This is a collection of my Kindle notes while reading the Lean startup by Eric Ries. 99% of the text below is copy paste from the books. Thus, any sentence starting with “I” is Eric Ries writing. I re-ordered a few paragraphs though. As a result, section titles are mine.
The result is intended for my own use and may not be easy to understand if you have not read the book. I may take the time to synthesize it further in the future.
The big question of our time is not Can it be built? but Should it be built? This places us in an unusual historical moment: our future prosperity depends on the quality of our collective imaginations.
Though, the grim reality is that most startups fail. Most new products are not successful. Most new ventures do not live up to their potential. This misuse of people’s time is a criminally negligent waste of human creativity and potential.
And how much of our current innovation work is guided by catchphrases that lack a scientific foundation? When things fail, we have plenty of blame to go around, but far too little theory to guide the actions of leaders and investors alike.
We are just beginning to uncover the rules that govern entrepreneurship, a method that can improve the odds of startup success, and a systematic approach to building new and innovative products. The Lean Startup aims at increasing the odds of success.
The innovator dilemna
Usually, companies fall into the trap described in Clayton Christensten’s The Innovator’s Dilemma: they are very good at creating incremental improvements to existing products and serving existing customers, which Christensen called sustaining innovation, but struggle to create breakthrough new products—disruptive innovation—that can create new sustainable sources of growth.
Most team members or departments live in a world where their department is constantly making things better, only to have their hard work sabotaged by other departments that just don’t get it. Is it any wonder these departments develop their own distinct language, jargon, culture, and defense mechanisms against the bozos working down the hall?
One of the problems is the number of tests we run. When you have only one test, you don’t have entrepreneurs, you have politicians. Out of a hundred good ideas, you’ve got to sell your idea. So you build up a society of politicians and salespeople. When you have five hundred tests you’re running, then everybody’s ideas can run. And then you create entrepreneurs who run and learn and can retest and relearn as opposed to a society of politicians.
Classical product development mistake
Here are four solid questions to ask before starting a development project:
1. Do consumers recognize 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?”
The common tendency of product development is to skip straight to the fourth question and build a solution before confirming that customers have the problem.
As we’ve seen, even the seasoned managers and executives at the world’s best-run companies struggle to consistently develop and launch innovative new products. Their challenge is to overcome the prevailing management thinking that puts its faith in well-researched plans.
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? Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment. Startups have neither.
What is a startup?
At its heart, a startup is a catalyst that transforms ideas into products. A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.
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.
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.
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. Bit by bit, customers will tear apart your seemingly brilliant initial strategy.
The Build-Measure-Learn feedback loop
The Lean Startup is a framework, not a blueprint of steps to follow. It is designed to be adapted to the conditions of each specific company. The Lean Startup method builds capital-efficient companies because it allows startups to recognize that it’s time to pivot sooner, creating less waste of time and money.
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.
This Build-Measure-Learn feedback loop is at the core of the Lean Startup model. We need to focus our energies on minimizing the total time through this feedback loop.
The first challenge for an entrepreneur is to build an organization that can test key 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.
The value and the growh assumptions
It is often easier to raise money or acquire other resources when you have zero revenue, zero customers, and zero traction than when you have a small amount. Zero invites imagination, but small numbers invite questions about whether large numbers will ever materialize.
Once a startup has been launched, the two most important assumptions entrepreneurs make are what the value hypothesis and the growth hypothesis.
There are many value-destroying kinds of growth that should be avoided. An example would be a business that grows through continuous fund-raising from investors and lots of paid advertising but does not develop a valuecreating product. Such businesses are engaged in what I call success theater, using the appearance of growth to make it seem that they are successful.
Identify the elements of the plan that are assumptions rather than facts, and figure out ways to test them. Using these insights, we could build a minimum viable product and have the agency up and running—on a micro scale—long before the official plan was set in motion.
There are four primary ways past customers drive sustainable growth:
- Word of mouth. Clients recommend the product to other clients.
- As a side effect of product usage. Fashion or status, such as luxury goods products, drive awareness of themselves whenever they are used. When you see someone dressed in the latest clothes or driving a certain car, you may be influenced to buy that product. This is also true of so-called viral products such as Facebook and PayPal. When a customer sends money to a friend using PayPal, the friend is exposed automatically to the PayPal product.
- Through funded advertising. Most businesses employ advertising to entice new customers to use their products. It is viable only if customer acquisition cost is below the long term value
- Through repeat purchase or use.
At any time, the company could invest its energy in finding new customers, servicing existing customers better, improving overall quality, or driving down costs.
Getting a startup’s engine of growth up and running is hard enough, but the truth is that every engine of growth eventually runs out of gas. Every engine is tied to a given set of customers and their related habits, preferences, advertising channels, and interconnections. At some point, that set of customers will be exhausted.
What are good indicators to follow?
As an entrepreneur, nothing plagued me more than the question of whether my company was making progress toward creating a successful business. As an engineer and later as a manager, I was accustomed to measuring progress by making sure our work proceeded according to plan, was high quality, and cost about what we hadprojected.
After many years as an entrepreneur, I started to worry about measuring progress in this way. What if we found ourselves building something that nobody wanted? In that case what did it matter if we did it on time and on budget? When I went home at the end of a day’s work, the only things I knew for sure were that I had kept people busy and spent money that day.
I hoped that my team’s efforts took us closer to our goal. If we wound up taking a wrong turn, I’d have to take comfort in the fact that at least we’d learned something important. Unfortunately, “learning” is the oldest excuse in the book for a failure of execution. It’s what managers fall back on when they fail to achieve the results we promised.
Entrepreneurs, under pressure to succeed, are wildly creative when it comes to demonstrating what we have learned. We can all tell a good story when our job, career, or reputation depends on it.
Measure two things: the number of customers using products that didn’t exist three years ago and the percentage of revenue coming from offerings that did not exist three years ago.
Cohort analysis is one of the most important tools of startup analytics. Although it sounds complex, it is based on a simple premise. Instead of looking at cumulative totals or gross numbers such as total revenue and total number of customers, one looks at the performance of each group of customers that comes into contact with the product independently. Each group is called a cohort.
The case for validated learning
Which of our efforts are value-creating and which are wasteful? This question is at the heart of the lean manufacturing revolution. Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects.
It is also the right way to think about productivity in a startup: not in terms of how much stuff we are building but in terms of how much validated learning we’re getting for our efforts. Everything a startup does—is understood to be an experiment designed to achieve validated learning.
Invariably the real problem is not a lack of development talent, energy, or effort. Cycle after cycle, the team is working hard, but the business is not seeing results. Managers trained in a traditional model draw the logical conclusion: our team is not working hard, not working effectively, or not working efficiently.
Learning milestones prevent this negative spiral by emphasizing a more likely possibility: the company is executing—with discipline!—a plan that does not make sense. The innovation accounting framework makes it clear when the company is stuck and needs to change direction.
Innovation accounting requires us to avoid the temptation to use vanity metrics. I call this system innovation accounting, an alternative to traditional accounting designed specifically for startups.
switching to validated learning feels worse before it feels better. That’s the case because the problems caused by the old system tend to be intangible, whereas the problems of the new system are all too tangible.
When this is done right, even the most powerful reality distortion field won’t be able to cover up this simple fact: if we’re not moving the drivers of our business model, we’re not making progress. That becomes a sure sign that it’s time to pivot.
Minimum Viable Product can avoid delusion and paralysis
There are two ever-present dangers when entrepreneurs conduct market research and talk to customers : delusion and paralysis.
Followers of the just-do-it school of entrepreneurship are impatient to get started and don’t want to spend time analyzing their strategy. They’d rather start building immediately, often after just a few cursory customer conversations. Unfortunately, because customers don’t really know what they want, it’s easy for these entrepreneurs to delude themselves that they are on the right path.
Other entrepreneurs can fall victim to analysis paralysis, endlessly refining their plans. In this case, talking to customers, reading research reports, and whiteboard strategizing are all equally unhelpful. The problem with most entrepreneurs’ plans is generally not that they don’t follow sound strategic principles but that the facts upon which they are based are wrong.
Unfortunately, most of these errors cannot be detected at the whiteboard because they depend on the subtle interactions between products and customers. If too much analysis is dangerous but none can lead to failure, how do entrepreneurs know when to stop analyzing and start building? The answer is a concept called the minimum viable product.
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. Contrary to traditional product development, which usually involves a long, thoughtful incubation period and strives for product perfection, 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.
Simplify the Minimum Viable Product
Deciding exactly how complex an MVP needs to be cannot be done formulaically. It requires judgment. Luckily, this judgment is not difficult to develop: most entrepreneurs and product development people dramatically overestimate how many features are needed in an MVP. When in doubt, simplify.
In a concierge MVP, this personalized service is not the product but a learning activity designed to test the leapof-faith assumptions in the company’s growth model. In fact, a common outcome of a concierge MVP is to invalidate the company’s proposed growth model, making it clear that a different approach is needed. This can happen even if the initial MVP is profitable for the company. Without a formal growth model, many companies get caught in the trap of being satisfied with a small profitable business when a pivot (change in course or strategy) might lead to more significant growth.
The best professionals and craftspersons alike aspire to build quality products; it is a point of pride. Though, if we do not know who the customer is, we do not know what quality is. Customers don’t care how much time something takes to build. They care only if it serves their needs.
MVPs require the courage to put one’s assumptions to the test. If customers 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?
We must be willing to set aside our traditional professional standards to start the process of validated learning as soon as possible.
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.
Building an MVP is not without risks, both real and imagined. Both can derail a startup effort unless they are understood ahead of time. The most common speed bumps are legal issues, fears about competitors, branding risks, and the impact on morale.
Pivot or persevere?
One decision stands out above all others as the most difficult, the most time-consuming, and the biggest source of waste for most startups. We all must face this fundamental test: deciding when to pivot and when to persevere.
Each pivot unlocks new opportunities for further experimentation, and the cycle repeats. Each time we repeat this simple rhythm: establish the baseline, tune the engine, and make a decision to 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?
Because of the scientific methodology that underlies the Lean Startup, there is often a misconception that it offers a rigid clinical formula for making pivot or persevere decisions. This is not true. There is no way to remove the human element—vision, intuition, judgment—from the practice of entrepreneurship, nor would that be desirable.
Ask most entrepreneurs who have decided to pivot and they will tell you that they wish they had made the decision sooner. I believe there are three reasons why this happens.
- First, vanity metrics can allow entrepreneurs to form false conclusions and live in their own private reality.
- Second, 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.
- Third, many entrepreneurs are afraid. Acknowledging failure can lead to dangerously low morale.
There is a large range of pivots that cover about every business model change once could make. Zoom-in Pivot, Zoom-out Pivot, Customer Segment Pivot, Customer Need Pivot, Platform Pivot, Business Architecture Pivot, Value Capture Pivot,Engine of Growth Pivot, Channel Pivot, Technology Pivot
Tip1 – Make your tests in the open
If a competitor can outexecute 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. If that’s true, it makes no difference what the competition knows. If it’s not true, a startup has much bigger problems, and secrecy won’t fix them.
Sooner or later, a successful startup will face competition from fast followers. A head start is rarely large enough to matter, and time spent in stealth mode—away from customers—is unlikely to provide a head start. The only way to win is to learn faster than anyone else.
The solution to this dilemma is a commitment to iteration. You have to commit to a locked-in agreement—ahead of time—that no matter what comes of testing the MVP, you will not give up hope. Successful entrepreneurs do not give up at the first sign of trouble, nor do they persevere the plane right into the ground. Instead, they possess a unique combination of perseverance and flexibility.
Tip2 – Go after early adopters
Early adopters use their imagination to fill in what a product is missing. They prefer that state of affairs, because what they care about above all is being the first to use or adopt a new product or technology. In consumer products, it’s often the thrill of being the first one on the block to show off a new basketball shoe, music player, or cool phone.
In enterprise products, it’s often about gaining a competitive advantage by taking a risk with something new that competitors don’t have yet. Early adopters are suspicious of something that is too polished: if it’s ready for everyone to adopt, how much advantage can one get by being early? As a result, additional features or polish beyond what early adopters demand is a form of wasted resources and time.
Tip3 – Prefer small batches
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.
The Lean Startup works only if we are able to build an organization as adaptable and fast as the challenges it faces. This requires tackling the human challenges inherent in this new way of working;
Tip4 – Go and see for yourself
The importance of basing strategic decisions on firsthand understanding of customers is one of the core principles that underlies the Toyota Production System. At Toyota, this goes by the Japanese term genchi gembutsu, which is one of the most important phrases in the lean manufacturing vocabulary. In English, it is usually translated as a directive to “go and see for yourself” so that business decisions can be based on deep firsthand knowledge.
Tip5 – Allow mistakes only once
When blame inevitably arises, the most senior people in the room should repeat this mantra: if a mistake happens, shame on us for making it so easy to make that mistake.
Be tolerant of all mistakes the first time, but never allow the same mistake to be made twice.
Tip6 – Use small teams
Greg set out to change the QuickBooks development process by using four principles: 1. Smaller teams. Shift from large teams with uniform functional roles to smaller, fully engaged teams whose members take on different roles.
2. Achieve shorter cycle times.
3. Faster customer feedback, testing both whether it crashes customers’ computers and the performance of new features/customer experience.
4. Enable and empower teams to make fast and courageous decisions.
Tip7 – Beware of vanity metrics
Companies have a strong incentive to align their PR stories around the heroic founder and make it seem that their success was the inevitable result of a good idea.
Vanity metrics wreak havoc because they prey on a weakness of the human mind. In my experience, when the numbers go up, people think the improvement was caused by their actions, by whatever they were working on at the time.
Vanity metrics are any indicator that cannot be directly linked to an action. Many people can explain its evolution with many reasons. They jeopardize progress.
How to drive innovation in large corporates
Classical mistakes include the use of vanity metrics instead of actionable metrics, an overly long cycle time, the use of large batch sizes, an unclear growth hypothesis, a weak experimental design, a lack of team ownership, and therefore very little learning.
Conventional wisdom holds that when companies become larger, they inevitably lose the capacity for innovation, creativity, and growth. I believe this is wrong. Internal or external, in my experience startup teams require three structural attributes:
- scarce but secure resources
- independent authority to develop their business
- a personal stake in the outcome (however, I do not believe that a personal stake has to be financial)
My suggested solution 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. It works as follows:
1. Any team can create a true split-test experiment that affects only the sandboxed parts of the product or service (for a multipart product) or only certain customer segments or territories (for a new product). However:
2. One team must see the whole experiment through from end to end.
3. No experiment can run longer than a specified amount of time (usually a few weeks for simple feature experiments, longer for more disruptive innovations).
4. No experiment can affect more than a specified number of customers (usually expressed as a percentage of the company’s total mainstream customer base).
5. Every experiment has to be evaluated on the basis of a single standard report of five to ten (no more) actionable metrics.
6. Every team that works inside the sandbox and every product that is built must use the same metrics to evaluate success.
7. Any team that creates an experiment must monitor the metrics and customer reactions (support calls, social media reaction, forum threads, etc.) while the experiment is in progress and abort it if something catastrophic happens.
Recognize differen types of innovators
Some people are natural inventors who prefer to work without the pressure and expectations of the later business phases. Others are ambitious and see innovation as a path toward senior management. Still others are particularly skilled at the management of running an established business, outsourcing, and bolstering efficiencies and wringing out cost reductions. People should be allowed to find the kinds of jobs that suit them best. In fact, entrepreneurship should be considered a viable career path for innovators inside large organizations.
Managers who can lead teams by using the Lean Startup methodology should not have to leave the company to reap the rewards of their skills or have to pretend to fit into the rigid hierarchies of established functional departments. Instead, they should have a business card that says simply “Entrepreneur” under the name.
They should be held accountable via the system of innovation accounting and promoted and rewarded accordingly.