Website: http://theleanstartup.com/
Book: The Lean Startup
Book Synopsis –Most startups fail. But many of those failures are preventable. The Lean Startup is a new approach being adopted across the globe, changing the way companies are built and new products are launched.
Eric Ries defines a startup as an organization dedicated to creating something new under conditions of extreme uncertainty. This is just as true for one person in a garage or a group of seasoned professionals in a Fortune 500 boardroom. What they have in common is a mission to penetrate that fog of uncertainty to discover a successful path to a sustainable business.
The Lean Startup approach fosters companies that are both more capital efficient and that leverage human creativity more effectively. Inspired by lessons from lean manufacturing, it relies on “validated learning,” rapid scientific experimentation, as well as a number of counter-intuitive practices that shorten product development cycles, measure actual progress without resorting to vanity metrics, and learn what customers really want. It enables a company to shift directions with agility, altering plans inch by inch, minute by minute.
Rather than wasting time creating elaborate business plans, The Lean Startup offers entrepreneurs – in companies of all sizes – a way to test their vision continuously, to adapt and adjust before it’s too late. Ries provides a scientific approach to creating and managing successful startups in a age when companies need to innovate more than ever. (Amazon)
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The Lean Startup Method
- Entrepreneurs are everywhere – The Lean Startup Method works for many types of companies, big and small. Eric Ries defines a start as: a human institution designed to create new products and services under conditions of extreme uncertainty.
- Entrepreneurship is management – Startups require management albeit a new type of management that is catered towards extreme uncertainty.
- Validated Learning – Approach building a startup with a validated learning perspective. Running frequent experiments allows entrepreneurs to test each element of their vision.
- Build-Measure-Learn – The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. Startups should aim to accelerate that feedback loop.
- Innovation accounting – Entrepreneurs should be held accountable for what they do by measuring progress, how to set up milestones, and how to prioritize work.
Vision
Chapter 1 – Start
Entrepreneurial Management
We need a new managerial framework for startups to reduce waste and increase chances of viability.
The Roots of Lean Startup
The Lean Startup takes
“Because startups often accidentally build something nobody wants, it doesn’t matter much if they do it on time and on budget. The goal of a startup is to figure out the right thing to build — the thing customers want and will pay for — as quickly as possible.”
“…the Lean Startup is a new way of looking at the development of innovative new products that emphasize fast iteration and customer insight, a huge vision, and great ambition, all at the same time.”
Most of the time spent in a startup is focused on improving products, marketing, or operations. Startups should be nimble and able to course correct as much as possible like driving a car not launching a rocket where you have to preplan everything in advance.
- Vision – Vision is the true north of a startup and rarely changes.
- Strategy – Strategy is how you make the vision come true which includes business model, a product road map, a point of view about partners and competitors, and ideas about who the customers will be. Strategy changes rarely (called a pivot).
- Product – The product is the end result of
strategy . Products constantly change.
Chapter 2 – Define
Who Exactly is an Entrepreneur?
The Lean Startup Method applies to entrepreneurs from young visionaries with little funding to seasoned visionaries WITHIN large companies (intrapreneurs).
If I’m an Entrepreneur, What’s a Startup?
Startup definition – “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.”
- Institution – Hiring creative employees, coordinating their activities, and creating a company culture that delivers results.
- Product – Any source of value for the people who become customers. Anything those customers experience from their interaction with a company should be considered part of that company’s product.
- Extreme uncertainty – Startups are
dsigned to confront situations of extreme uncertainty. A new business that is an exact clone of an existing business (pricing, business model, target customers, and product) is not a startup.
Innovation
- Novel scientific discoveries
- Repurposing an existing technology for a new use
- Devising a new business model that unlocks value that was hidden
- Bringing a product or service to a new location or a previously underserved set of customers.
The Snaptax Story
Snaptax was created by Intuit, a large existing company not a startup. They created a small team of 5 within Intuit to create a new company called Snaptax and it was very successful. Upper management gave them the freedom to innovate without much oversight but they did operate under a new management paradigm.
The Seven-thousand Person Lean Startup
Measuring new innovation:
– Number of customers using products that didn’t exist three years ago
– Percentage of revenue coming from offerings that did not exist three years go
Entrepreneurial Management – This kind of leadership requires the ability for abilities to conduct experiments like an entrepreneur. Investing into systems that allow tests to be built, deployed, and analyzed.
Chapter 3 – Learn
Validated Learning – 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 startup’s present and future business prospects. It is more concrete, more accurate, and faster than market forecasting or classical business planning.
Validated Learning at IMVU
Questions guiding IMVU:
- What should we build and for whom?
- What market could we enter and dominate?
- How could we build durable value that would not be subject to erosion by competition?
Brilliant Strategy
Created an IM messaging system integrating into IMVU that interoperated with existing Instant Messaging companies. The rationale behind this was that the switching costs were too high to go to another IM platform. It would cost too much money, so instead, create an interoperable IM system so no one would need to switch or learn another platform.
Six Months to Launch
It’s better to launch a crappy product to test it than make something perfect and no one wants it.
Launch
Product launched but no one really took onto the product. They started bringing in customers to talk to them about
Talking to Customers
Actually talking to customers and having them use the products was insanely beneficial to see what would actually stick. It turns out many of the assumptions IMVU made were incorrect and was only uncovered after seeing potential customers try their product. IMVU was able to figure out, mainly based on responses they gave after given tasks to do, what was going to work.
Also, just asking customers what they want might not be the best option. If you’re entering new territory then they probably don’t know what they want. But by seeing how they interact with the product, trying new features etc. They are more likely to give you clues about what they want.
Throwing My Work Away
BUILDING A PRODUCT NO ONE WANTS IS THE BIGGEST WASTE.
Value vs. Waste
Which of our efforts are value0-creating and which are wasteful? That’s the question at the heart of lean.
Lean thinking – Defines value as providing benefit to the customer; anything else is waste.
Where Do You Find Validation?
“We adopted the view that our job was to find a synthesis between our vision and what customers would accept; it wasn’t to capitulate to what customers thought they wanted or tell customers what they ought to want.”
Productivity in a startup is now how much stuff you build but how much validated learning we’re getting for our efforts. True startup productivity is systematically figuring out the right things to build.
The Audacity of Zero
By having real metrics through validated learning, you’ll know if your product is actually gaining traction. If you aren’t tracking real metrics you could easily fool yourself and others by wasting money on gimmicky ads or ways to increase customers momentarily but eventually if you don’t have a product people want — you’ll go back to reality after wasting precious resources.
Lessons Beyond IMVU
The tactics in the book are helpful but it doesn’t apply to everything. The real learning behind the IMVU story is learning to see every startup in any industry as a grand experiment.
Chapter 4 – Experiment
Most important thing about the scientific method is: if you cannot fail, you cannot learn.
From Alchemy to Science
Using the Scientific Method for startups:
- Clear hypothesis that makes predictions about what is supposed to happen
- Tests those predictions empirically
Think Big, Start Small
Zappos started their business by testing if there was demand for a better online retail shoe experience. Instead of building everything out, buying a warehouse, buying inventory, getting customer support etc., they just asked local shoe places if they could take pictures of their shoes and buy it at full price when someone purchased it online. They created a MVP to get real time data from customers. This is better than doing secondary research and trying to assume how customers would act.
For Long-Term Change, Experiment Immediately
HP trying to encourage employees to use their skills to volunteer in the community on company time. Use small experiments to test what will work with employees.
Break it Down
“The two most important assumptions entrepreneurs make are what I call the value hypothesis and the growth hypothesis.”
- Value Hypothesis – Tests whether a product or service really delivers value to customers once they are using it. What’s a good indicator that employees find donating their time valuable? Survey could work but most people have a hard time assessing their feelings objectively. Instead of asking someone to give their feedback, their actions will give you more truthful data. On a small sample group, you can track how many people are volunteering again.
- Growth Hypothesis – Tests how new customers will discover a product or service.
It’s helpful to test things with early-adopters because they will usually have more buy-in with your product and more willing to help you experiment to get your product to fruition. They are usually more forgiving and will to give feedback.
An Experiment is a Product
Any experiment you conduct is part of becoming a product. It gives you the feedback, customers already interested, and detailed specs on what needs to be built.
“Success is not delivering a feature; success is learning how to solve the customer’s problem.” – Mark Cook at Kodak Gallery
The Village Laundry Service
Do small tests to see if your big ideal will work with a small population. Get insights into what they are most interested in. What are their concerns? How much are they willing to pay? What features are they most interesting about.
A Lean Startup in Government
Think about building things in micro scale first so you can test your assumptions.
“Planning is a tool that only works in the presence of a long and stable operating history. And yet, do any of us feel that the world around us is getting more and more stable every day?”
Steer
How Vision Leads to Steering
Build-Measure-Learn Feedback Loop
The build-measure-learn feedback loop is at the heart of The Learn Startup.
“To apply the scientific method to a startup, we need to identify which hypotheses to test. I call the riskiest elements of a startup’s plan, the parts on which everything depends, leap-of-faith assumptions. The two most important assumptions are the value hypothesis and the growth h
Chapter 5 – Leap
Leap-of-faith assumptions:
- Value Hypothesis – Facebook measured the amount of times users were using their site. Users logged onto their site every single day proving it was valuable.
- Growth Hypothesis – In one month, 3/4 of Harvard’s undergraduate cohort were signed up for the website.
For startups, the role of strategy is to help figure out the right questions to ask.
Strategy is Based on Assumptions
“…the goal of a startup’s early efforts should be to test them [assumptions] as quickly as possible.”
- First challenge to test assumption is to create an organization that can test these assumptions systematically
- Second challenge is to perform rigorous testing without losing sight of the company’s overall vision.
Analogs and Antilogs
Analogs to prove something already works and there is demand. i.e. people listening to music in public with headphones on showed that Apple’s
Beyond “The Right Place at the Right Time”
“What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.”
Value and Growth
Value – Startups need to quickly determine if the product is fundamentally value-creating or value-destroying.
Growth – Startups also need to determine if their growth strategy is fundamentally value-creating or value-destroying. Value-destroying examples are companies that just grow through more rounds of fundraising and lots of paid advertising but they don’t actually create a value-creating product.
Genchi Gembutsu
Genchi Gembutsu gets its name from the Toyota Production System. It translated as “go and see for yourself.” Getting out and talking to customers in real life and seeing how they interact with your product is essential early on for startups. It allows you to see what needs to be rigorously tested to find product/market fit.
Get out of the Building
Getting out and talking to people about how they deal with the problem you’re trying to solve can shed invaluable insight as you determine if your solution is for a real problem.
Design and the Customer Archetype
Getting out and talking to customers only give a rough idea of the potential customers and what problems they have. With this basic understanding, it’s not possible to create a customer archetype. This archetype is an assumption about our ideal customer. This assumption is not a static one time effort. The archetype itself is an assumption so that assumption can be improved upon over time and you get more interaction with your product and customer. It should be evolving until the customer archetype is validated (people actually buying).
Analysis Paralysis
Act too quickly on customer feedback or over analyze are both problematic. To solve this, you need to create an MVP.
Chapter 6 – Test
The MVP or Minimal Viable Product is the fastest way to go through the Build-Measure-Learn Cycle to test the fundamental business concept. It allows us to get real-time feedback of our business.
Why First Products Aren’t Meant to be Perfect
First products aren’t meant to be perfect because early adopters usually want a 80% complete product. They are okay with the missing features and usually buy because they want to be on the cutting edge, have strategic advantage vs. other companies, or to be the first to try something new.
MVP’s aren’t polished. They can even be embarrassing but to get something workable out there to see if there is demand will provide guidance for future builds.
Entrepreneurs need to avoid the pull to overbuild and overpromise.
The Video Minimum Viable Product
Drew Houston of Dropbox instead of creating his technically challenging product, he created a video of what the experience would be like instead. He put his vision onto a video so others could experience what he wanted them to experience. They had 70,000 new people on their wait list overnight.
The Concierge Minimum Viable Product
Instead of building out a product, go out and manually do what your product would do. Use this time to learn about your customer. Get more customers until you need to start automating parts of your business until you’ve automated yourself out of the process. This allows you to build only what is needed through validated learning.
Pay No Attention to the Eight People Behind the Curtain
Another option to creating an MVP is having humans do the interactions you would have wanted your software to do. The key is keeping things as cheap and simple as possible to test your hypothesis about your business model.
The Role of Quality and Design in an MVP
“MVPs require the courage to put one’s assumptions to the test. If customer react the way we expect, we can take that as confirmation that our assumptions are correct. If we release a poorly designed product and customers (even early adopters) cannot figure out how to use it, that will confirm our need to invest in superior design. But we must always ask: what if they don’t care about design in the same way we do?”
RULE FOR MVP:
Remove any feature, process, or effort that does not contribute directly to the learning you seek.
Speed Bumps in Building an MVP
Managers in most companies are already overwhelmed with good ideas. Their challenge lies in prioritization and execution. You shouldn’t be too worried your idea will be stolen.
For companies operating under a parent company, it’s advisable to launch your MVP under a different brand to not tarnish reputation.
From the MVP to Innovation Accounting
Innovation Accounting allows us to determine if we are making progress or not and something we can show investors to show them you’re learning and moving forward even though it might not seem like it.
Chapter 7 – Measure
Why Something as Seemingly dull as Accounting Will Change Your Life
Accounting for startups will help meaningfully track your progress. You need to track if you are making progress AND are you learning the right lessons along the way.
An Accountability Framework That Works Across Industries
Innovation accounting enables startups to prove objectively that they are learning how to grow a sustainable business.
(Manufacturing Company) Rate of growth depends primarily on three things: the profitability of each customer, the cost of acquiring new customers, and the repeat purchase rate of existing customers.
How Innovation Accounting Work — Three Learning Milestones
Innovation accounting works in three steps:
- Establish the baseline – Use
a MVP to establish real data on where the company is right now. - Tuning the Engine – Startups must attempt to tune the engine to the ideal.
- Pivot or Persevere
Establish the Baseline
A startup can build a complete prototype and test all assumptions off the bat or they can build separate MVPs that are aimed at feedback on the individual assumptions. It makes sense to test the riskiest assumption first because if you can’t pull that off there is no point in testing the ancillary assumptions.
Tuning the Engine
Once you’ve established some metrics to track your assumptions, you want to optimize for that metric by making adjustments to your product.
Tuning the engine properly:
- Get clear baseline metrics
- Have a hypothesis about what will improve that metric
- A set of experiments designed to test that hypothesis
Pivot or Persevere
Persevere if your numbers are converging to your ideal and away from your baseline. If you are way off and it’s not changing it might be time to pivot
Innovation Accounting at IMVU
Improving a Product on Five Dollars a Day
By using paid ads, IMVU was able to track how they were doing based on their funnel metrics. They looked at customer registration, the download of their application, trial, repeat usage, and purchase.
Cohort Analysis
One of the most important tools of startup analysis.
Once you have the data, you can start asking the right questions to customers so that what you are creating is aligned with that customers want. The metrics you track will tell you if you are going in the right direction.
“Poor quantitative results force us to declare failure and create the motivation, context, and space for more qualitative research. These investigations produce new ideas — new hypotheses– to be tested, leading to a possible pivot.”
Optimization Versus Learning
Engineers, designers, and marketers are great at optimizing but if you’re optimizing the wrong things then you’re wasting time. In startups, you need to know if you’re building the right thing or it doesn’t matter that you’re optimizing your product.
Vanity Metrics: A Word of Caution
Vanity metrics are deceiving. They make it look like you’re growing a sustainable business but you might not be. Top-line numbers can be vanity metrics: new customers, gross customers, gross revenue, etc.
Actionable Metrics Versus Vanity Metrics
Using the wrong kind of metrics will give you a feeling of progress but you won’t know if you’re actually making progress. You can’t draw inferences of cause-and-effect to prioritize work.
Cohorts and Split-Tests
Cohort-based metrics
Split testing (A/B testing) – Test different feature adds so that you know your work is creating meaningful changes.
Customer interviews or surveys are another way to test if you’re changes are effective
Kanban
Kanban = capacity constraint in lean manufacturing
A way to bucket work and to make sure that product builds are being validated.
“A solid process lays the foundation for a healthy culture, one where ideas are evaluated by merit and not by job title.”
Hypothesis Testing at Grockit
By split testing, you can see if your major assumptions that require added resources are fruitful or not.
The Value of the Three A’s
Metrics should be actionable, accessible, and auditable
Actionable
Metrics need to be clear that there is a cause and effect. High level numbers rarely do that. When gross numbers go up everything thinks it was because of their efforts. When numbers go down, they blame others. Vanity metrics can affect company culture and morale. When you drive real metrics that are clearly associated with the cause and effect, you drive the right behaviors in the organization.
Accessible
Create reports on metrics that everyone can understand. Use clear language and define words that might be convoluted (unclear). Cohort-based reports are the gold standard of learning metrics.
Cohort analysis says: among the people who used our product in this period, here’s how many of them exhibited each of the behaviors we care about.
Reports should be widely accessible to everyone.
Auditable
Data should be auditable. Data should also be pulled from the master data.
Innovation Accounting:
- Product prioritization decisions
- Deciding which customers to target or listen to
- Having the courage to subject a grand vision to constant testing and feedback
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