Lean Startup Summary (Eric Ries)¶

VISION¶

Entrepreneurship requires a managerial discipline to harness the entrepreneurial opportunity we have been given.

Lean thinking is radically altering the way supply chains and production systems are run. Among its tenets are drawing on the knowledge and creativity of individual workers, the shrinking of batch sizes, just-in-time production and inventory control, and an acceleration of cycle times. The Lean Startup adapts these ideas to the context of entrepreneurship, proposing that entrepreneurs judge their progress differently from the way other kinds of ventures do.

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. In other words, the Lean Startup is a new way of looking at the development of innovative new products that emphasizes fast iteration and customer insight, a huge vision, and great ambition, all at the same time.

Every new version of a product, every new feature, and every new marketing program is an attempt to improve the startup engine of growth.

Many startup business plan prescribes the steps to take and the results to expect in excruciating detail, and as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes.

The Lean Startup method is designed to make constant adjustments with the Build-Measure-Learn feedback loop. 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.

Startups have a destination in mind: creating a thriving and world-changing business. It is a startup’s vision. To achieve that vision, startups employ a strategy, which includes a business model, a product road map, a point of view about partners and competitors , and ideas about who the customer will be. The product is the end result of this strategy.

In general management, a failure to deliver results is due to either a failure to plan adequately or a failure to execute properly.

1-DEFINE¶

The entrepreneurial prerequisites are — proper team structure, good personnel, a strong vision for the future, and an appetite for risk taking. Anyone who is creating a new product or business under conditions of extreme uncertainty is an entrepreneur whether he or she knows it or not and whether working in a government agency, a venture-backed company, a nonprofit, or a decidedly for-profit company with financial investors. Other source: https://www.cloudave.com/1171/what-makes-an-entrepreneur-four-letters-jfdi/

A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty. The fact that a startup’s product or service is a new innovation is also an essential part of the definition and a tricky part too. Product encompasses any source of value for the people who become customers.

Innovation: Startups use many kinds of innovation: novel scientific discoveries, repurposing an existing technology for a new use, devising a new business model that unlocks value that was hidden, or simply bringing a product or service to a new location or a previously under-served set of customers.

Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business all the way down to the business model, pricing, target customer, and product may be an attractive economic investment, but it is not a startup because its success depends only on execution.

2- LEARN¶

Measuring progress by making sure our work proceeded according to plan, with high quality, and cost about what we had projected, lead to failure if it builds a product that nobody wants.

“learning” is the oldest excuse for a failure of execution. Yet if the fundamental goal of entrepreneurship is to engage in organization building under conditions of extreme uncertainty, its most vital function is learning. We must learn the truth about which elements of our strategy are working to realize our vision and which are just crazy. We must learn what customers really want, not what they say they want or what we think they should want. We must discover whether we are on a path that will lead to growing a sustainable business. Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects.

At the beginning of start-up life we want to answer: 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?

Could we have learned lessons earlier if we hadn’t been so focused on making the product “better” by adding features and fixing bugs? which of our efforts are value-creating and which are wasteful? This question is at the heart of the lean manufacturing revolution.

Lean thinking defines value as providing benefit to the customer; anything else is waste.

The effort that is not absolutely necessary for learning what customers want can be eliminated. It is called "validated learning" because it is always demonstrated by positive improvements in the startup’s core metrics. 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 to tell customers what they ought to want.

3- EXPERIMENT¶

If you cannot fail, you cannot learn. 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 two most important assumptions entrepreneurs make are the "value hypothesis" and the "growth hypothesis".

• The value hypothesis tests whether a product or service really delivers value to customers once they are using it.
• For the growth hypothesis, which tests how new customers will discover a product or service, we can do a similar analysis. Once the program is up and running, how will it spread among the employees, from initial early adopters to mass adoption throughout the company?

Find early adopters: the customers who feel the need for the product most acutely . Those customers tend to be more forgiving of mistakes and are especially eager to give feedback.

In the Lean Startup model, an experiment is more than just a theoretical inquiry; it is also a first product.

4- STEERING¶

This Build-Measure-Learn feedback loop is at the core of the Lean Startup model. The essence of steering a startup is to focus our energies on minimizing the total time through this feedback loop. The Minimum Value Product is that version of the product that enables a full turn of the Build -Measure-Learn loop with a minimum amount of effort and the least amount of development time. Upon completing the Build-Measure-Learn loop , we confront the most difficult question any entrepreneur faces: whether to pivot the original strategy or persevere. If we’ve discovered that one of our hypotheses is false, it is time to make a major change to a new strategic hypothesis.

Planning really works in the reverse order: we figure out what we need to learn, use innovation accounting to figure out what we need to measure to know if we are gaining validated learning, and then figure out what product we need to build to run that experiment.

5- LEAP¶

Every business plan begins with a set of assumptions. It lays out a strategy that takes those assumptions as a given and proceeds to show how to achieve the company’s vision. The goal is to test them as quickly as possible.

The first challenge for an entrepreneur is to build an organization that can test these assumptions systematically. The second challenge, as in all entrepreneurial situations, is to perform that rigorous testing without losing sight of the company’s overall vision.

Many assumptions in a typical business plan are unexceptional. These are well established facts drawn from past industry experience or straightforward deductions. The others are more risky and do not have clear cut answers. A strategy can be built by assessing analog: things or questions answered by another company, and assessing antilogs which are somethings companies are doing that are in opposition with one of the assumptions. In the iPod business, antilog was Naptser with free download and so the leaps of faith was that people would pay for music they download.

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. The first step in understanding a new product or service is to figure out if it is fundamentally value-creating or value-destroying. A strong lean practice: genchi gembutsu: "go and see for yourself” so that business decisions can be based on deep firsthand knowledge.

All successful sales models depend on breaking down the monolithic view of organizations into the disparate people that make them up.

Startups need extensive contact with potential customers to understand them, so get out of your chair and get to know them.

The first step in this process is to confirm that your leap-of-faith questions are based in reality, that the customer has a significant problem worth solving.

Design and the Customer Archetype: The goal of such early contact with customers is not to gain definitive answers. Instead, it is to clarify at a basic, coarse level that we understand our potential customer and what problems they have.

With that understanding, we can craft a customer archetype, a brief document that seeks to humanize the proposed target customer. This archetype is an essential guide for product development and ensures that the daily prioritization decisions that every product team must make are aligned with the customer to whom the company aims to appeal.

No amount of design can anticipate the many complexities of bringing a product to life in the real world.

6- TEST¶

A minimum viable product (MVP) helps entrepreneurs start the process of learning as quickly as possible. It is not necessarily the smallest product imaginable, though; it is simply the fastest way to get through the Build-Measure-Learn feedback loop with the minimum amount of effort. The goal of the MVP is to begin the process of learning, not end it. Unlike a prototype or concept test, an MVP is designed not just to answer product design or technical questions. Its goal is to test fundamental business hypotheses.

Before new products can be sold successfully to the mass market, they have to be sold to early adopters. They accept, in fact prefer, an 80 percent solution; you don’t need a perfect solution to capture their interest. Early adopters use their imagination to fill in what a product is missing.

In enterprise products, it’s often about gaining a competitive advantage by taking a risk with something new that competitors don’t have yet.

Additional features or polish beyond what early adopters demand is a form of wasted resources and time. Minimum viable products range in complexity from extremely simple smoke tests (little more than an advertisement) to actual early prototypes complete with problems and missing features. Deciding exactly how complex an MVP needs to be cannot be done formulaically. It requires judgment.

THE ROLE OF QUALITY AND DESIGN IN AN MVP¶

One of the most vexing aspects of the minimum viable product is the challenge it poses to traditional notions of quality. Thus, for startups the following quality principle applies: If we do not know who the customer is, we do not know what quality is.

Even a “low-quality” MVP can act in service of building a great high-quality product. Yes, MVPs sometimes are perceived as low-quality by customers. If so, we should use this as an opportunity to learn what attributes customers care about.

As you consider building your own minimum viable product, let this simple rule suffice: remove any feature, process, or effort that does not contribute directly to the learning you seek.

IP protection may be needed before releasing a MVP or as early as possible after. Most of the time competitors are overwhelmed and no time to chase after your idea. If a competitor can out execute a startup once the idea is known, the startup is doomed anyway.

The reason to build a new team to pursue an idea is that you believe you can accelerate through the Build-Measure-Learn feedback loop faster than anyone else can.

7- MEASURE¶

Innovation accounting enables startups to prove objectively that they are learning how to grow a sustainable business. Innovation accounting begins by turning the leap-of-faith assumptions into a quantitative financial model. For established companies the rate of growth depends primarily on three things:

• the profitability of each customer,
• the cost of acquiring new customers,
• the repeat purchase rate of existing customers.

HOW INNOVATION ACCOUNTING WORKS¶

Innovation accounting works in three steps:

• First, use a minimum viable product to establish real data on where the company is right now
• Second, startups must attempt to tune the engine from the baseline toward the ideal. This may take many attempts.
• Pivot or preserve

Establish the Baseline:

A startup might create a complete prototype of its product and offer to sell it to real customers through its main marketing channel. This MVP validates all major assumptions in one run. Or develop a MVP for each assumption at a time. Before developing the full product the startup can perform a smoke test: customers are given the opportunity to pre-order a product that has not yet been built.

A smoke test measures only one thing:

Whether customers are interested in trying a product. An MVP allows a startup to fill in real baseline data in its growth model—conversion rates, sign-up and trial rates, customer lifetime value. All being foundation for learning. When selecting among multiple assumptions, it makes sense to test the riskiest assumptions first. If you can’t find a way to mitigate these risks toward the ideal that is required for a sustainable business, there is no point in testing the others.

• Agile development with sprint, user stories, backlog, small sized story, etc make a team disciplined to build product with good feedbacks. But it is important to understand if the prioritization decisions is making sense?
• Agile does not answer the startup problems: How do we know which features to prioritize? How can we get more customers to sign up and pay? How can we get out the word about our product?
• The grand bargain of agile development : engineers agree to adapt the product to the business’s constantly changing requirements but are not responsible for the quality of those business decisions.
• Adopting vanity metrics such as the total number of customers and the total number of questions answered, gives the team the sensation of forward motion even though the company was making little progress.
• Changed the metrics to evaluate success in two ways, cohort-based metrics, and a true split-test experiment. A split-test (A/B testing) experiment is one in which different versions of a product are offered to customers at the same time. By observing the changes in behavior between the two groups , one can make inferences about the impact of the different variations.
• It requires extra accounting and metrics to keep track of each variation, it almost always saves tremendous amounts of time in the long run by eliminating work that doesn’t matter to customers.

The lean manufacturing principle of Kanban, or capacity constraint, can be used to control product development:

• Under the new system, user stories were not considered complete until they led to validated learning.
• Thus, stories could be cataloged as being in one of four states of development: in the product backlog, actively being built, done (feature complete from a technical point of view), or in the process of being validated. Validated was defined as “knowing whether the story was a good idea to have been done in the first place
• The kanban rule permitted only a limited number of stories in each of the four states. As stories flow from one state to the other, the buckets fill up. Once a bucket becomes full, it cannot accept more stories.
• The only way to start work on new features is to investigate some of the stories that are done but haven’t been validated.
• Every feature should be split-tested. Always ask why build a new feature that is not part of a split-test experiment?
• Most important, teams working in this system begin to measure their productivity according to validated learning, not in terms of the production of new features.

Three A’s of metrics: actionable , accessible, and auditable.

• Actionable: For a report to be considered actionable, it must demonstrate clear cause and effect. Otherwise , it is a vanity metric.
• Accessible: First, make the reports as simple as possible so that everyone understands them. Remember the saying “Metrics are people, too.” The easiest way to make reports comprehensible is to use tangible, concrete units. The report deals with people and their actions, which are far more useful than piles of data points.
• Auditable: We must ensure that the data is credible to employees. Most data reporting systems are built by business managers and they lack a way to test if the data is consistent with reality. To solve this problem first use the report to talking to customers. This is the only way to be able to check if the reports contain true facts. Second, whenever possible, reports should be drawn directly from the master data, rather than from an intermediate system, which reduces opportunities for error.

8-PIVOT¶

A pivot is a structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth. there is no bigger destroyer of creative potential than the misguided decision to persevere.

Startup productivity is about aligning our efforts with a business and product that are working to create value and drive growth. In other words, successful pivots put us on a path toward growing a sustainable business.

Deciding to pivot or persevere is one of the hardest decisions entrepreneurs face. The goal of creating learning milestones is not to make the decision easy; it is to make sure that there is relevant data in the room when it comes time to decide. The more money, time, and creative energy that has been sunk into an idea, the harder it is to pivot. Failure is a prerequisite to learning. The problem with the notion of shipping a product and then seeing what happens is that you are guaranteed to succeed, at seeing what happens. But then what ? 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. The process to deliver new MvP accelerates even if much of the product had to be discarded between pivots. Worse, the product that remained was classified as a legacy product, one that was no longer suited to the goals of the company. But still the startup accelerated its MVP process because it was learning critical things about its customers, market, and strategy.

Runway is defined as the remaining cash in the bank divided by the monthly burn rate. Two ways to extends the Runway: get more money or cut costs. But the true measure of runway is how many pivots a startup has left: the number of opportunities it has to make a fundamental change to its business strategy. Which suggests another way to extend that runway: get to each pivot faster.

Pivot needs courage. Three reasons that slows pivot decisions:

• Vanity metrics can allow entrepreneurs to form false conclusions and live in their own private reality
• When an entrepreneur has an unclear hypothesis, it’s almost impossible to experience complete failure, and without failure there is usually no impetus to embark on the radical change a pivot requires.
• Entrepreneurs’ biggest fear, is that the vision might be deemed wrong without having been given a real chance to prove itself. This fear drives much of the resistance to the minimum viable product, split testing, and other techniques to test hypotheses. Ironically, this fear drives up the risk because testing doesn’t occur until the vision is fully represented. However, by that time it is often too late to pivot because funding is running out.

Every startup have a regular “pivot or persevere ” meeting. It requires the participation of both the product development and business leadership teams.

When efforts at tuning the engine were reaching diminishing returns, it is the classic sign of the need to pivot.

Different type of pivot:

• Platform pivot: for example changing the payment model from license to subscription / credit card.
• Customer segment pivot: In this pivot, the company realizes that the product it’s building solves a real problem for real customers but that they are not the customers it originally designed to serve.
• Zoom-in Pivot: In this case, what previously was considered a single feature in a product becomes the whole product.
• Zoom-out Pivot: what was considered the whole product becomes a single feature of a much larger product.
• Customer Need Pivot: the product hypothesis is partially confirmed; the target customer has a problem worth solving, just not the one that was originally anticipated.
• Business architecture pivot: companies generally follow one of two major business architectures: high margin, low volume (complex systems model) or low margin, high volume (volume operations model). In a business architecture pivot, a startup switches architectures.
• Value Capture Pivot: capturing value (revenue model) is an intrinsic part of the product hypothesis. Often, changes to the way a company captures value can have far-reaching consequences for the rest of the business, product, and marketing strategies.
• Engine of growth pivot: there are three primary engines of growth that power startups : the viral, sticky, and paid growth models. In this type of pivot, a company changes its growth strategy to seek faster or more profitable growth. Commonly but not always, the engine of growth also requires a change in the way value is captured.
• Channel Pivot: the requirements of the channel determine the price, features, and competitive landscape of a product. A channel pivot is a recognition that the same basic solution could be delivered through a different channel with greater effectiveness.
• Technology pivot: company discovers a way to achieve the same solution by using a completely different technology. Technology pivots are much more common in established businesses.

Accelerates¶

Batch¶

• When we do work that proceeds in stages, the “batch size” refers to how much work moves from one stage to the next at a time.
• Toyota discovered that small batches made their factories more efficient.
• The biggest advantage of working in small batches is that quality problems can be identified much sooner.
• 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.
• Working in small batches ensures that a startup can minimize the expenditure of time, money, and effort that ultimately turns out to have been wasted.
• Instead of working in separate departments, engineers and designers would work together side by side on one feature at a time. Whenever that feature was ready to be tested with customers, they immediately would release a new version of the product, which would go live on our website for a relatively small number of people. The team would be able immediately to assess the impact of their work , evaluate its effect on customers, and decide what to do next.
• IMVU makes about fifty changes to its product (on average) every single day.
• The key to being able to operate this quickly is to check for defects immediately, thus preventing bigger problems later.
• Analogously to the Toyota "andon" cord, IMVU used an elaborate set of defense mechanisms that prevented engineers from accidentally breaking something important.
• Continuously monitored the health of our business itself so that mistakes were found and removed automatically.
• By reducing batch size, we can get through the Build-Measure-Learn feedback loop more quickly.

Growth¶

The engine of growth is the mechanism that startups use to achieve sustainable growth. Sustainable growth is characterized by one simple rule: New customers come from the actions of past customers.

There are four primary ways past customers drive sustainable growth:

1. Word of mouth.
2. As a side effect of product usage.
3. Funded advertising: marginal cost < marginal revenue
4. Through repeat purchase or use.

Three engine of growth:

• Sticky engine product: The rules that govern the sticky engine of growth are pretty simple: if the rate of new customer acquisition exceeds the churn rate, the product will grow. The way to find growth is to focus on existing customers for the product even more engaging to them.
• The Viral Engine of Growth: the viral engine is powered by a feedback loop that can be quantified. It is called the viral loop, and its speed is determined by a single mathematical term called the viral coefficient. The viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up. Companies that rely on the viral engine of growth must focus on increasing the viral coefficient more than anything else, because even tiny changes in this number will cause dramatic changes in their future prospects. In the viral engine of growth, monetary exchange does not drive new growth; it is useful only as an indicator that customers value the product enough to pay for it. By investing their time and attention in the product, they make the product valuable to advertisers.
• The Paid Engine of Growth: evaluate the cost of acquiring new customer. The engine increases the revenue from each customer or drive down the cost of acquiring a new customer. The margin between the LTV (lifetime value) and the CPA (cost per acquisition) determines how fast the paid engine of growth will turn.

Technically, more than one engine of growth can operate in a business at a time. But successful startups usually focus on just one engine of growth.

Only after pursuing one engine thoroughly should a startup consider a pivot to one of the others.

• Product/market fit: in a great market— a market with lots of real potential customers— the market pulls product out of the startup. A startup can evaluate whether it is getting closer to product/ market fit as it tunes its engine by evaluating each trip through the Build-Measure-Learn feedback loop using innovation accounting. What really matters is not the raw numbers or vanity metrics but the direction and degree of progress.

Five whys¶

Adaptive processes force you to slow down and invest in preventing the kinds of problems that are currently wasting time. As those preventive efforts pay off, you naturally speed up again.

The core idea of Five Whys is to tie investments directly to the prevention of the most problematic symptoms. The system takes its name from the investigative method of asking the question “Why?” five times to understand what has happened (the root cause).

At the root of every seemingly technical problem is a human problem. Five Whys provides an opportunity to discover what that human problem might be.

How to use Five Whys analysis to build an adaptive organization¶

Consistently make a proportional investment at each of the five levels of the hierarchy.

If the outage is a minor glitch, it’s essential that we make only a minor investment in fixing it.

The Five Whys approach acts as a natural speed regulator. The more problems you have, the more you invest in solutions to those problems. As the investments in infrastructure or process pay off, the severity and number of crises are reduced and the team speeds up again.

Make sure that any person impacted by the problem is in the room during the analysis of the root cause. For the Five Whys to work properly, there are rules that must be followed:

• It requires an environment of mutual trust and empowerment.
• Be tolerant of all mistakes the first time.
• Never allow the same mistake to be made twice.
• Be ready to face unpleasant truth.
• Start small and be specific: starting with a narrowly targeted class of symptoms. The more specific the symptoms are , the easier it will be for everyone to recognize when it’s time to schedule a Five Whys meeting.
• Appoint a five whys master: he is the moderator for each Five Whys meeting, making decisions about which prevention steps to take, and assigning the follow-up work from that meeting.

Innovation¶

Startup teams require three structural attributes:

• scarce but secure resources,
• independent authority to develop their business,
• a personal stake in the outcome.

Whenever possible, the innovation team should be cross-functional and have a clear team leader. Those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed.