This is, of course, easier to do when you're adding to an existing production application. You can launch a new startup site with one small feature, you need a compelling package of features. Once you're up then this advice is more useful.
I do like the short iterative feature/flow based approach in general though. It really does help keep you motivated, and it gives you something useful to show your users/clients/etc... on a more regular basis, which in turn gets you access to feedback and usage patterns earlier, etc...
I agree it's more relevant once your up and running. But you should also follow it when you're launching.
Anyone remember what facebook's wall was when it launched?? Yep, just a textbox! And facebook had no photo albums or anything like that, just profiles and friends. It was pretty much a couple mySQL tables with some php displaying the data. And people still flocked to it.
I do like the short iterative feature/flow based approach in general though. It really does help keep you motivated, and it gives you something useful to show your users/clients/etc... on a more regular basis, which in turn gets you access to feedback and usage patterns earlier, etc...