This is an extract from my first THINK, PLAN, ACT! Book Club for Growth series on “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses”, by Eric Ries, available directly from Amazon by clicking here
Note: The purpose of the Book Club for Growth is to provide business leaders with an effective but short forum to play catch up on learning. As the catalyst I will help you turn thoughts into reality, fast. I will quote liberally and re-tell a few of the best stories and examples in very short form, and as this is a synopsis please do not expect a critique of the books featured.
So who is Eric Ries?
He is a man who failed many times before becoming a successful technology entrepreneur. He is entrepreneur-in-residence at Harvard and a trusted advisor to all kinds of companies, from start-ups to Fortune 100 enterprises; all struggling with the same problems of starting and building something new.
It is IMHO very important to state right up front that The Lean Startup is not solely targeting the archetype startup we all imagine setting up to dominate the world from mum and dads garage. What he covers in this book is as relevant to our mega sized global enterprises as it is to the gung ho twenty-something entrepreneur.
Eric Ries is adamant that most New Product Development is wrong. He argues it is highly wasteful, citing that all too often we build stuff nobody actually wants! He explains how established companies are very good at creating incremental improvements to existing products and serving customers (sustaining innovation), but struggle to create breakthrough new products (disruptive innovation) than can create new sustainable sources of growth. The amount of time a company can count on holding on to market leadership to exploit its earlier innovations is shrinking, and this creates an imperative for even the most entrepreneurial companies to invest in innovation. The only sustainable path to long-term economic growth he argues is to build an “innovation factory” to create disruptive innovations on a continuous basis
The Methodology
This is a book for entrepreneurs and the people who hold them accountable. His Lean Startup method is part mash up part gigantic step forwards and is an evolutionary step up from:
- Lean manufacturing
- Design thinking
- Customer development
- Agile development
The methodology has three characteristics worth mentioning, these being: extremely fast cycle times, a focus on what customers want without necessarily asking them what they want and a scientific measurable approach to decision making.
The book is split into these three parts, each is beautifully written and you’ll find this an engaging read.
VISION STEER ACCELERATE VISION STEER ACCELERATE VISION STEER ACCELERATE
Part I: Vision
So let’s start with what he has to say in part one: Vision. In “Vision” he makes the case for a new discipline of entrepreneurial management and articulates a new way for startups to gauge if they are making progress, called validated learning. To achieve this kind of learning, he gives case studies of startups be they garage startups or from inside an enterprise that have used scientific experimentation to discover how to build a sustainable business.
Part II: Steer
In “Steer” Eric Ries dives into the Lean Startup method in some detail, showing one major turn of the flywheel with examples taking us through what he calls the Build-Measure-Learn feedback loop. In fact, if you are looking for a mantra from his teaching it’s going to be Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn! Got it? Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn! Beginning with leap-of-faith assumptions that demand rigorous testing, you’ll learn how to build a minimum viable product (MVP as it’s now commonly known as) to how to test those assumptions, a new accounting system for evaluating whether you’re making progress, and a method for deciding whether to pivot (changing course with one foot anchored to the ground) or persevere.
Part III: Acceleration
In Acceleration he explores techniques that enable Lean Startups to speed through the Build-Measure-Learn feedback loop as quickly as possible, even as they scale rapidly for growth. He takes us through the lean manufacturing concepts that are applicable to startups, too, such as the power of small batches. And he also discusses organizational design, how products grow, and how to apply Lean Startup principles beyond the proverbial garage, even inside the world’s largest companies.
The 5 Principles
Next up he discusses and explains that there are 5 principles at the core of the Lean Startup methodology and how all are critical throughout the VISION STEER ACCELERATE stages. These are:
- Entrepreneurs are everywhere.
- Entrepreneurship is management.
- Validated learning.
- Build-Measure-Learn.
- Innovation accounting
Entrepreneurs are everywhere
Let’s now dive into what he says about each of these five principals. What does he mean when he says Entrepreneurs are Everywhere? You don’t have to work in a garage to be in a startup. The concept of entrepreneurship includes anyone who works within his definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty. That means entrepreneurs are everywhere and the Lean Startup approach can work in any size company, even a very large enterprise, in any sector or industry.
But who are these people? They are the person who just lost their job in the recession and have struck out on their own. They are the person who has started and sold his first 5 businesses, and is on to his sixth. These are the people we traditionally read about in magazines and books – the self-made success stories. However, entrepreneurs are also found in global corporations, working on the next big idea. Sometimes we refer to these people as Intrapreneurs.
In other words entrepreneurs are everywhere!!
Entrepreneurship is management
His next point and rational focuses on Entrepreneurship is Management. He is coming at you straight from the school of No BS. He states that a startup is an institution, not just a product, and so it requires a specific kind of management specifically geared to its context of extreme uncertainty. In fact, Eric Ries goes on to recommend that “entrepreneur” should be considered a job title in all modern companies that depend on innovation for their future growth. Furthermore he discusses how the goal of an entrepreneur is to build a sustainable enterprise, not just a new cool product, and this is what the Lean Startup method is defining: a new (and predictable) method of using continuous innovation to create radically successful businesses.
Next, he reminds us of the extremely high stats of failure attributed to innovation. Not just in startups but within established companies too. Innovation without disciplined management is an unacceptable risk especially in the middle of the cool digital revolution we find ourselves in.
In short he is reminding readers that all too often entrepreneurship forgets the importance of management capabilities
Validated learning
The next principal validated learning speaks of the importance of learning by scientifically validating the data; this is straight from the school of ‘what gets measured gets done’. And he has this to say. Startups exist not just to make money, or even serve customers. He argues that they exist to learn how to build a sustainable business and that this learning can be validated scientifically by running frequent experiments that allow entrepreneurs to test each element of their vision.
This is the idea that is the most critical to Ries’ entire premise, and it’s a revolutionary one. Samsung are masters at this, this is the approach they used on their tablets and note innovations. Yet most entrepreneurs start a business with a new idea thinking that they have an idea that will be a huge success. Why else start a business and take all that risk? They then plod along, hustling the hell out of that idea until it either succeeds or fails – usually in spectacular fashion.
Ries proposes that if the organization can learn as quickly as possible what the marketplace values enough to pay for, they will be able to adapt their business and grow it into a sustainable enterprise.This is what he calls validated learning.
Build-Measure-Learn
Next is 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. His idea is to get back to “build” as quickly as possible after learning from the marketplace. He gives examples of how the quicker you can get through this cycle, the faster you’ll learn what the market values, and the better chance you have of surviving and building a sustainable business. Remember the mantra…Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn
Innovation accounting
The fifth and final principal is what he calls innovation accounting. Do not be fooled by the implication, this is not about fiddling the books to keep investors and the markets happy! What he is arguing for is a way to holding innovation to account. He informs convincingly that it is the boring stuff that matters the most that will make a company truly successful. To improve entrepreneurial outcomes and hold innovators accountable, he tells of the need to focus on the boring stuff: be sure on
- how to measure progress
- how to set up milestones
- how to prioritize work
Mr. Ries goes onto argue that this requires a new kind of accounting designed specifically for the startup scenario and for the people who hold them accountable. The process must continuously validate using KPIs the startup’s Value Hypotheses and Growth Hypotheses…A
- Value hypothesis – test whether a product or services really delivers value to customers once they’re using it
- Growth hypothesis – tests how new customers will discover a product or service
To reframe this last section of the book we can say that what these 5 principles add up to is a new way of thinking about management. Because if you value innovation as a company – whether you are a startup or a multi-billion behemoth – this is the way you will accomplish it.
Why Do Startups Fail?
Next the book asks why do startups fail? But before we get to this, can you remember his explicit definition of a startup?
He defines a start-up as a “human institution designed to create a new product or service under conditions of extreme uncertainty”.
The words “human” and “uncertainty” are essential to what follows. A successful start-up does not just rely on a brilliant idea, but also requires managing people through all the challenges of innovation and growth, and through times when the idea will fail and when people will fight over what to do next.
So, why do startups fail? He gives us two reasons.
- Established business metrics get used all too often when in essence they simply do not apply to the highly uncertain startup environment because startups don’t yet know who their customer is or what their product should be and because traditional planning and forecasting are only accurate when based on a long, stable operating history, and relatively static environment.
- Entrepreneurs/ Intrapreneurs rebel against the machine and take the “Just Do it” approach. But this never works either, it’s one of the biggest myths that JDI is a core reason why startups work out. This is because an “unmanaged” startup will always fail, because Entrepreneurship is management and equally importantly Entrepreneurship is a discipline to be mastered.
Hit-or-Miss Proposition
Next up in the book he explains how launching a new enterprise—whether it’s a tech start-up, a small business, or an initiative within a large corporation—has always been a hit-or-miss proposition. According to the decades-old formula, you
- write a business plan
- pitch it to investors
- assemble a team
- introduce a product
- start selling as hard as you can
And somewhere in this sequence of events, you’ll probably suffer a fatal setback. The Lean Startup method favours experimentation over elaborate planning, customer feedback over intuition and iterative design over traditional “big design up front” development.
Mechanics of the Methodology
Let us now take a deep dive and let us get into the mechanics of getting the right stuff done, right using the Lean Startup methodology. The first thing you need to do is to build a quality product or service for the marketplace. And if you don’t know who the customer is, you don’t know what quality is. So the first step is to create something called a customer archetype. The purpose of the archetype is to humanize the target market for your business. It will guide all of the decisions you make about product development and allocation of resources moving forward. So, before you make anything, make sure you know exactly who you are making it for.
Second, you are going to need to take a leap of faith at some point. No matter how much research you’ve done, and how certain you are of your chances of success, your new venture is going to have to make some assumptions on some very important things. The key is to know just what part of your plan is a leap of faith. A simple tool for this would be the analogue/antilog. There’s no problem basing the strategy for your new business based on the success of some other company or industry, as long as you also know what you don’t know.
For instance, when they were building the iPod, Apple knew that people would listen to music in public places wearing earphones based on the success of the Sony Walkman. This answered a critical question for Apple. However, what they didn’t know was whether or not people would pay for music. The antilogto this is that Napster had just proven that people – in record numbers – would stop paying for music when offered a free (albeit illegal) alternative. So they built their now insanely successful business on a leap of faith, but they knew exactly where the risk lied.
The next step on this process is to build a rapid prototype. Most people have heard of Zappos by now – the billion dollar a year online shopping portal. It had started out as a rapid prototype by founder Nick Swinmurn. His original idea was to build a brand new retail experience –which he could have pursued at great cost and risk. Instead, he chose to run an experiment. He wanted to see if people would buy shoes online. So, he went around to shoe stores in his area and asked if he could take pictures of the shoes the stores had in stock. He would take those pictures and put them up on a website, and if people bought the shoes from him, he would return to the store and buy them at full price. There, for next to nothing except for time and energy, Nick had figured out that people would indeed buy shoes online. So what does this tell us?
- Firstly, always build what the startup community now calls a “minimum viable product” (MVP). It’s the smallest product or service that you can create and start generating learning from. Nick didn’t need anything more than a simple website to start Zappos, and it’s likely that you need a heck of a lot less than you think you do to launch your new product.
- Second, you should be attempting to attract the early adopter market with this MVP. Because these early adopters know that they will almost always get a product with “bugs” in it, you don’t need to worry about having the best possible product to launch. In fact, any effort beyond what you need for an MVP is considered waste –because it wasn’t driven in a response to the marketplace.
Three Learning Milestones
He discusses that the point of successful New Product Development in a startup is to figure out where they are right now, confront the cold hard facts, and then design experiments to move the numbers closer to what they laid out in the business plan. To know this and act accordingly Ries recommends sticking to what he calls the 3 Learning Milestones:
- establish the baseline
- tuning the engine
- pivot (or persevere)
In establishing the baseline, you need to make sure you are setting the right metrics. One thing to be wary of are “vanity metrics”. In the web startup world these metrics might include “website visitors”, and in some cases even “registered users”. In almost every case, these metrics will lead you to focus on actions that, at best, limit your chances for success. How often does a CEO say ‘add this feature’ because a friend told him or an engineer tweaks something ‘to make it better’ yet there’s no impact on customer behavior and still this behavior gets repeated time and time again. This is the waste LEAN strives to eliminate
The Three A’s
In order to prevent failure, he proposes you ensure your metrics meet the “3 A’s test”, in other words they must be
- Actionable: demonstrate a clear cause and effect relationship so that you can take definitive action in response to it.
- Accessible: be easily understood and available widely to people in the company.
- Auditable: be able to go back to the source of data to prove that the metrics were telling the true (and entire) story.
Pivot or Persevere?
Next he talks of the importance of PIVOT or PERSEVERE. At some point, you will need to make the decision about whether or not your business strategy has a reasonable chance of success. This is the time where you will need to decide to either “pivot or persevere”. Of course, if things are working well and you can see a path the great success and profits, keep working on the idea you’ve started with. Just make sure to make your decision based on the cold hard facts. PERSEVERE?
A pivot is a fundamental change in business strategy. If you conclude that your business strategy isn’t likely to succeed, you can change your strategy. This is where the mindset of an entrepreneur comes in. A true entrepreneur is learning how to build a sustainable enterprise, not make a single product idea a success. There are many kinds of pivots you could make
• Zoom-in: where a single feature of your product becomes the entire product.
• Zoom-out: where your product is too narrow to support a business, and you decide to make a broader product.
• Customer segment: where you realize that you are building a product that solves a need for a segment of customers that is different than the one you started with.
• Customer need: based on an intimate understanding of the customers developed during your iteration process, you realize that the need you were solving for isn’t very important. But you find new needs you can solve instead.
• Business architecture: this is where you go from a high margin, low volume solution to a low margin high volume solution.
• Technology: where you realize that you could solve the exact same problem using a completely different (and usually less expensive) technology.
There are other pivots; the point being made is that whichever pivot you take, it’s only the next hypothesis in your business model, and that it should be rigorously tested just like everything else. You may pivot twenty times before hitting gold.
Three Ways to a Sustainable Business
And now that you have found the product that you know will help you create a sustainable business, he challenges you to think plan act on the topic of how to create a sustainable business. He puts forth the idea that the only way you can build a sustainable business is when your new customers come from old customers. He has three ways to do this.
First, you can create a “sticky” growth engine. This depends on having a product or service that customers will continue to pay for over time. In this model, if you can bring in new customers at a faster rate than your old customers leave the service, your business will grow. The metric that you’ll want to pay the most attention to is your retention rate
Second, you could create a “viral” engine of growth. In this model, you depend on your current customers to bring in your new customers. The most famous example of this is Hotmail, which was once a slow growth business struggling to get traction. That was until they decided to append each mail message You sent with an invitation for other people to sign up for the service, with a link directly to the signup page. The metric for this engine is something called the “viral loop”. If you can get each new customer to bring in 1 or more customers, the viral growth will continue.
The last engine for growth is the “paid” model. In this model, you take the profits you’ve earned from your old customers, and invest it into advertising (or any new business development tactic) to attract new customers. The metrics to pay attention to in this case are the Lifetime Customer Value (the profits you’ll make off each customer over the lifetime of doing business with you) and the Customer Acquisition Cost. As long as your Lifetime Customer Value exceeds your new Customer Acquisition Cost, you will grow.
So what are the key takeaways from The Lean Startup?
- Most New Product Development fails, it produces stuff nobody wants and is terribly wasteful. Successful Entrepreneurship is not in asking ‘can it be built’ but ‘should it be built’ and success is about building a sustainable business
- The entrepreneur must set their vision and their value hypothesis and growth hypothesis for success must be continuously validated through experiments and against KPIs, avoid vanity metrics!
- An Experiment is a Product and each experiment tests your business assumptions, so best test your MVP on early adopters. Experimentation is faster and cheaper than traditional market research
- Measure exactly what people did on the experiment. If the plan is to see what happens, a team is guaranteed to succeed – at seeing what happens – but won’t necessarily gain validated learning – If you cannot fail, you cannot learn
- It’s about what works today not what might work tomorrow. As Mark Cook from the Kodak Gallery put it ‘success is not delivering a feature, success is learning how to solve the customer’s problem’ Continuously hold the team to account and when the data stares you in the face and proves your Business Model assumptions wrong, PIVOT!
- Think BIG Start SMALL Learn FAST. Just like Zappos ask the right questions!
- Do customers recognize that they have the problem you’re trying to solve?
- If there was a solution, would they buy it?
- Would they buy it from you (company)?
- Can we build a solution for that problem?
Typically, companies go to step 4 prior to confirming customers have the problem.
- Treat the new venture as an experiment
- Identify the elements of the plans that are assumptions rather than facts and find ways to test them. Then using these insights, build a minimal viable product.
- And remember Planning is a tool that only works in the presence of a long and stable operating history not a startup prone to extreme uncertainty
“The Lean Startup method teaches you how to drive a startup; how to steer, when to turn, and when to persevere and grow a business with maximum acceleration.” Through the examples he gives us 4 core benefits as
- Eliminating Uncertainty
- Working Smarter not Harder
- Continuously Develop Minimum Viable Products and apply
- Validated Learning to drive forward, fast
And Finally…
Steve Blank is famed for this observation:
Business plans rarely survive first contact with customers.
As the boxer Mike Tyson once said about his opponents’ prefight strategies: “Everybody has a plan until they get punched in the mouth.”
The great point Eric Ries is championing is that entrepreneurship can succeed in any size company, in any industry in any market as it is a process and this means it can be learnt and if it can be learnt it can be thought.
So to avoid a punch in the mouth master the Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn Build-Measure-Learn and the 5 PRINCIPLES
- Entrepreneurs are everywhere.
- Entrepreneurship is management.
- Validated learning.
- Build-Measure-Learn.
- Innovation accounting
In summary I will quote Peter Drucker, he may have died in 2005 but if he were alive today I am sure he would allow me to summarize The Lean Startup with this quote of his. There is surely nothing quite so useless as doing with great efficiency what should not be done at all.
I hope you enjoyed this summary and let me know how you plan to put this new found knowledge to the test.If you now see reason to purchase the book or the audible version clicking here
