interested in it.
One of the start-ups that has adopted the approach is Touchbase, which began operations in August. The three founders of the company, Lior Grossman, Yaron Budowski and Tomer Filiba, are self-financed, and are working from improvised office space in Grossman's Ramat Hasharon apartment. Although the company has been operating only three months, it is already carrying on close contacts with users who are trying out the initial versions of the product. "We are concentrating on product development and are trying it out on the customers. It is happening with short turnaround times. We make a small set of things, we try it out, we make changes and then we go back to the customers with new versions, on a daily basis," says Grossman.
The company's application enables users to schedule appointments easily and effectively, and it locates the most suitable place for the meeting. Before the company began, the founders worked at multinationals as well as start-ups. "We had a chance to get a taste of all worlds, and now we understand the power of the Lean Startup," says Grossman. He mentions the lengthy development turnaround time at large companies, and says that a product is liable to reach the market as long as two years after development began.
"Indirectly, the process leads to a saving of time and money, because by means of the short development turnaround we are always focused on matters that are important to users, and don't waste time on expensive development of unnecessary items," says Grossman.
Fear of theft
Consulting with customers, users or investors at an early stage of a start-up's life runs counter to Israeli suspiciousness and fears of intellectual property theft. "You have to assume that for every good idea there are 10 people around the world who are trying to make it happen. So it is worth talking about it with as many people as possible, in order to learn how to improve it," says Shochat.
In the past few years technological, monetary and management changes have led to a shift in the approach adopted by start-ups. One of the most significant of these is the decrease in financial sources available to start-ups early in their existence; VC funds have cut back on their seed-stage investments.
"Once, it was patently obvious that once you got money from the VC funds, you went and rented office space in Herzliya or Tel Aviv; it was obvious that a start-up company looked like a bank branch and that everything was tip-top. Now, people are looking for the minimum. Location is less important. They collect furniture from friends, they look at every penny that is spent. They hold onto the money so they can bring in good people, because they understand that a beautiful office does not move the product ahead," says Timor.
Also contributing to these shifts were technological changes that made the lives of the developers easier. "You don't have to reinvent everything now, primarily thanks to elements of open code, and it is easier to integrate your code with software that you did not develop. You don't have to take on an employee for every possible thing; you can outsource. For instance, to convert an Android application to an iPhone application."
The move to cloud computing saves companies on the expense of large servers. "You don't have to spend tens of thousands of dollars at the get-go in order to set up some insane computer room," Timor adds. "Everything is much more modular than in the past, and the infrastructures on which the companies are built are simpler and cheaper."