Some Words of Caution for Lean Start-Up Followers

While Im no expert at Lean Start-Up nor do I have experience with many start-ups, but what I experienced in my 2nd start-up, AEP, was enough to know that something about Lean Start-Up is a bit out of touch with reality. Its not that I disagree with anything Eric Ries’ has presented. In fact applaud his progressive thinking and easy to understand approach to changing trends in business management and entrepreneur ship.  Its just as I read through the principles and philosophies of the Lean Start-up I cant help but to think that some key concepts about the Lean Start-Up miss some major consideration and Id like to provide some suggestion to help apply to the Lean Start-Up practices and philosophies.

My 2nd start-up was AEP.  AEP was a high-tech start-up, exapting an existing technology to innovate production of polysilicon, a key material used in the manufacturing of primarily solar photovoltaic cells but also used in integrated circuit board manufacturing and semiconductor equipment components manufacturing. In a 5 year period starting in 2005, AEP went from and uncle and nephew (me) in a kitchen to hiring 145 employees, raising approximately $200 million from multiple equity and debt sources, securing over $1 billion in contracts for its products, receiving a term-sheet for a $250 million loan guarantee from the US Federal Government, and was just about to complete its first demonstration plant. By 2011, the market for solar, particularly polysilicon, was teetering downward. With prices for polysilicon tumbling, delays in AEP’s production, poor initial product performance, and on top of all that AEP’s investors were dealing with major internal struggles independent of AEP.  Under pressure for cash in 2011, the company was sold to a Chinese manufacturer for an exact amount that I can’t contractually disclose but it was a small fraction of our previous round’s $170 million post money valuation. Just enough to buyout individual investors and pay-off all debt.  By 2012, the plant was shut the plant down and transferred the technology to China.  At least I was able to pay-off a house in Princeton but it was not the 9 digit IPO payout / acquisition that nearly every entrepreneur dreams of but we were oh so close.

AEP's Production Facility circa 2011
AEP’s Production Facility circa 2011

In hind-sight, AEP glorified many of the Lean Start-Up principles including business-hypothesis-driven experimentation, iterative product releases, and validated learning.  There were many points during AEP’s early life where we tested the business model and tweaked it to fit what our customers and investors were looking for.  This meant adjusting plant scale, markets served, technology used, and many other strategic considerations.  Sure the core technological concept and product stayed the same, but nearly every other piece of the strategy had been tweaked a few times.

As an approach to iterative product releases and validated learning, we innovatively took a parallel-path to development work while the detailed plant engineering plans were being developed to get to market sooner (anyone who has worked with construction knows that once detailed plans are made, changes from new developments tend later on in the project to be time and cost consuming). We partnered with another company to develop technology and they served as a pilot plant although separate approaches to the technology were ultimately pursued.  We had pilot plants of all sizes and types to test every parameter we could possibly think of before actually getting all the funding to build the commercial demonstration plant.  We even had product testing teams with potential customers that were addressing technical challenges and benefits from our product.  These teams provided technical information that directly influenced how the plant was operated.  The feedback loops were fluid. Product and process testing was impressive even to multi-nationals such as Samsung, GE, Total Oil and Gas, even the US Department of Energy were all amazed at our cost-effectiveness in proving the technology.

So sounds like AEP was on track to be the Lean Start-Up of the year but why did it fail? Well, surely simply practicing Lean Start-Up techniques always guarantee success.  And perhaps here are couple things that will help entrepreneurs frame up Lean Start-Up methodology, or whatever they consider it.

 1.     Timing is everything…don’t ever forget that.

Sometimes we don’t have time to test every iteration of a business model before we need to commit to it.  Markets and industries are extremely fluid and demand for product can go from high to nil in a matter of months if not week’s.  As entrepreneurs, we can’t afford to miss these waves of demand to gather customers or additional investment.  When you’re not at cash-flow break-even, you’re constantly looking for money to at the very least cover you’re overhead and pay your employees.  When there is strong interest in a particular segment (for AEP, as polysilicon manufacturers in solar/clean-tech from financial investors in 2006-2009), valuations are raised (which means more money and giving up less equity for the entrepreneur) and even strategic investors are willing to pay premiums to buy shares in your company. Miss that wave and it does matter how well founded your idea, it becomes harder to raise money and still hold onto a significant portion of your equity, which could mean significant control. Timing the start-up to catch these waves of opportunity to meet market demand and investment interest should be considered and is not very well covered in Lean Start-Up practices and philosophies.

Similarly, opportunity is literally everywhere and not every opportunity is right for the entrepreneur AT THAT TIME. Again timing is everything.  AEP looked at many options to move into separate manufacturing segments to better serve the market.  However, we have limited personnel already working hard on getting the plant running. Surely there were many opportunities to “pivot” which would have set-up AEP for more success than it ultimately turned out.  It was just a matter of time and skills that AEP didn’t have to expend to seek out those opportunities and the resources available might not allow you to pivot. Think, if you’ve hired 100, even 10 people to run a bread plant, its not too easy get them to run a shoe plant on a drop of dime.

Lean Start-Up seemed to be pretty loose as to when the time to be a Lean Start-Up and when not to be but it seems clear to me that time is one of the greatest factors that influences when opportunities can be pursued and when they should be pursued.

2.     Managing expectations with ALL stakeholders, not just shareholders, starts from day 1.

From the moment you explain your plan to someone, anyone. They are attached to it in some sort of way and expect something in their own minds of what the outcome will be in the future.  Surely when there are not firm commitments, changes to any relationship or plan is reasonable. However, it is very rare in a start-up that you can build enough momentum without making some sort of commitment, even early on.

At AEP, before we had closed our first Series A round of $10 million, we had quite a few key Letters of Intent (a legally limited-binding contract to work together) with technology providers, engineering firms, customers, and employees/consultants.  Sure we could have changed direction before raising this money but it took us 1 year to get to just that point.  It would have been difficult to abandon the core technology and business model.  Managing the expectations could have included some flexibility but we were actually legally bound to our strategy with our investors once Series A closed.

I would recommend that anyone thinking about using the Lean Start-Up be fully transparent on your commitment to a business model or strategy with all your stakeholders. If they are ready for you to change gears at the drop of a dime, it will be easier for you to do so. (On that point, it may be easier to do this with financial investors (VC funds, angels, etc) rather than strategic investors as just because you’re strategy can change quickly, it doesn’t mean that they will either. Financial investors are simply seeking the best return on their investment and can be more easily convinced.

OK so what?

I hope these two suggestions will help to frame up Lean Start-Up in a manner that can be more beneficial to the entrepreneur in seeking out market and investment opportunities. It won’t assure success by any means and theres probably 15 more things off the top of my head that need to addressed during start-up phase but hopefully these two suggestions will help not set them up for failure or a difficult strategic/ leadership/ management situation.  We all seek for easy ways to achieve success but ultimately going out there and doing it gives us the best tools we need. I hope that you have learned from my experience and how it can help you’re implementation of Lean Start-Ups more effectively.

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