Lean startup notes
- 1. Michael’s notes on: “The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses” by Eric Ries
- 2. Lean Startup 1. Entrepreneurs are everywhere You don’t have to work in a garage to be in a startup. 2. Entrepreneurship is management A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty. 3. Validated learning Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business 4. 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. 5. Innovation accounting To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.
- 3. Lean Startup 1. Entrepreneurs are everywhere You don’t have to work in a garage to be in a startup. 2. Entrepreneurship is management A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty. 3. Validated learning Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business 4. 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. 5. Innovation accounting To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.
- 4. Lean Startup 1. Entrepreneurs are everywhere You don’t have to work in a garage to be in a startup. 2. Entrepreneurship is management A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty. 3. Validated learning Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business 4. 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. 5. Innovation accounting To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.
- 5. Lean Startup 1. Entrepreneurs are everywhere You don’t have to work in a garage to be in a startup. 2. Entrepreneurship is management A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty. 3. Validated learning Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business 4. 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. 5. Innovation accounting To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.
- 6. Lean Startup 1. Entrepreneurs are everywhere You don’t have to work in a garage to be in a startup. 2. Entrepreneurship is management A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty. 3. Validated learning Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business 4. 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. 5. Innovation accounting To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.
- 7. Traditional Management does NOT work for Startups and Innovation • Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment • In general management, a failure to deliver results is due to either a failure to plan adequately or a failure to execute properly • Both are significant lapses, yet new product development in our modern economy routinely requires exactly this kind of failure on the way to greatness • Most tools from general management are not designed to flourish in the harsh soil of extreme uncertainty in which startups thrive • Innovation is a bottoms-up, decentralized, and unpredictable thing, but that doesn’t mean it cannot be managed
- 8. How to Measure Progress in Innovation? • As an engineer and managers we are accustomed to measuring progress by making sure our work proceeded according to plan, was high quality, and cost about what we had projected • Lethal problem of achieving failure: successfully executing a plan that leads nowhere
- 9. Validated Learning • Lean thinking defines value as providing benefit to the customer; anything else is waste • 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 called validated learning because it is always demonstrated by positive improvements in the startup’s core metrics • Validated learning is backed up by empirical data collected from real customers.
- 10. The question is not “Can this product be built?” In the modern economy, almost any product that can be imagined can be built. The more pertinent questions are “Should this product be built?” and “Can we build a sustainable business around this set of products and services?”
- 11. Two Main Assumptions Value hypothesis The value hypothesis tests whether a product or service really delivers value to customers once they are using it Growth hypothesis Does startup has a business model that can achieve a sustainable growth
- 13. MVP Minimum Valuable Product • The MVP 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 • 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. • The lesson of the MVP is that any additional work beyond what was required to start learning is waste, no matter how important it might have seemed at the time • Always focused on scaling something that was working rather than trying to invent something that might work in the future. • Remove any feature, process, or effort that does not contribute directly to the learning you seek
- 14. What about Quality? • Modern business and engineering philosophies focus on producing high-quality experiences for customers as a primary principle; • It is the foundation of Six Sigma, lean manufacturing, design thinking, extreme programming, and the software craftsmanship movement. • These discussions of quality presuppose that the company already knows what attributes of the product the customer will perceive as worthwhile. • In a startup, this is a risky assumption to make. Often we are not even sure who the customer is. Thus, for startups, I believe in the following quality principle: If we do not know who the customer is, we do not know what quality is
- 15. FROM THE MVP TO INNOVATION ACCOUNTING • When one is choosing among the many assumptions in a business plan, 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. • Once the baseline has been established, the startup can work toward the second learning milestone: tuning the engine. Every product development, marketing, or other initiative that a startup undertakes should be targeted at improving one of the drivers of its growth model. • For example, a company might spend time improving the design of its product to make it easier for new customers to use. This presupposes that the activation rate of new customers is a driver of growth and that its baseline is lower than the company would like. To demonstrate validated learning, the design changes must improve the activation rate of new customers
- 16. OPTIMIZATION VERSUS LEARNING • If you are building the wrong thing, optimizing the product or its marketing will not yield significant results • Thus the downward cycle begins: the product development team valiantly tries to build a product according to the specifications it is receiving from the creative or business leadership. When good results are not forthcoming, business leaders assume that any discrepancy between what was planned and what was built is the cause and try to specify the next iteration in greater detail. • 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.
- 17. User stories were are not 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) 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
- 18. ACTIONABLE METRICS VERSUS VANITY METRICS • Actionable For a report to be considered actionable, it must demonstrate clear cause and effect • Accessible All too many reports are not understood by the employees and managers who are supposed to use them to guide their decision making. • Auditable We must ensure that the data is credible to employees
- 20. Catalog of Pivots • Zoom-in Pivot In this case, what previously was considered a single feature in a product becomes the whole product. • Zoom-out Pivot In the reverse situation, sometimes a single feature is insufficient to support a whole product. In this type of pivot, what was considered the whole product becomes a single feature of a much larger product. • Customer Segment Pivot In this pivot, the company realizes that the product it is building solves a real problem for real customers but that they are not the type of customers it originally planned to serve. In other words, the product hypothesis is partially confirmed, solving the right problem, but for a different customer than originally anticipated.
- 21. Catalog of Pivots (Continued) • Customer Need Pivot As a result of getting to know customers extremely well, it sometimes becomes clear that the problem we’re trying to solve for them is not very important. However, because of this customer intimacy, we often discover other related problems that are important and can be solved by our team • Platform Pivot A platform pivot refers to a change from an application to a platform or vice versa. Most commonly, startups that aspire to create a new platform begin life by selling a single application, the so-called killer app, for their platform • Business Architecture Pivot This pivot borrows a concept from Geoffrey Moore, who observed that companies generally follow one of two major business architectures: • high margin, low volume (complex systems model) or • low margin, high volume (volume operations model)
- 22. Catalog of Pivots (Continued) • Channel Pivot In traditional sales terminology, the mechanism by which a company delivers its product to customers is called the sales channel or distribution channel. A channel pivot is a recognition that the same basic solution could be delivered through a different channel with greater effectiveness. • Technology Pivot Occasionally, a company discovers a way to achieve the same solution by using a completely different technology. Technology pivots are much more common in established businesses. In other words, they are a sustaining innovation, an incremental improvement designed to appeal to and retain an existing customer base. •
- 23. Catalog of Pivots (Continued) • Value Capture Pivot There are many ways to capture the value a company creates. These methods are referred to commonly as monetization or revenue models. 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 paid growth In this type of pivot, a company changes its growth strategy to seek faster or more profitable growth.
- 24. Engines of Sustainable Growth • Sticky Attract and retain customers for a long time. The rules that govern the sticky engine of growth are simple: rate of new customer acquisition needs to exceed the churn rate • Viral Awareness of the product spreads rapidly from person to person similarly to the way a virus becomes an epidemic. The viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up • Paid Customers are acquired based on investment in advertising or sales force Customer lifetime value needs to exceed customer acquisition cost
- 25. Product Market Fit Product/Market Fit was a phrase coined by Marc Andreessen. “Product/market fit means being in a good market with a product that can satisfy that market.”
- 26. We often miss the memo Dear XXX, Congratulations! The job you used to do at this company is no longer available. However, you have been transferred to a new job in the company. Actually, it’s not the same company anymore, even though it has the same name and many of the same people. And although the job has the same title, too, and you used to be good at your old job, you’re already failing at the new one. This transfer is effective as of six months ago, so this is to alert you that you’ve already been failing at it for quite some time. Best of luck!
- 27. Wisdom of Five Whys A new release disabled a feature for customers. 1. Why? Because a particular server failed. 2. Why did the server fail? Because an obscure subsystem was used in the wrong way. 3. Why was it used in the wrong way? The engineer who used it didn’t know how to use it properly. 4. Why didn’t he know? Because he was never trained. 5. Why wasn’t he trained? Because his manager doesn’t believe in training new engineers because he and his team are “too busy”
- 28. Learning to use Five Whys • Make a Proportional Investment The investment should be smaller when the symptom is minor and larger when the symptom is more painful. We don’t make large investments in prevention unless we’re coping with large problems • Avoid Five Blames 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. Never allow the same mistake to be made twice • Start Small; Start with a narrowly targeted class of symptoms • Appoint a Five Whys Master To facilitate learning
- 29. How can we use Lean Startup principles?
Editor's Notes
- two leaps of faith stand above all others: the value creation hypothesis and the growth hypothesis. The first step in understanding a new product or service is to figure out if it is fundamentally value-creating or value-destroying.Read more at location 1108 Top of Form Bottom of Form it’s essential that entrepreneurs understand the reasons behind a startup’s growth. 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 value-creating product.
- Although we write the feedback loop as Build-Measure-Learn because the activities happen in that order, our 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 and get that measurement
- 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.
- Startups also have a true north, a destination in mind: creating a thriving and world-changing business. I call that 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 (see the chart on this page). Products change constantly through the process of optimization, what I call tuning the engine. Less frequently, the strategy may have to change (called a pivot). However, the overarching vision rarely changes. Entrepreneurs are committed to seeing the startup through to that destination. Every setback is an opportunity for learning how to get where they want to go (see the chart below
- Pivots come in different flavors. The word pivot sometimes is used incorrectly as a synonym for change. A pivot is a special kind of change designed to test a new fundamental hypothesis about the product, business model, and engine of growth
- The Sticky Engine of Growth when customer is returning to the site to use product constantly Dropbox or Evernote Therefore, companies using the sticky engine of growth track their attrition rate or churn rate very carefully. The churn rate is defined as the fraction of customers in any period who fail to remain engaged with the company’s 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 Viral Engine of Growth Online social networks and Tupperware are examples of products for which customers do the lion’s share of the marketing. Awareness of the product spreads rapidly from person to person similarly to the way a virus becomes an epidemic. Customers are not intentionally acting as evangelists; they are not necessarily trying to spread the word about the product. Growth happens automatically as a side effect of customers using the product. Viruses are not optional. 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 higher this coefficient is, the faster the product will spread. The viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up. The Paid Engine of Growth advertising or sales force
- Each engine requires a focus on unique metrics to evaluate the success of new products and prioritize new experiments. Sticky collectable market place, customers has reason to return or some subscriptions models Viral is Hotmail or social netwroks The Sticky Engine of Growth when customer is returning to the site to use product constantly Dropbox or Evernote Therefore, companies using the sticky engine of growth track their attrition rate or churn rate very carefully. The churn rate is defined as the fraction of customers in any period who fail to remain engaged with the company’s 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 Viral Engine of Growth Online social networks and Tupperware are examples of products for which customers do the lion’s share of the marketing. Awareness of the product spreads rapidly from person to person similarly to the way a virus becomes an epidemic. Customers are not intentionally acting as evangelists; they are not necessarily trying to spread the word about the product. Growth happens automatically as a side effect of customers using the product. Viruses are not optional. 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 higher this coefficient is, the faster the product will spread. The viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up. The Paid Engine of Growth advertising or sales force
- 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. 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. This may take a long time or a short time, depending on one’s industry and timing.
- Product market fit is not forever. Business is changing and growing and what was sufficient before is not guaranteed to work in the future When Eric was CTO of IMVU
- To accelerate, Lean Startups need a process that provides a natural feedback loop. When you’re going too fast, you cause more problems. 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. 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 A new release disabled a feature for customers. 1)Why? Because a particular server failed. 2. Why did the server fail? Because an obscure subsystem was used in the wrong way. 3. Why was it used in the wrong way? The engineer who used it didn’t know how to use it properly. 4. Why didn’t he know? Because he was never trained. 5. Why wasn’t he trained? Because his manager doesn’t believe in training new engineers because he and his team are “too busy
- Five Whys sessions as new problems come up. Since baggage issues are endemic, they naturally come up as part of the Five Whys analysis and you can take that opportunity to fix them incrementally. If they don’t come up organically, maybe they’re not as big as they seem. 2. Everyone who is connected to a problem needs to be at the Five Whys session. Many organizations face the temptation to save time by sparing busy people from the root cause analysis. This is a false economy, as IGN discovered the hard way. 3. At the beginning of each Five Whys session, take a few minutes to explain what the process is for and how it works for the benefit of those who are new to it. If possible, use an example of a successful Five Whys session from the past. If you’re brand new, you can use my earlier example about the manager who doesn’t believe in training. IGN learned that, whenever possible, it helps to use something that has personal meaning for the team