The Long Read: Summary and Key Takeaways of the Lean Startup Method PART I

Posted 26 May By PlugAdminOtherNo Comments
Below are excerpts and a summary taken from the book.

Summary and Key Takeaways of The Lean Startup by Eric Ries

“The road map for innovation for the twenty-first century. The ideas in The Lean Startup will help create the next industrial revolution.” -Steve Blank, lecturer, Stanford University, UC Berkeley Hass Business School

 

“Every founding team should stop for forty-eight hours and read The Lean Startup. Seriously, stop and read this book now. “ -Scott, Case, CEO, Startup America Partnership

 

 

Origins of The Lean Startup

Eric Ries is a computer engineer, co-founder of his own successful company, IMVU, an experienced worker on “incredibly hard products that ultimately failed in the marketplace,” and finally an avid proponent of unorthodox approaches inspired by the Toyota Production System he calls Lean Startup: the application of lean thinking to the process of innovation. 

The key points of the Lean Startup Method are outlined as follows:

  1. Entrepreneurs. They are everywhere because an entrepreneur is anyone who works within Ries’ definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty.  Thus, the Lean Startup approach can work in any size company (or enterprise), in any sector or industry.
  2. Management.  A startup is an institution, not just a product and therefore entrepreneurship is management.
  3. Validated learning. Startups exist to learn how to build a sustainable business. This learning can be validated by running frequent experiments.
  4. Build-Measure-Learn. The fundamental activity of a startup is to turn ideas into products, measure customers’ responses, and decide whether to pivot or preserve.
  5. Innovation accounting. To improve entrepreneurial outcomes, entrepreneurs need to focus on how to measure progress, how to set up milestones, and how to prioritize work.

Why Startups Fail

The first problem that startups deal with is uncertainty. They don’t know who their customer is or what the product should be. Old management methods (often mistakenly used by startups) such as having a good plan, a solid strategy, and thorough market research, don’t work when you can’t predict the future and lack any long, stable operating history.

Once these traditional management methods fail to solve startups’ problems, they resort to the  “just do it” method. And that welcomes chaos and thus doesn’t work either. So in this three part blog series we will outline and provide a summary and excerpts of the Lean Startup method as written by Eric Ries.

Part One: Vision

1. START

The Lean Startup method uses something called validated learning as a yardstick, a unit of progress, in order to eliminate sources of waste. It also asks people to start measuring their productivity differently. The goal of any startup is to figure out the right thing to build — the thing customers want and will pay for — as quickly as possible. Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called Build-Measure-Learn feedback loop.

Every startup has a vision and should employ a strategy (including the business model, a product road map, a point of view about partners and competitors, and ideas about who the customer will be) in order to achieve that end result or the final product

 

 

 

 

Your startup’s product should change constantly through the process of optimization. Less frequently, the strategy may have to change, something called a pivot. And the overarching vision should never change.

 

 

 

2. DEFINE

Who, exactly, is an entrepreneur? Most entrepreneurs are people faced with a mission to convert the raw materials of innovation (metaphorical kindling, wood, paper, flint, sparks) into real-world breakthrough success (actual fire). And if you’re an entrepreneur, what’s a startup? Startups are not just a product, or a technological breakthrough, or even a brilliant idea. A startup is greater than the sum of its parts; it is an acutely human enterprise.

Your product should be considered as anything that customers experience from their interaction with a company. And the organization should be dedicated to uncovering a new source of value for customers as well as the impact of its product on those customers. Innovation, too, should be defined; it can be a novel scientific discovery, repurposing of an existing technology, a new business model that unlocks hidden value, or an existing product brought to a new location.

3. LEARN

Learning is an integral part of entrepreneurship. It is the most vital function in an organization that has a fundamental goal of building an organization under conditions of extreme uncertainty. 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. That is why the Lean Startup model rehabilitates learning with validated learning, a process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects. This method is more concrete, more accurate, and faster than market forecasting or classical business planning.

Validated Learning at IMVU

Ries takes a closer look at his company, IMVU. In 20014, the IM market was strictly following Metcalfe’s law: the value of a network as a whole is proportional to the square of the number of participants. Or in other words, the more popular the network, the more valuable it is. That year, top three networks controlled more than 80 percent of the overall usage. This means that in order for any new IM network to enter the market, it had to spend a significant amount of money on marketing (users had high switching costs of convincing all of their friends to join them in the new platform). 

Taking this analysis into consideration, IMVU co-founders agreed on a strategy that would combine the large mass appeal of traditional IM platform with the high revenue per customer model of three-dimensional video games and virtual worlds. They decided to build an IM add-on product that would interoperate with the existing networks. Thus, customers would be able to adopt the IMVU virtual goods and avatar communication technology without having to switch IM providers, learning new user interface, and — most important — bring their friends with them. With this strategy in place, their main task lied in creating a product that would support as many of the existing IM networks as possible and work on all kinds of computers. After incredibly hard six months, IMVU team has finally come up with (a pretty flawed) final product. The main worry was that this low-quality product would tarnish the reputation of everyone involved and turn off potential investors.

Upon the actual launch, Ries and his team were very disappointed to see a minuscule number of downloads. Despite their hard efforts to beg friends and family to download, they were barely making $300 per month. Even fixing bugs on the daily basis and changing positioning to increase downloads did not help. Out of desperation, the team decided to bring in customers for in-person interviews in efforts to really try to figure out what was really going on.

Through a series of interviews, close observation, and long discussions, it was finally clear —  two of the preconceptions were wrong: learning new software and moving friends over to a new platform were not something IM users found hard. Turns out, most of the users, an overwhelming majority of which are teenagers, run seven or eight IM clients. And they don’t mind building new lists and trying to persuade all of their buddies to join a new network, they saw it as a positive challenge. The whole mental model for how people used software was outdated, IM add-on concept was fundamentally flawed. The customers wanted a stand-alone network.

It was very hard for the team to just throw away thousands of lines of code they had slaved over for months. But without these mistakes, would they have learned that the product positioning was all wrong? This propped the next logical question: which efforts are value-creating and which are wasteful?

Turns out, all of IMVU’s efforts were a waste. In a startup world, where customer’s opinions are unknown, anything that that does not contribute to the company’s learning is a form of waste. That is why Lean thinking is designed specifically to eliminate waste through a process called validated learning. Validated learning works becuase it is always demonstrated by positive improvements in the startups’ core metrics and is backed up by empirical data collected from real customers. 

Where Do You Find Validation?

You won’t get any validation until you put your theory into practice. The real true story of IMVU begins with the hard work of discovering what customers really wanted and adjusting product and strategy to meet those desires. Besides working harder, it’s also important to work smarter which means aligning with your customers’ real needs.

For example, in one early experiment, IMVU team changed the entire website, home page, and product registration flow to replace “avatar chat” with “3D instant messaging.” New customers were split automatically between these two versions of the site; half saw one, and half saw the other. Then the team measured the difference in behavior between the two groups. Not only were the people in the experimental group more likely to sign up for the product, they were more likely to become long-term paying customers.

After months of learning and hundreds of experiments, the Ries’ team has figured out that customers wanted to use IMVU to make new friends online (a completely different model than their original assumption!). This is true startup productivity: systematically figuring out the right things to build by learning which products customers would use and why. Every new knowledge should point to a new experiment which, in turn, brings you closer to your goal.

The Audacity of ZERO

It is ironic but 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.

What you need to demonstrate is that the product development efforts are leading you towards massive success and not engaging in“success theater” — the work we do to make ourselves look more successful and make investors the illusion of traction. Better save your precious resources and gear them towards real progress.

Lessons Beyond IMVU

The Lean Startup is not just a collection of individual tactics like launching a low-quality early prototype, charging customers from day one, and using low-volume revenue targets as a way to drive accountability. It is a principled approach to new product development. It is a method for systematically breaking down a business plan into its component parts and testing each party empirically. The Lean Startup provides that empirical method to achieve validated learning across industries and sectors.

4. EXPERIMENT

If you follow the “just do it and see what happens” approach, you are guaranteed success — at seeing what happens — but you won’t necessarily gain validated learning. And the lesson here is that if you cannot fail, you cannot learn.

From Alchemy to Science

This method lets you run experiments with your strategy to see which parts are brilliant and which are crazy. Every experiment begins with a hypothesis. Then it tests it empirically. Just as scientific experimentation is informed by theory, startup experimentation is guided by its vision. The goal of every startup experiment is to discover how to build a sustainable business around that vision.

Think Big, Start Small

Zappos is the world’s largest online shoe store, with annual gross sales in excess of $1 billion. It is known as one of the most successful, customer-friendly e-commerce businesses in the world. But it did not start that way. The founder, Nick Swinmurn, started with an experiment. His hypothesis was that customers were ready to buy shoes online. To test it, he began by asking local shoe stores if he could take pictures of their inventory. In exchange for permission to take pictures, he would post the pictures online and come back to buy the shoes at full price if a customer bought them online. By beginning with a tiny, simple product (and not just relying on market research or surveys), Zappos was able to gather accurate data about the customer demand (e.g. how are customer perceptions of the product affected by the discounting strategy) by directly interacting with them. This experiment provided a clear, quantifiable outcome: either a sufficient number of customers would buy the shoes or they would not.

Break It Down

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 (retention or repeat rate, are the potential customers voluntarily spending time on your product). The growth hypothesis tests how new customers will discover a product or service (how does your product or service spread among users from initial adopters to mass adoption, are there opportunities for viral growth and if so, how can you measure this behaviour).

Next, using a technique called the concierge minimum viable product, you can make sure the first few participants had an experience that was as good as you could make it, completely aligned with your vision. Unlike a focus group, your goal would be to measure what the customers actually did. Negative results shown by your early adopters (all decline to use your product again, don’t recommend to any of their peers) are significant too. This means there is a problem with your strategy which means it’s time to get some immediate qualitative feedback. Here’s where this kind of experimentation has an advantage over traditional market research — you already have a cohort of people as well as knowledge about their actual behavior.

Another advantage of experimental process is that it is fast. A full experiment can be conducted in a matter of weeks and can be done in parallel with strategic planning (while that plan is being formulated). Even when experiments produce a negative result, those failures prove instructive and can influence strategy. It means it’s time to pivot.

An Experiment is a Product

In the Lean Startup Model, an experiment is more than just a theoretical inquiry; it is also the first product. And once successful, it allows the manager to get started with his or her campaign.

Take Kodak, for example. Mark Cook, its vice president, is trying to instill a culture of experimentation. He tries to push his team to first answer the following questions:

  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. Until you can figure out how to sell and make the product, it’s not worth spending any engineering time on it.

The Kodak team believed that an online “event album” would be a useful product for people who attend a wedding, conference, or another gathering and want to share photos from that event. So Cook led the group through a process of identifying risks and assumptions before building anything. The two main hypotheses were whether the customers would want to create the album in the first place and whether the event participants would upload photos to event albums created by their friends or colleagues.

The first thing the team built was a simple prototype of the event album. It lacked many features but did the job of allowing customers to use that prototype. The team received a lot of complaints about missing features and other negative results that demoralized the team. Cook, on the other hand, saw it as a success — this initial, flawed product showed that users did have the desire to create event albums. This was extremely valuable information.Through a beta launch, the team continued to learn and iterate. For example, a major discovery they made was that the users wanted to arrange the order of pictures before they would invite others to contribute. All of this work needed to be done before launching a marketing campaign; it yielded better results. As Cook says, “Success is not delivering a feature; success is learning how to solve the customer’s problem.”

Compiled by: Aliya Serikpayeva

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