The lean startup By Eric Ries Book summary.
THE LEAN STARTUP BY ERIC RIES | BOOK SUMMARY
The Lean Startup defines
a scientific methodology for running startups and launching new products. This
new approach has been adopted around the world within startups and established
organisations. Regardless of your role or company size, this is a must read for
entrepreneurs, marketers, developers and business leaders.
This book is organised into three key parts.
In ‘Vision’ the book defines what an entrepreneur and startup actually are and
articulates a new way for startups to measure their progress called ‘validated
learning’. ‘Steer’ dives into the methodology of the build-measure-learn
feedback loop. And in ‘Accelerate’ the book explores techniques to speed up the
‘Steer’ process and growth methods.
KEY PRINCIPLES OF THE LEAN STARTUP
• Entrepreneurs
are everywhere. Regardless of industry, company size or your role,
entrepreneurs are everywhere. You don’t necessarily have to be the founder to
apply entrepreneurship.
• Entrepreneurship
is management. A startup is an institution that needs to be managed.
• Validated
learning. Startups exist, not just to make a product and make money, but to
learn how to create a sustainable business. This is done using frequent
experiments and testing to reach a vision.
• Build-measuer-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.
• Innovation
accounting. Startups need to focus on measuring progress towards goals and
prioritise work. This requires a new kind of accounting designed for startups.
PART ONE: VISION
Start
• The
Lean Startup takes its name from lean manufacturing and adapts the ideas of
just-in-time inventory management, small batch sizes and accelerated cycle
times to the context of entrepreneurship and startups.
• Vision
is defined, the strategy is the means to get there (changed by a pivot or
persevere) and the product defines the strategy (and is constantly optimized).
• The
Lean Startup model is designed to teach you how to drive a startup. Instead of
making complex plans that are based on a lot of assumptions, you can make
constant adjustment with a steering wheel called the build-measure-learn
feedback loop.
Define
• Entrepreneurs
are everywhere. They’re in large established organisations as well as small
startups.
• A
startup is a human institution designed to create a new product or service
under conditions of extreme uncertainty.
• This
definition has nothing to do with the size of the company or the industry
you’re operating in.
Learn
• If
the fundamental goal of entrepreneurship is to engage in organisation 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
realise our vision and which are just crazy.
• Validated
learning is the process of demonstrating empirically that a team has discovered
valuable truths about a startup’s present and future business prospects.
• In
other words, which of our efforts are value-creating and which are wasteful?
This question is at the heart of the lean manufacturing revolution; it is the
first question any lean manufacturing adherent is trained to ask.
Experiment
• The
Lean Startup method reconceives a startup’s efforts as experiments that test
its strategy to see what works. A 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
value hypothesis tests whether a product or service really delivers value to
customers once they are using it.
• The
growth hypothesis tests how new customers will discover a product or service.
• You
then need to set up real tests. Not just survey people, as they often don’t
know what they want. This means iterating your product or service and testing
key metrics to determine if your hypothesis is true or false.
PART TWO: STEER
As we saw in Part One, the products a startup
builds are really experiments; the learning about how to build a sustainable
business is the outcome of those experiments. For startups, that information is
much more important than dollars, awards, or mentions in the press, because it
can influence and reshape the next set of ideas.
This Build-Measure-Learn feedback loop is at
the core of the Lean Startup model. In Part Two, we will examine it in great
detail.
Leap
• I
call the riskiest elements of a startup’s plan, the parts on which everything
depends, leap-of-faith assumptions. The two most important assumptions are the
value hypothesis and the growth hypothesis. These give rise to tuning variables
that control a startup’s engine of growth. Each iteration of a startup is an
attempt to rev this engine to see if it will turn. Once it is running, the
process repeats, shifting into higher and higher gears.
• The
value hypothesis: The first step in understanding a new product or service is
to figure out if it is fundamentally value-creating or value-destroying.
• The
Growth Hypothesis: A similar thing is true for growth. As with value, it’s
essential that entrepreneurs understand the reasons behind a startup’s growth.
Test
• Once clear on these leap-of-faith assumptions, the first step is to enter theBuild phase as quickly as possible with a minimum viable product (MVP). TheMVP 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.
The minimum viable product lacks many features that may prove essential later
on. A minimum viable product (MVP) helps entrepreneurs start the process of
learning as quickly as possible.3 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.
• Dropbox
used a video to demonstrate the value of their service and show people how they
have a problem they didn’t know they had.
• Food
on the Table (delivers groceries to you door based on what you like to eat and
cook as well as finding the best bargains in your area) used a concierge MVP.
By starting with one customer and a chef manually collecting the ingredients,
they were able to test the fundamental value of their hypothesis.
• 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.
Measure
• A
startup’s job is to (1) rigorously measure where it is right now, confronting
the hard truths that assessment reveals, and then (2) devise experiments to
learn how to move the real numbers closer to the ideal reflected in the
business plan.
• “I
asked the team a simple question that I make a habit of asking startups
whenever we meet: are you making your product better? They always say yes. Then
I ask: how do you know? I invariably get this answer: well, we are in
engineering and we made a number of changes last month, and our customers seem
to like them, and our overall numbers are higher this month. We must be on the
right track. This is the kind of storytelling that takes place at most startup
board meetings. Most milestones are built the same way: hit a certain product
milestone, maybe talk to a few customers, and see if the numbers go up.
Unfortunately, this is not a good indicator of whether a startup is making
progress. How do we know that the changes we’ve made are related to the results
we’re seeing? More important, how do we know that we are drawing the right
lessons from those changes?”
• To
answer these kinds of questions, startups have a strong need for a new kind of
accounting geared specifically to disruptive innovation. That’s what innovation
accounting is.
• How
innovation accounting works: 1) Establish the baseline. Where are you now, and
how are you currently performing? 2) Tune the engine. Initiate your experiment
to test your value or growth hypothesis. e.g. 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. 3) Pivot or
persevere. Based on the data, you can persevere with the
product/features/process you now know to
be correct, or pivot and test your next assumption.
• 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 (cohort
analysis). e.g. new customer signups by month.
• Measure
actionable metrics. For this they need to be 1) Actionable: they display cause
and affect 2) Accessible: can be understood by everyone. Each cohort analysis
says: among the people who used our product in this period, here’s how many of
them exhibited each of the behaviors we care about 3) Auditable: We must ensure
that the data is credible to employees.
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? That change is called a
pivot: a structured course correction designed to test a new fundamental
hypothesis about the product, strategy, and engine of growth.
• A
startups runway is the number of pivots it can still make. 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. Measuring runway through the lens of pivots rather than that
of time suggests another way to extend that runway: get to each pivot faster.
• Conduct
regular ‘pivot or persevere’ meetings.
• A
pivot is not just an exhortation to change. Remember, it is a special kind of
structured change designed to test a new fundamental hypothesis about the
product, business model, and engine of growth.
• Zoom-in
pivot – In this case, what previously was considered a single feature in a
product becomes the whole product. This is the type of pivot Votizen made when
it pivoted away from a full social network and toward a simple voter contact
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 realises 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.
• 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. In
many cases, these related problems may require little more than repositioning
the existing product. In other cases, it may require a completely new product.
Again, this a case where the product hypothesis is partially confirmed; the
target customer has a problem worth solving, just not the one that was
originally anticipated.
• 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. Only later does the platform emerge as a vehicle for third parties to
leverage as a way to create their own related products. However, this order is
not always set in stone, and some companies have to execute this pivot multiple
times.
• 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).6 The former commonly is associated with
business to business (B2B) or enterprise sales cycles, and the latter with
consumer products (there are notable exceptions). In a business architecture
pivot, a startup switches architectures. Some companies change from high
margin, low volume by going mass market (e.g., Google’s search “appliance”);
others originally designed for the mass market, turned out to require long and
expensive sales cycles.
• Value
capture pivot – There are many ways to capture the value a company creates.
These methods are referred to commonly as monetisation or revenue models. These
terms are much too limiting. Implicit in the idea of monetisation is that it is
a separate “feature” of a product that can be added or removed at will. In
reality, capturing value 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 – As we’ll see in Chapter 10, 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 – In traditional sales terminology, the mechanism by which a company
delivers its product to customers is called the sales channel or distribution
channel. For example, consumer packaged goods are sold in a grocery store, cars
are sold in dealerships, and much enterprise software is sold (with extensive
customisation) by consulting and professional services firms. Often, 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. Whenever a company abandons a previously complex sales process
to “sell direct” to its end users, a channel pivot is in progress.
• 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.
PART THREE: ACCELERATE Batch
• The
small-batch approach produces a finished product every few seconds, whereas the
large-batch approach must deliver all the products at once, at the end. Imagine
what this might look like if the time horizon was hours, days, or weeks.
• What
if it turns out that the customers have decided they don’t want the product?
Which process would allow a company to find this out sooner?
• The
biggest advantage of working in small batches is that quality problems can be
identified much sooner.
• Toyota
discovered that small batches made their factories more efficient. In contrast,
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.
Grow
• The
engine of growth is the mechanism that startups use to achieve sustainable
growth. I use the word sustainable to exclude all one-time activities that
generate a surge of customers but have no long-term impact, such as a single
advertisement or a publicity stunt that might be used to jump-start growth but
could not sustain that growth for the long term.
• Sustainable
growth is characterised 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 use, e.g. luxury goods and status
symbols, 3) Through funded advertising and 4) Through repeat purchase or use.
• These
sources of sustainable growth power feedback loops that I have termed engines
of growth. Each is like a combustion engine, turning over and over. The faster
the loop turns, the faster the company will grow.
• The
sticky engine of growth – 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 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 speed of growth is determined by what I call the rate of
compounding, which is simply the natural growth rate minus the churn rate.
• The
viral engine of growth – Awareness of the product spreads rapidly from person
to person similarly to the way a virus becomes an epidemic. Like the other
engines 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. For a product with a
viral coefficient of 0.1, one in every ten customers will recruit one of his or
her friends.
This is not a sustainable loop. Imagine
that one hundred customers sign up. They will cause ten friends to sign up.
Those ten friends will cause one additional person to sign up, but there the
loop will fizzle out. By contrast, a viral loop with a coefficient that is
greater than 1.0 will grow exponentially, because each person who signs up will
bring, on average, more than one other person with him or her.
• The
paid engine of growth – As the name suggests, this engine of growth is
dependent on paying to acquire customers. If either company wants to increase
its rate of growth, it can do so in one of two ways: increase the revenue from
each customer or drive down the cost of acquiring a new customer. Like the
other engines, the paid engine of growth is powered by a feedback loop. Each
customer pays a certain amount of money for the product over his or her
“lifetime” as a customer.
Adapt
• An
adaptive organisation is one that automatically adjusts its process and
performance to current conditions.
• 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. By asking
and answering “why” five times, we can get to the real cause of the problem,
which is often hidden behind more obvious symptoms.
• 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.
Innovate
• Successful
innovation teams must be structured correctly in order to succeed.
• Scarce
but secure resources – It is extremely rare for a stand-alone startup company
to lose 10 percent of its cash on hand suddenly (compared to a large
organization where a department may have 10% reallocated in an emergency).
Thus, startups are both easier and more demanding to run than traditional
divisions: they require much less capital overall, but that capital must be
absolutely secure from tampering.
• Independent
development authority – Startup teams need complete autonomy to develop and
market new products within their limited mandate. They have to be able to
conceive and execute experiments without having to gain an excessive number of
approvals.
• A
personal stake in the outcome – Third, entrepreneurs need a personal stake in
the outcome of their creations. In stand-alone new ventures, this usually is
achieved through stock options or other forms of equity ownership. Where a
bonus system must be used instead, the best incentives are tied to the Longterm
performance of the new innovation.
• Create an innovation sandbox where the changes and experiments only affect one set of features or customers at a time.