My wife and I are angel investors – individuals who provide capital to start-up businesses in exchange for equity ownership. We typically invest at the very early stages of a company after friends and family have invested and before venture capitalists invest. Agile startups are where we want to invest, so we examine candidate companies through an agile lens.
What is an Agile Startup?
If a newly formed company is using Scrum or Kanban, does that make them an agile startup? It's a good start, but it’s not sufficient. Let me illustrate with an example.
Several years ago, the founder of an eSports startup (a company that was developing a product to support team-based video game competitions) sent me an introductory email. The gist of the email was: “I heard you’re an angel investor. My company uses Scrum to build our product and we all have copies of your book Essential Scrum. Are you interested in investing in us?”
I had a conversation with the founder, and what I learned is fairly commonplace. His company was using agile as a process for building its product (agile delivery), and not as an overarching mindset for operating the company. To me:
An agile startup is an early-stage business that has fully embraced the agile mindset as its core operating model to address the extreme uncertainty that comes with being a startup.
I have a very simple approach to getting an initial gauge on a founder’s agile mindset (or lack thereof); I ask one or more of the following questions:
- What was the most important thing you learned about your business last week?
- How many experiments did you run last week, and what did you learn?
- What is the most important assumption you’re making about your business, and if you are wrong, you’ll fail? And, what are you going to do to quickly and cost-effectively validate the assumption?
Notice that in the formulation of these questions I was specifically silent on the “product,” but instead focused on the business as a whole (which includes the product).
Unfortunately, the eSports founder didn’t really have good answers to my questions. But he was completely certain that he understood his customers and the product he needed to build, and his team was apparently really good at applying Scrum to build things.
Needless to say, we did not invest in this company.
Product-Market Fit
In my experience, the delivery part (building the product) is not where most startups tend to fail. Honestly, put a handful of technically talented people in a garage and tell them to build something, and they will. They’ll get the job done in spite of any obstacles in whatever process they use to build it.
Most startups falter because they fail to achieve product-market fit, which means being in a good (large) market with a product that can cost-effectively satisfy the real (not perceived) customer needs.
An agile startup recognizes the importance of product-market fit (building the right product for the right customers in the right market) as well as product development (building the product right) and uses an agile mindset to address both.
Uncertainty
At its heart, the core agile mindset addresses uncertainty. Let me elaborate.
Any product (or service) organization has to grapple with three types of uncertainty:
- End (what) uncertainty surrounding what product to build
- Means (how) uncertainty surrounding how to build the product
- Customer (who) uncertainty surrounding who are the customers for the product
Traditional, sequential development processes (like Waterfall) focus first on eliminating all end uncertainty by fully defining up front what to build (i.e., by creating a complete, correct, and unchanging statement of the requirements). Only after fully determining what to build do they address the means uncertainty of how to build it (i.e., design it, code it, test it, deploy it). Whether your company is a startup or not, this simplistic, linear approach to uncertainty reduction is ill suited to the complex business of product development.
The agile mindset is not constrained to linearly addressing one type of uncertainty before addressing the next type. Instead, the agile mindset takes a more holistic approach and focuses on simultaneously reducing all uncertainties (ends, means, and customer) through constant inspection, adaptation, and transparency. Such an approach supports the opportunistic probing and exploring of the environment to validate important assumptions and to identify and learn about the unknown unknowns (the things that we don’t yet know that we don’t know).
Basically, we need to learn into the understanding of the what, how, and who of the product. It is this fundamental focus on opportunistically learning across all three uncertainties that I deem so important in an agile startup.
So, an agile startup not only applies an agile mindset to building the product, but also to making sure proper customer discovery and validation takes place. For startups, there can and often is a great deal uncertainty as to who are the actual customers and what do they want. Not recognizing and addressing these uncertainty leads to failure (not learning). To quote David Hussman:
The difference between learning and failure is how much money you spend to do it.
And, in startup, when you’re out of cash, it’s over.
Summary
Using agile to develop and deliver a product has proven itself a very effective way of getting products to market quickly. However, it is critical to make sure we have achieved product-market fit or we risk brilliantly building a product that no one wants.
An agile startup not only applies an agile mindset to building the product, but also to making sure proper customer discovery and validation takes place. Agile startups have woven into their DNA an intense focus on continuous learning in the presence of extreme uncertainties. They take nothing for granted and validate all important assumptions quickly in an economically sensible way. They also realize there are important things they just don’t know, so they are constantly probing and responded to what they learn. In my experience, these are the companies to consider investing in.