Lean Startup Method
- Entrepreneurs are everywhere: a human institution designed to create new products and services under conditions of extreme uncertainty
- Entrepreneurship is management: a startup is an institution, not just a product
- Validated learning: startups exist to learn how to build a sustainable business, running frequent experiments that allow entrepreneurs to test each element of their vision.
- Build-Measure-Learn: turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere (feedback loop).
- Innovation accounting: focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.
The book is divided in three parts:
- Vision: how the startups are gauging the progress, and using that learning, with scientific experimentation, to build a sustainable business
- Steer: understand the core Build-Measure-Learn feedback loop to build a MVP (minimum viable product) and validate your assumptions. If that are making progress or deciding to pivot the direction.
- Accelerate: techniques that enable Lean Startups, lean manufacturing, organizational design and products growth
PART I – START
Lean Startup adapts lean manufacturing revolution – developed at Toyota by Taiichi Ohno and Shigeo Shingo, based on shrinking of batch sizes and just-in-time production – to the context of entrepreneurship, using validated learning to track their progress.
“Startups often accidentally build something nobody wants, it doesn’t matter much if they do it on time and on budget. 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”.
Comparing with Ford’s thinking, Startups have a similar engine that is called engine of growth. Every new features, product is an attempt to improve this engine of growth. The Lean Startup method is designed to make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop.
The chart below shows that while Products change constantly the process of optimization, the Strategy less frequently may have to change (pivot). However, the overarching Vision rarely changes.
The difference between “Intrapreneurs” – who operate inside an established organization within special circumstances attend building a startup within a larger company – and Entrepreneur – the whole startup ecosystem regardless of company size, sector, or stage of development.
Also the SnapTax amazing innovation story and the technology developed to compile and file most of the 1040 EZ tax return (taking a picture), instead of having consumers fill out a complex form. What allowed the SnapTax team to innovate was a process deliberately facilitated by Intuit’s senior management.
“Innovation is a bottoms-up, decentralized, and unpredictable thing, but that doesn’t mean it cannot be managed. It can, but to do so requires a new management discipline, one that needs to be mastered not just by practicing entrepreneurs seeking to build the next big thing but also by the people who support them, nurture them, and hold them accountable”.
“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 more concrete, more accurate, and faster than market forecasting or classical business planning. It is the principal antidote to the lethal problem of achieving failure: successfully executing a plan that leads nowhere”.
As example, the IM add-on product that spent too many hours including features and fixing bugs before launching, and that was not talking to customer. The result was a serious frustration: customers wouldn’t even have downloaded the product. And the following changes to validate the user experience.
Value Vs. Waste – “Lean thinking defines value as providing benefit to the customer; anything else is waste”. So, validated learning is backed up by empirical data collected from real customers, the essential unit of progress for startups.
If you cannot fail, you cannot learn…
…experiment, identify the elements of the plan that are assumptions rather than facts, and figure out ways to test them.
This part of the book mentions the case of Zappos – world’s largest online shoe store and was acquired by Amazon in 2009 – and how the company interacted with customers and learned about their needs. The qualitative learning, applying quantitative testing, was necessary to experiment and provide a clear vision about the customer needs.
“The Lean Startup model offers a way to test these hypotheses rigorously, immediately, and thoroughly. Strategic planning takes months to complete; these experiments could begin immediately. By starting small, Caroline (HP – Hewlett-Packard director) could prevent a tremendous amount of waste down the road without compromising her overall vision”.
The recommendation here is to start breaking down the vision into component parts. Afterwards, the value hypothesis to verify whether a product or service really delivers value to customers. And the growth hypothesis to explore more details during the tests.
As example, the Kodak case and how they worked at early stage, allowing customers to use the prototype and helped the team to refute their hypotheses. The employees were used to being measured on their progress at completing tasks. As Cook says, “Success is not delivering a feature; success is learning how to solve the customer’s problem.”
PART II – STEER
In Part I we’ve learned: 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.
The first step is to enter the Build phase as quickly as possible with a minimum viable product (MVP). 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.
In the Measure phase, the biggest challenge will be determining whether the product development efforts are leading to real progress. Learning milestones are useful for entrepreneurs as a way of assessing their progress accurately and objectively.
Finally, and most important, there’s the pivot. Upon completing the Build-Measure-Learn loop, we confront the most difficult question any entrepreneur faces: whether to pivot the original strategy or persevere. If we’ve discovered that one of our hypotheses is false, it is time to make a major change to a new strategic hypothesis.
Strategy is based on assumptions? Every business plan begins with a set of assumptions and how to achieve the company’s vision. And the assumptions haven’t been proved to be true and in fact are often erroneous, the goal of a startup’s early efforts should be to test them as quickly as possible. Facebook’s early investors was criticized, claiming the social network had “no business model”, but nowadays lots of startups try to apply the lessons of Facebook and the role of strategy that is to help figure out the right question to ask.
The Video produced by Dropbox, a simple three-minute demonstration of the technology synchronizing the files, drove hundreds of thousands of people to the website. The MVP validated Drew’s leap-of-faith assumption that customers wanted the product he was developing not because they said so in a focus group or because of a hopeful analogy to another business, but because they actually signed up. Today, Dropbox is one of Silicon Valley’s hottest companies, rumored to be worth more than $1 billion.
Often we are not sure who the customer is. Thus, for startups, consider the following quality principle: If we do not know who the customer is, we do not know what quality is. 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.
This is infinitely better than mere speculation or whiteboard strategizing, because it provides a solid empirical foundation on which to build future products. 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.
Three learning milestones in how innovation accounting works:
- First, use a MVP to establish real data on where the company is right now. Without a clear-eyed picture of your current status, you cannot begin to track your progress.
- Second, startups must attempt to tune the engine from the baseline toward the ideal.
- Third, pivot or persevere.
Cohort analysis, one of the most important tool of startup analytics, looks at the performance of each group of customers that comes into contact with the product independently. Each group is called a cohort. Instead of looking at cumulative totals or gross numbers such as total revenue and total number of customers.
A split-test experiment is one in which different versions of product are offered to customers at the same time (this technique is sometimes called A/B). By observing the changes in behavior between the two groups, one can make inferences about the impact of the different variations.
David Binetti, the CEO of Votizen, discovered in the first MVP (using cohorts) that 5 percent signed up for the service and 17 percent verified their registered voter status. The numbers were so low that there wasn’t enough data to tell what sort of engagement or referral would occur. It was time to start iterating.
David spent the next two months and another $5,000 split testing new product features, messaging, and improving the product’s design to make it easier to use. Those tests showed dramatic improvements, going from a 5 percent registration rate to 17 percent and from a 17 percent activation rate to over 90 percent. Such is the power of split testing. This optimization gave David a critical mass of customers with which to measure the next two leaps of faith. However, as shown in the chart below, those numbers proved to be even more discouraging: David achieved a referral rate of only 4 percent and a retention rate of 5 percent.
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. In other words, the startup has to find ways to achieve the same amount of validated learning at lower cost or in a shorter time.
A pivot is a special kind of change designed to test a new fundamental hypothesis about the product, business model, and engine of growth. There are different types of pivots:
- Zoom-in Pivot: what previously was considered a single feature in a product becomes the whole product
- Zoom-out Pivot: what was considered the whole product becomes a single feature of a much larger product
- Customer Segment Pivot: the product hypothesis is partially confirmed, solving the right problem, but for a different customer than originally anticipated
- Customer Need Pivot: pivot the way into an entirely different line of business based on the customer intimacy
- Platform Pivot: a change from an application to a platform or vice versa
- Business Architecture Pivot: switches architectures, for example, some companies change from high margin, low volume by going mass market
- Value Capture Pivot: methods like monetization or revenue models
- Engine of Growth Pivot: change its growth strategy – the engine (the viral, sticky and paid growth)
- Channel Pivot: is a recognition that the same basic solution could be delivered through a different channel with greater effectiveness
- Technology Pivot: they are a sustaining innovation, an incremental improvement designed to appeal to and retain an existing customer base. The only question is whether the new technology can provide superior price and/or performance compared with the existing technology
Start Your Engines
The critical first question for any lean transformation is: which activities create value and which are a form of waste? Once you understand this distinction, you can begin using lean techniques to drive out waste and increase the efficiency of the value-creating activities.
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.
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.
Sustainable growth is characterized by one simple rule: new customer come from the actions of past customers. There are four ways past customer’s drive:
- Word of mouth – caused by satisfied customer’s enthusiasm for the product
- As a side effect of product usage
- Through funded advertising
- Through repeat purchase or use
Five Whys provides an opportunity to discover what that human problem might be. Repeating “why” five times, can help uncover the root problem and correct it. And the Five Whys approach acts as a natural speed regulator. The more problems you have, the more you invest in solutions to those problems.
An Innovation Sandbox is to create a mechanism for empowering innovation teams out in the open and a sustainable culture of innovation over time. The suggested solution is to create a sandbox that contains the impact of the new innovation but not constrain the methods of the startup team:
- Any team can create a true split-test experiment that affects
only the sandboxed parts of the product or service. However:
- One team must see the whole experiment through from end to
- No experiment can run longer than a specified amount of time
- No experiment can affect more than a specified number of customers
- Every experiment has to be evaluated on the basis of a single standard report of five to ten (no more) actionable metrics.
- Every team that works inside the sandbox and every product that is built must use the same metrics to evaluate success.
- Any team that creates an experiment must monitor the metrics and customer reactions while the experiment is in progress and abort it if something catastrophic happens.
At the beginning, the sandbox has to be quite small. In the company above, the sandbox initially contained only the pricing page. Depending on the types of products the company makes, the size of the sandbox can be defined in different ways.
Companies trying to bring an entirely new product to market might build the restriction around customers in certain segments. Unlike in a concept test or market test, customers in the sandbox are considered real and the innovation team is allowed to attempt to establish a long-term relationship with them. After all, they may be experimenting with those early adopters for a long time before their learning milestones are accomplished.
13. Epilogue: Waste Not
As Deming taught, what matters is not setting quantitative goals but fixing the method by which those goals are attained. The Lean Startup movement stands for the principle that the scientific method can be brought to bear to answer the most pressing innovation question: How can we build a sustainable organization around a new set of products or services?
For one thing, everyone would insist that assumptions be stated explicitly and tested rigorously not as a stalling tactic or a form of make-work but out of a genuine desire to discover the truth that underlies every project’s vision.
We would not waste time on endless arguments between the defenders of quality and the cowboys of reckless advance; instead, we would recognize that speed and quality are allies in the pursuit of the customer’s long-term benefit. We would race to test our vision but not to abandon it. We would look to eliminate waste not to build quality castles in the sky but in the service of agility and breakthrough business results.
We would respond to failures and setbacks with honesty and learning, not with recriminations and blame. More than that, we would shun the impulse to slow down, increase batch size, and indulge in the curse of prevention. Instead, we would achieve speed by bypassing the excess work that does not lead to learning. We would dedicate ourselves to the creation of new institutions with a long-term mission to build sustainable value and change the world for the better.
Most of all, we would stop wasting people’s time.