The Lean Startup

Eric Ries

After reading Reid Hoffman and Jeff Gothelf I was expecting a lot more from this one. The concepts lack detail and it's pretty dry at times. It still contains some useful ideas though.

🚀 Entrepreneurship
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2/5
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9
min

Lean startup builds on lean manufacturing, design thinking, customer development, and agile development.

The Lean Startup Method

  • Entrepreneurship is management
  • Validated learning — startups exist to learn how to build a sustainable business.
  • Build-Measure-Learn — turn ideas into products, measure how customers respond, learn whether to pivot or persevere.
  • Innovation accounting — how to measure progress, how to set up milestones, and how to prioritise work.

Vision

Start

Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop.

Through this process of steering, we can learn when and if it’s time to make a sharp turn called a pivot or whether we should persevere along our current path.

Products change constantly through the process of optimisation, what I call tuning the engine. Less frequently, the strategy may have to change (called a pivot).

Define

Startup — a human institution designed to create a new product or service under conditions of extreme uncertainty.

A company’s only sustainable path to long-term economic growth is to build an “innovation factory” that uses Lean Startup techniques to create disruptive innovations on a continuous basis.

Leadership requires creating conditions that enable employees to do the kinds of experimentation that entrepreneurship requires.

Learn

Validated learning is not after-the-fact rationalisation or a good story designed to hide failure. It is a rigorous method for demonstrating progress when one is embedded in the soil of extreme uncertainty in which startups grow.

Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects.

The effort that is not absolutely necessary for learning what customers want can be eliminated. I call this validated learning because it is always demonstrated by positive improvements in the startup’s core metrics.

True startup productivity: systematically figuring out the right things to build.

Experiment

One of the most important lessons of the scientific method: if you cannot fail, you cannot learn.

A true experiment follows the scientific method. It begins with a clear hypothesis that makes predictions about what is supposed to happen. It then tests those predictions empirically.

The first step: to break down the grand vision into its component parts (two most important assumptions entrepreneurs make).

  • Value hypothesis — tests whether a product or service really delivers value to customers once they are using it.
  • Growth hypothesis — tests how new customers will discover a product or service

Key questions to answer pre product development (tendency is to jump to 4, this is bad):

  1. Do consumers recognise that they have the problem you are trying to solve?
  2. If there was a solution, would they buy it?
  3. Would they buy it from us?
  4. Can we build a solution for that problem?

Steer

None of these activities by itself is of paramount importance. Instead, we need to focus our energies on minimising the total time through this feedback loop.

When we enter the Measure phase, the biggest challenge will be determining whether the product development efforts are leading to real progress.

Innovation accounting — a quantitative approach that allows us to see whether our engine-tuning efforts are bearing fruit.

  • Allows us to create learning milestones instead of traditional product milestones.

Leap

Facebook example (early on):

  • Value hypothesis — customers find the product valuable (validated by the fact that more than half of user come back to the site every single day).
  • Growth hypothesis — Facebook launched on February 4, 2004, and by the end of that month almost three-quarters of Harvard’s undergraduates were using it (without any marketing costs).

Genchi Gembutsu — You cannot be sure you really understand any part of any business problem unless you go and see for yourself firsthand (Toyota lean concept).

Steve Blank — the facts we need to gather about customers, markets, suppliers, and channels exist only “outside the building.”

Test

A minimal viable product (MVP) helps entrepreneurs start the process of learning as quickly as possible. The fastest way through the build-measure-learn feedback loop.

Concierge MVP — e.g. a face-to-face personalised service as an initial MVP for a piece of software. It's not the product but a learning activity designed to test the leap-of-faith assumptions in the company’s growth model.

Quality and Design in an MVP

  • Quality principle for startups: If we do not know who the customer is, we do not know what quality is.
  • MVPs are sometimes perceived as low-quality by customers. If so, we should use this as an opportunity to learn what attributes customers care about.

MVP rule: remove any feature, process, or effort that does not contribute directly to the learning you seek.

Measure

A startup’s job:

  1. Rigorously measure where it is right now, confronting the hard truths that assessment reveals, and then
  2. Devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan.

Innovation accounting works in three steps:

  1. First, use a minimum viable product to establish real data on where the company is right now. Without a clear-eyed picture of your current status—no matter how far from the goal you may be—you cannot begin to track your progress.
  2. Second, startups must attempt to tune the engine from the baseline toward the ideal.
  3. Pivot or persevere: after the startup has made all the micro changes and product optimisations it can to move its baseline toward the ideal, the company reaches a decision point.

Cohort analysis — looks at the performance of each group of customers that comes into contact with the product independently. Each group is called a cohort.

The traditional numbers used to judge startups are “vanity metrics,” and innovation accounting requires us to avoid the temptation to use them.

Hypothesis Testing at Grockit

  • For a report to be considered actionable, it must demonstrate clear cause and effect (actionable).
  • When cause and effect is clearly understood, people are better able to learn from their actions.
  • Make the reports as simple as possible so that everyone understands them (accessible).
  • We must ensure that the data is credible to employees (auditable).

Pivot (or Persevere)

Everything that has been discussed so far is a prelude to a seemingly simple question: are we making sufficient progress to believe that our original strategic hypothesis is correct, or do we need to make a major change?

A pivot is a special kind of change designed to test a new fundamental hypothesis about the product, business model, and engine of growth.

Failure is a prerequisite to learning.

A pivot requires that we keep one foot rooted in what we’ve learned so far, while making a fundamental change in strategy in order to seek even greater validated learning.

A startups runway is the number of pivots it can still make

Each pivot or persevere meeting requires the participation of both the product development and business leadership teams.

Accelerate

Waiting too long to release can lead to the ultimate waste: making something that nobody wants.

The critical first question for any lean transformation is: which activities create value and which are a form of waste?

Lean Startups practice just-in-time scalability, conducting product experiments without making massive up-front investments in planning and design.

Batch

Toyota discovered that small batches made their factories more efficient. In contrast, in the Lean Startup the goal is not to produce more stuff efficiently. It is to—as quickly as possible—learn how to build a sustainable business.

Continuous Deployment — a process by which software is released several times throughout the day – in minutes versus days, weeks, or months.

The essential lesson is not that everyone should be shipping fifty times per day but that by reducing batch size, we can get through the Build-Measure-Learn feedback loop more quickly than our competitors can. The ability to learn faster from customers is the essential competitive advantage that startups must possess.

Although we write the feedback loop as Build-Measure-Learn because the activities happen in that order, our planning really works in the reverse order: we figure out what we need to learn and then work backwards to see what product will work as an experiment to get that learning.

Grow

Sustainable growth is characterised by one simple rule: New customers come from the actions of past customers.

  1. Word of mouth
  2. As a side effect of product usage (e.g. When a customer sends money to a friend using PayPal, the friend is exposed automatically to the PayPal product).
  3. Through funded advertising
  4. Through repeat purchase or use

Three engines of growth (sustainable growth power feedback loops):

  • Sticky — if the rate of new customer acquisition exceeds the churn rate, the product will grow. (churn rate: the fraction of customers in any period who fail to remain engaged with the company’s product).
  • Viral — awareness of the product spreads rapidly from person to person similarly to the way a virus becomes an epidemic.
  • Paid — if a company want to increase rate of growth it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer.

Technically, more than one engine of growth can operate in a business at a time. This is not recommended due to the level of complexity and operational expertise required to pull it off effectively.

Adapt

Focusing on speed alone would be destructive. To work, startups require built-in speed regulators that help teams find their optimal pace of work.

Andon cord — allows any employee along the production line to call a halt to the system if a defect was discovered (Toyota lean concept).

This is one of the most important discoveries of the lean manufacturing movement: you cannot trade quality for time.

At the root of every seemingly technical problem is a human problem. The Five Whys exercise provides an opportunity to discover what that human problem might be (see The Design of Everyday Things, 5 Whys).

One of the primary benefits of using techniques that are derived from lean manufacturing is that Lean Startups, when they grow up, are well positioned to develop operational excellence based on lean principles.

Innovate

Internal or external, in my experience startup teams require three structural attributes: scarce but secure resources, independent authority to develop their business, and a personal stake in the outcome.

My suggested solution for allowing internal innovation to flourish is to create a sandbox for innovation that will contain the impact of the new innovation but not constrain the methods of the startup team.

To combat the inevitable commoditisation of the product in its market, line extensions, incremental upgrades, and new forms of marketing are essential.

Those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed.

In a startup situation, things constantly go wrong. When that happens, we face the age-old dilemma summarised by Deming: How do we know that the problem is due to a special cause versus a systemic cause?

If we’re in the middle of adopting a new way of working, the temptation will always be to blame the new system for the problems that arise. Sometimes that tendency is correct, sometimes not. Learning to tell the difference requires theory. You have to be able to predict the outcome of the changes you make to tell if the problems that result are really problems.

Image credits: The Lean Startup by Eric Ries