Eric Ries: The Lean Startup

Eric Ries

The Lean Startup

How Constant Innovation Creates Radically Successful Businesses

IN A NUTSHELL

🥜

BASIC CONCEPTS

📑

IDEAS

💡

TOOLS FOR LEADERS

🔫

FURTHER READING

📚

IN A NUTSHELL

🥜

Entrepreneurs are everywhere. Everyone is an entrepreneur who is trying to build something new under the condition of extreme uncertainty.
Entrepreneurship isn’t chaos. It is rigorous management.
The startup’s job is not to sell a product or service. But to figure out how to build a profitable and scalable business model. (Steve Blank)
Build-Measure-Learn feedback loop: You cannot know whether or not you’re going to succeed. Start small, build something, gather feedback from customers and learn from it. Repeat the cycle.
Innovation isn’t an art. It is a science. You can measure it and you can hold people accountable.

BASIC CONCEPTS

📑

5 PRINCIPLES OF LEAN STARTUP

1. ENTREPRENEURS ARE EVERYWHERE

The definition of a “startup” and “entrepreneur” is broader than you might think. Regardless of place or setting, whether it is just a 2 person venture founded in a garage or a multi-million dollar project inside a well-establish company entrepreneurs and startups can be found everywhere.
“The concept of entrepreneurship includes anyone who works within my definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty.”

2. ENTREPRENEURSHIP IS MANAGEMENT

Entrepreneurship is a certain kind of management applied for situations of extreme uncertainty.
Entrepreneurship should be considered as a job title inside many companies.

3. VALIDATED LEARNING

Unlike established companies, startups exist no to do business but to learn how to do it properly.
Validated learning is a scientific method to run experiments and and “allow entrepreneurs to test each element of their vision.”

4. BUILD-MEASURE-LEARN feedback loop

Build something small —> measure how customers respond —> learn from it, pivot, or persevere
The faster you can learn what customers want the faster you can build a sustainable business.

5. INNOVATION ACCOUNTING

Innovation doesn’t have to be mysterious. It can be concrete and measurable.
“(…) how to measure progress, how to set up milestones, and how to prioritize work. This requires a new kind of accounting designed for startups”

📑

LEAN STARTUP

DEFINITION of STARTUP

It is “a human institution designed to create new products or services under conditions of extreme uncertainty.”

According to Steve Blank, the startup’s job is “searching for a scalable, repeatable business model.”
What is Lean Startup? “The Lean Startup is a set of practices for helping entrepreneurs increase their odds of building a successful startup.”

CORE IDEA

The most important job of a startup is the LEARN, not to try to make money. “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.”

ORIGINS of LEAN MANAGEMENT

Lean manufacturing, Japan, Toyota Production System, Taichi Ohno, and Shigeo Shingo
post-world war economy: America —> huge machines, mass production, Japan: no capital – small, multipurpose machines, a large variety of products. The Japanese couldn’t compete head-to-head with American mass production, they had to figure out an entirely new way of managing work.

📑

4 QUESTIONS FOR STARTUPS

Do consumers recognize they have the problem we’re trying to solve?
If there was a solution would they buy it?
Would they buy it from us?
Can we build a solution for that problem?

IDEAS

💡

TRADITIONAL vs LEAN MANAGEMENT

Lean management is fundamentally different than traditional management.
Traditional management is like LAUNCHING A ROCKETSHIP: planning every single detail and move and then carefully executing the plan.
Lean management is like DRIVING A CAR and STEERING THE WHEEL frequently. Because of the very nature of innovation and uncertainty it is pointless to plan every single detail of the journey. Instead you have to be flexible and responsive to your environment. You have to test every element of your plan and pivot frequently.
“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.”
Planning and forecasting only work “when based on a long, stable operating history and a relatively static environment. Startups have neither.”

💡

VISION —> STRATEGY —> PRODUCT framework

VISION

A clear idea of where you going
True north, a destination in mind
“If you want to reach a goal, you must “see the reaching” in your own mind before you actually arrive at your goal.” – Zig Ziglar

STRATEGY

The strategy explains what we are doing to achieve the company’s vision.
Figure out the right questions to ask.
The strategy is constantly changing via — PIVOT

How to build a strategy?

“Leap of faith assumptions”
Minimum viable product
Build – measure – learn feedback loop
Gain validated learning: (finding out if your assumptions were correct and what the customers really want)

PRODUCT

The end result of a strategy.
Constantly changing through optimization.

💡

METRICS

VANITY METRICS

Makes you feel good but does not refer to real business progress.
Total registered user, total paying customers, growth revenue (rather than profit).
This gives the rosiest possible picture. You cannot tell if you’re going to build a sustainable business.
“When the numbers go up people think the improvement was caused by their actions, by whatever they’re working on at that time. Finding out what is actually going on it’s extremely costly.” BUT when the numbers go down, now it’s somebody else’s fault”

THREE A’S: ACTIONABLE, ACCESSIBLE, AUDITABLE

ACTIONABLE METRICS

It is a metric you can act on.
How do we know which feature to prioritize? How confident are you that you’re making the right decision in terms of establishing priorities?
An actionable metric must demonstrate clear cause and effect, otherwise, it is a vanity metric.
The most important question: are we making sufficient progress to believe that our original hypothesis is correct, or do we need to make a major change? (PIVOT)
Find a KPI (Key Performance Indicator). This will be the most important thing to measure that will tell you whether you’re making progress or not.

ACCESSIBLE

If metrics are overcomplicated, data flowing from everywhere you cannot know where to look, what is important, and what is not.
Keep things as simple as possible.
“As the gross numbers get larger, accessibility becomes more and more important.”

AUDITABLE

“When informed that their pet project is a failure, most of us are tempted to blame the messenger, the data, the manager, the gods, or anything else we can think of. That’s why the third A of good metrics, “auditable,” is so essential. We must ensure that the data is credible to employees.”
“Metrics are people, too.” – Do not overcomplicate. Keep the data as close to the source as possible rather than using an intermediate system.

VIRAL COEFFICIENT, CLV and CPA (also known as CAC)

VIRAL COEFFICIENT

The higher is the faster the product spreads.
How many new customers will use a product as a consequence of each new customer who signs up? In other words: how many friends will each customer bring with him or her?
A product with a viral coefficient that is greater than 1.0 will grow exponentially. Because each person who signs up will bring more than one other person with him or her.

CLV and CPA (CLV)

CPA: Cost per Acquisition. Every ad has a cost per acquisition CPA (Suppose an ad cost $100 and causes 50 customers to sign up: this ad had a CPA of $2)
CLV: Customer Lifetime Value: Each customer pays a certain amount of money over his lifetime as a customer deducted by the variable costs.
CLV is greater than CPA the product will grow.
MARGINAL PROFIT: the margin between the CLV and the CPA determines how fast the company will grow (how much money we have to pay for ads).

Source

💡

PRODUCT/MARKET FIT

The term was coined by Marc Andreessen, one of the fathers of the World Wide Web.
[he] “coined the term product/market fit to describe the moment when a startup finally finds a widespread set of customers that resonate with its product.”
“In a great market—a market with lots of real potential customers—the market pulls product out of the startup. This is the story of search keyword advertising, Internet auctions, and TCP/IP routers. Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter—you’re going to fail.” — Marc Andreessen
Examples for product-market fit: Ford T-model, Facebook, Lotus 1-2-3…

💡

VALUE CREATING ACTIVITIES vs WASTE

“There is surely nothing quite so useless as doing with great efficiency what should not be done at all.” ― Peter Drucker

THE MYTH OF “BUILD IT AND THEY WILL COME”

There is a popular misconception: if you build something valuable enough customers will come and buy it. The painful truth is most of the time you just simply cannot know what is valuable for customers and what is not.
The customer’s reaction cannot be predicted. Even customers are not able to tell what they want.
Delivering a product or service nobody wants means successfully executing failure.
Many companies fail when they realize they cannot sell their products. There is a myth about the stubborn entrepreneur who persevered and succeeded against all odds and led their business to great success. BUT we often forget to talk about hundreds of others who persevered too long and failed. You have to know when to pivot and when to persevere.

2 ANSWERS to this problem

“Just Do It” school of startups: If the management is the problem CHAOS is the answer. This is not working either. That’s why so many startups failed after the dotcom boom. Startups must be managed.
LEAN Startup method: figure out the right thing to build based on real customer feedback, using Build-measure-learn feedback loop.

💡

BUILD – MEASURE – LEARN FEEDBACK LOOP

Validating your ideas

Because you want to build something that your customers really want, you have to validate your ideas: if your idea really matches what your customers need (VALIDATED LEARNING)
REPEAT the cycle until you find PRODUCT/MARKET FIT (see below)

1. BUILD

Write down your expectations, ideas, hypothesizes about your customer’s needs and about your product Eric calls this: LEAP OF FAITH ASSUMPTIONS.
Build the smallest thing you can validate your ideas with. Think small, think fast (MINIMUM VIABLE PRODUCT).
Run an experiment to test your initial hypothesizes.

LEARN — PIVOT or PERSEVERE?

Decide whether the experiment proved your assumptions or not.
Decide whether to continue on the same path (persevere) or modify your hypothesizes and try something different (pivot).
Focus on the CUSTOMER’S PROBLEM and on how can you solve it.
The problem of OPTIMIZING: Don’t try to optimize your results too early. Otherwise, you’ll end up on a local maximum instead of climbing toward a global maximum.

Source

💡

ENGINES OF GROWTH

STICKY – WORD OF MOUTH MARKETING

Brading is a big asset when you try to make your product sticky.
The mechanism: people see someone using a product, it looks great, so he or she decides to buy one for him or herself as well.
It can be especially effective in branded or luxury products that represent status, like clothing, watches, new car.
A few examples: Apple, Nike, Rolls Royce, Mercedes-Benz, Rolex, Gucci, Armani, etc.

Further reading:

VIRAL – SIDE EFFECT OF PRODUCT USAGE

The customer does the line-share of the marketing. Awareness of the product spreads from person to person similarly the way the virus becomes an epidemic.
How does it happen? Person-to-person transmission is a necessary consequence of normal product use. Customers not necessarily try to spread the product. Growth happens automatically as a side effect of a customer using a product —> Viruses are not optional.

Source

PAID – FUNDED ADVERTISING

Using primarily paid advertising to grow the company has to spend less money on acquiring a new customer than the amount which the customer brings to the company.

2 QUESTIONS:

How much money does the company make on each customer?
How much does it cost to sign up a new customer?

2 WAYS TO BOOST THE ENGINE:

Increase the revenue from each customer.
Drive down the cost of acquiring a new customer.

💡

5 WHYS technique

A powerful tool for analyzing to finding out the root cause of the problem, not just the symptom.
Problem prevention, not problem-solving, developed by Tychy Ono Toyota.
Investigation method, asking the question WHY 5 times.
At the root of every seemingly technical problem is a HUMAN problem. The 5 whys technique provides an opportunity to discover it.
It is an automatic speed regulator: (there is a danger that teams are working too fast, trading quality for time).
5whys meeting: everyone involved is in the room, contributing input equally.
Requires an environment of mutual trust the empowerment. (Further reading: Amy Edmondson – The Fearless Organization).
Don’t send your baggage through the 5 whys process. Deal with just one problem at a time, otherwise, you’ll be overloading your people’s capabilities.

Source

TOOLS FOR LEADERS

🔫

THE 7 STEPS GUIDE to THE LEAN STARTUP METHOD

1.

“LEAP OF FAITH ASSUMPTIONS”

Ask questions

The most important aspect of the business, the whole business stands on it.
Break down the vision into its parts: make a VALUE hypothesis and a GROWTH hypothesis.

VALUE HYPOTHESIS

Test whether a product or service really delivers value to customers once they’re using it.
The critical first question: “which activities create VALUE and which are a form of WASTE. After you’re clear what customers value the most drive out waste and increase the efficiency of value-creating activities.

GROWTH HYPOTHESIS

What is behind the growth? How will the business grow?
There are 2 kinds of growth:

Value-creating growth: when you’re something that customers value and are willing to pay for it.
Value-destroying growth: when you’re profitable in the short term but you can’t sustain it in the long run. For example: when the business is growing because of continuous fund-raising without creating a valuable product or service for customers, excessive paid advertising which is not sustainable for a long term. Eric Ries calls this “success theater”.

“One of the goals of innovation accounting, which is discussed in depth in Chapter 7, is to help differentiate these false startups from true innovators.”

MAKE AN EXPERIMENT

Write a clear hypothesis: “what is supposed to happen” and TEST those hypotheses.
Test the riskiest assumption first. If you cannot prove the riskiest idea there is no point to test the others.

Types of LEAP OF FAITH ASSUMPTIONS:

Registration: Will customers be interested enough to sign up?
Activation: Will the customers be interested enough to use and pay for the product?
Retention Will the customers be interested enough to use the product multiple times?
Referral: Will the customers recommend the product to others?

2.

Understand your customer

Build a customer archetype

What problems the customer has? Is the customer aware he or she has a problem?

Traditional approaches vs LEAN UX

Traditional approaches: INTERACTION DESIGN, DESIGN THINKING (rapid prototyping and in person customer observations. — The PROBLEM with these approaches: the rapid learning and the experimentation stops. The assumption is what the designers learned all there is to know. “these discussions of quality pre-suppose that the company already knows what attributes of the product the customer will appreciate”
LEAN UX: In some cases startups don’t even know who the customer is. The customer archetype is a hypothesis and not a fact. The customer profile should be considered provisional until our strategy had shown via VALIDATED LEARNING that we can serve this type of customer in a sustainable way.

3.

Plan and design a MINIMUM VIABLE PRODUCT

Test your hypothesizes

DEFINITION: “MVP is a process, not a product” Alistair Croll – Lean Analytics
The traditional product development approach: long incubation period and strive for product perfection.
Contrary to this an MVP is a learning process. It’s ONLY GOAL is to test fundamental business hypothesizes.
The MVP validates “LEAP OF FAITH ASSUMPTIONS“. For different assumptions can be built different MVPs.
It is simply the fastest was to get thought the build-measure-learn feedback loop with a minimum amount of effort and gain VALIDATED LEARNING.
Any additional work beyond what was required to start learning is WASTE.
Exactly how complex an MVP needs to be? There is no magic formula for creating a perfect MVP. It requires judgement.
SIMPLIFY: The key is to simplify. Keep things as simple as possible. It doesn’t have to be perfect. The MVP’s only purpose is to validate one single hypothesis.

EXAMPLES for MVP

WordPress blog
video MVP (Dropbox)
person-to-person
concierge MVP (serving customers in person one-by-one. This won’t scale but it’s fast and easy way to validate your assumptions)

4.

EARLY ADOPTERS

Before new products can be sold successfully to the mass market they have to be sold to early adapters. They are people who are willing to take a risk with a new product or solution to gain the benefits of being the first one who can use it.
They accept and prefer an 80% solution. What they care about: being the first to use or adapt to a new product or technology. They are suspicious about something that is too polished. If it’s ready for everybody to adapt how much advantage one can get by being early?
DON’T OPTIMIZE the MVP for the early adopters, just validate your ideas and then go on. (Further reading on this topic: Guy Kawasaki – Rules for Revolutionaries)
“After all the VISION is a high quality main stream product that will change the world.”

5.

METRICS

Measure your progress

Total registered user, total paying customers, growth revenue.
You cannot tell if you’re going to build a sustainable business.
“When the numbers go up people think the improvement was caused by their actions, by whatever they’re working on at that time. Finding out what is actually going on it’s extremely costly. BUT when the numbers go down, now it’s somebody else’s fault”
Use actionable metrics, avoid using vanity metrics.
More on metrics: ABOVE

6.

PIVOT

Course correction

“A structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth.”
“The LEAN method is resilient in the face or mistakes. If we take a wrong turn we have the tools we need to realize it and the agility to find another path.”

TYPES OF PIVOT

Customer segment pivot: keeping the functionality of the product the same, but changing the audience focus (who pays) b2c or b2b. The company realizes that the product it is building solves a real problem for customers, but they are not the type of customers it originally planned to serve.
Platform pivot: instead of selling to one customer at a time building a self-serve sales platform.
Zoom in pivot: what previously was considered a single feature in a product becomes the whole product.
Zoom out pivot: a single feature is insufficient to support a product. What was considered the whole product becomes a single feature of a much larger product.
Customer need pivot: (know your customer): we often discover other related problems that are important and can be solved by our team. Sometimes it requires little more than repositioning the existing product or may require a completely new product.
Business architecture pivot: (concept from Jeffry More) companies generally follow 1 of 2 major business architecture: 1. high margin, low volume (complex systems model) 2. low margin, high volume (volume operations model).
Value capture pivot: changing monetization or revenue models. It is a separate feature or a product that can be added or removed.
Engine of growth pivot: seek faster or more profitable growth engine.
Channel pivot: the mechanism by which a company delivers its products to customers: sales channel of distribution channel.
Technology pivot: a company discovers a way to achieving the same solution by using a completely different technology.

BARRIERS OF PIVOTING

Vanity matrix can allow entrepreneurs to form false conclusions and live in their own private reality.
The metrics must be concrete and measurable. When the entrepreneur has an unclear hypothesis it’s almost impossible to experience complete failure. You cannot have ambiuos sucess or ambiouos failue. The “launching ans see what happens” – you will always succeed in seeing what happens.
Entrepreneurs are afraid that the vision is wrong.

ORGANIZE PIVOT MEETINGS