Book summary: The lean startup by Eric Ries

Eric Ries The Lean Startup is an interesting read to bridge the concepts introduced in Steve Blanks Four Steps to the Epiphany, Lean Manufacturing and Agile Development methods in software engineering. Eric describes how he learned the hard way in his first startup that the biggest Waste any company can have is to build a product that no customers want. The lean startup method is build upon the following five basic principles:
  • Entrepreneurs are everywhere
    • Which just denotes that the lean startup principles can be applied in other contexts than startups.
  • Entrepreneurship is management
    • Most specifically managers today need to become entrepreneurs as all companies will depend on innovation.
  • Validated Learning
  • Build-Measure-Learn
  • Innovation Accounting
The roots of the lean startup are from lean manufacturing that taught the world to discriminate between value creating activity and waste. The goal of a startup is to figure out the right things to build, the things customers want to pay for, as quickly as possible. The lean startup works through the concept of Build-Measure-Learn. Progress is measured in validated learning through completion of learning milestones. The strategy is evaluated frequently to determine wether to persevere or to Pivot the strategy.  

A lean startup in the definition of Eric Ries is an organisation designed to create new products and services under conditions of extreme uncertainty. Point of this definition is that innovations are diverse and that the lean startup method can also be used outside a true startup context.

Validated learning is the process of determining emperically that a team has discovered valuable truths of the startups present or future business prospects. It aims to be more concrete, more accurate and faster than marketing research. The described validated learning use automated collected metrics a lot. The example of IMVU that Eric Ries described was quite fun to read. His original strategy for positioning the 3D chat service was as an 'add-on' feature for instant messing. All of his testing with his 'young' target group revealed that they did not bought into using a new product with their friends. They merely were interested in the product to discover new friends. He describes how hard it was to depart from his original strategy as he felt "betrayed" as he recognized all his work and energy basically were deamed 'obsolete' by his customers. But this lead him towards one of the more interesting quotes in the book, after doing all the 'right' things in product development (Agile,Lean), their customers didn't want to use it: "I had committed the biggest waste of all: building a product our customers refused to use". This started him down the path of trying to reduce waste as early as possible: "The most important question of any startup product development is not can this product be build? but should this product be build?".

The lean startup method is all about designing experiments to maximize learning:
  1. Define a hypothesis
    1. Define a Value Hypothesis
    2. Define a Growth Hypothesis
  2. Design the cheapest experiment that can falsify your hypothesis
The example in the book is how Zappos started their online shoe sales by taking pictures of shoes in local stores and selling these through a website to validate if enough customers would buy shoes online. A lean startup experiment is also a first product. If this experiment is succesful, it also a product managers to continue. Product managers should ask themselves the following questions:
  1. Do customers recognize they have a problem you are trying to solve? (see also The Problem Awareness Grid found in How You Make the Sale)
  2. If there was a solution, would they buy it?
  3. Would they buy it from us?
  4. Can we build a solution for that problem?

Steer

In The Lean Startup one of the key concepts is that of build-measure-learn.
  • Ideas
    1. All startups start out with an idea and a strategy based on certain assumptions. The most important strategy assumptions are so called leap-of-fate assumption because they make or break the value proposition of the venture.
    2. Sharpen your ideas by working with a Customer Archetype and validate them (see also Empathy Map)
    3. Beware of analysis paralysis and start validating your ideas quickly!
  • Build
    1. As your first product targets Early Adopter, it does not need to be perfect.
    2. Most people overestimate the # features that need to be present in a product when in doubt simplify
  • Product
  • Measure
    1. The concept of Innovation accounting enables a startup (or new in company innovation) to validate objectively that they are learning how to grow a sustainable business.
    2. Each startup has a different hypothesis on their financial operational model. Depending on these assumptions, learning milestones will be different.
    3. As an example, in a manufacturing company, growth depends on three things:
      • The profitability of each customer
      • The cost of acquiring new customers
      • The repeat purchase rate of existing customers
      • These are the basic drivers for this companies growth model
    4. By contrast, eBay's success depends on:
      • Network effects, sellers want the highest number of potential customers, buyers want the marketplace with the biggest competition among sellers
  • Data
    • A useful concept in measuring your business is Cohort Analysis
    • Be aware of Vanity Metrics. Using Cohort Analysis you can measure if customers in new cohorts actually use the product more, are willing to pay more or otherwise are more engaged with the product.
  • Learn
    • Validated Learning in a Kanban board is a great way to have developers engage in how useful their features and ideas work in a customer environment.
In The Lean Startup a pivot is a change of strategy. See this for a visual introduction.The following pivots are possible:
  • Zoom-in Pivot
    • A single feature in the product becomes the new product
  • Zoom-out Pivot
    • A single feature is not enough. The single feature becomes part of a larger product
  • Customer Segment Pivot
    • The product solves a real problem for a real customer but they are not the customers originally planned.
  • Customer Need Pivot
  • Platform Pivot
    • A platform pivot can refer to change from a platform to an application or vice versa
  • Business Architecture Pivot
  • Value Capture Pivot
    • A value capture method requires a change in the revenue or monetization model.
  • Engine of Growth Pivot
    • A change from the Engines of Growth, viral, sticky and paid growth models.
  • Channel Pivot
  • Technology Pivot
    • A technology pivot is a change in the underlying technology due to the fact that you are limitted in your ability to satisfy your customers with your current technology choice.
Of course other pivots are possible, see the Business Model Canvas, you can pivot in each component of the canvas. Or alternatively look at Hypothesis to recognize that each hypothesis can be pivoted. Accelerate Customers do not really know what they want in product development, as a result the concept of 'pull' as it is known in Lean does not work the same. The way to think about pull in a lean startup product development concept is to run an Experiment to test the hypothesis underlying the pull request. Continuous Deployment Sustainable growth can be summarized as follows: new customers are a result from the actions of (learn from) past customers. Eric Ries describes four possible ways past customers drive growth:
  • Word of mouth
    • Customers telling other people what they like about your product
  • As a side effect of product usage
    • Fashion or status, seeing it being used by role model
  • Through funded advertising
    • Your existing customers are the prime source to be able to pay for advertizing.
  • Through repeat purchase or use
    • Some products are designed for repeat usage or subscription
The Lean Startup defines three engines of growth:
  • The Sticky Engine of Growth
    • The sticky engine of growth depend highy on customer loyalty and brand. Critical for this growth engine is that the rate of new Acquisition rate must be higher than the Churn rate.
  • The Viral Engine of Growth
    • The viral engine of growth is power by a feedback loop that can be quantified. This is called the Viral loop and its speed is defined by the Viral coefficient.
    • The Viral coefficient measures how many new customers will use a product as a consequence of each customer who signs up. This must be greater than one otherwise it will not be viral
  • The Paid Engine of Growth
    • The paid engine of growth grows linear as a function of revenue and cost per customer. This is a very common model
To create an adaptive organization and deploy Build-Measure-Learn continously the Five Whys technique is very useful.

Conclusion

The lean startup from Eric Ries is an intriguing book with a lot of useful pointers and thinkers. He builds on top of lean manifacturing techniques and puts them into the context of a bringing an innovation to market in a startup or large company. Highly recommended reading.

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