The Lean Startup
336 pages; Average reading time 4 hours 45 min
This bookbhook book summary will take not more than 9 minutes
The reality is that most start-ups fail. Most of these failures are externalised to ‘not being in the right place at the right time’, ‘product not being perfect for launch’ and many more reasons. With my own start-up experience and of those around me, I believe that startup success can be engineered into a process, and therefore startup success can be learnt as well as taught. I began writing on the blog Startup Lessons Learned-which has now refined into the theory of Lean Startup. The Lean Startup is not a ‘how-to’ book of tactics-it is an approach that helps entrepreneurs move away from ‘Can this product be built?’ to ‘Should this product be built?’ After all, the biggest risk that a startup carries is consuming precious resources to build a product that nobody wants! The Lean Startup is now a global movement. This book is divided into three parts:
- Build the vision for the startup with validated learning
- Steer the startup towards success using the Build-Measure-Learn feedback loop
- Accelerate the Build-Measure-Learn loop while scaling up simultaneously
PART ONE: Build the Vision for the startup with validated learning
The goal of any startup needs to be to build a product that consumers want and are willing to pay the (right) price for it. Building the vision to enable such a goal comprises of four steps: Start, Define, Learn and Experiment.
- Start the engine: In a majority of cases, start-ups begin with ‘just do it’ approach without thinking through the various aspects of entrepreneurial management. Yes, entrepreneurs also need management principles, just that these management principles are different from the traditional management tools (forecasts, business plans, milestones) used in larger and more mature organisations. If a startup is seen as a car, then the startup also needs to fire up its growth engine and there needs to be constant tuning the engine to ensure the car (startup) is running well and in the right direction.
- Define the entrepreneur: The definition of entrepreneur goes beyond the founder of a startup. Managers working in large organisations are also entrepreneurs, especially those leading new products or ventures within the larger organisation. Intuit began in 1983 as a startup, founded by Scott Cook. But by 2002, Cook was struggling with the same set of challenges that plague most large organisations. The contribution of new products to overall revenue was declining-more and more new launches were failing for Intuit. Cook decided to do something about it and along with me and CEO Brad Smith, he infused entrepreneurship and risk taking across all teams in Intuit. The results were dramatic-TurboTax, a key product from Intuit would earlier have one or two major feature addition /changes in a year. Now the TurboTax team tests more than five hundred changes in just over two and a half months! People test and learn and re-learn, instead of indulging in politics to promote their one major idea.
- Learn the concept of validated learning: ‘Learning’ does not help anyone. It becomes an excuse for no performance. There is no comfort in saying ‘we learnt XYZ from the project’ if the project did not meet its objective or if it delivered a product that no one wants. But then being an entrepreneur means working under extreme uncertainty-and in such a scenario the only certainty is that you will have some ‘learning’. The differentiator is what I call as ‘validated learning’. In validated learning there is a sense of direction and a purpose to show progress. It is very important to not end up building a product that no one wants! This happened to me during the initial prototyping of our IM product called IMVU. What do you do with ‘learning’ from a product that you spent six months on, only to discover no one wants it? Validated learning is about differentiating between value and waste. It is also about focussing on efforts that are absolutely critical to determine what the consumer really needs (not wants). Vanity metrics and the pressure to show success at any cost ‘success theatre’ are avoided when validated learning is used in everything that the startup does-new product, campaign or feature.
- Experiment with value hypothesis and growth hypothesis: Building hypothesis and then testing them is the scientific process of conducting experiments. In the Lean Startup model, there is no need to wait for the final product. An experiment is also a product. For a startup, there are two hypothesis that need to be tested:
- Value hypothesis to check whether the product is really delivering value to the consumers.
- Growth hypothesis to check how easy it is for new consumers to discover the product.
Zappos is today world’s largest online shoe store. But when founder Nick Swinmurn began, he did not go for the full blown online e-commerce model-with warehouse and supply chain. Instead, he began with a small experiment-the value hypothesis being ‘customers are willing to buy shoes online’-in which Swinmurn took pictures of shoes available at his local shoe shop and uploaded them on his website. If a consumer bought the shoes from the website, he would then buy them from the local shop and deliver to the consumer. This small yet measurable experiment was the first step for the million dollars business that Zappos is today.
PART TWO: Steer the startup towards success using the Build-Measure-Learn loop
Part one was all about designing and running experiments that enable validated learning. Having crystallised the vision of a sustainable startup, the need now is to steer the startup through the feedback loop of Build-Measure-Learn. This feedback loop can also be described as Build the Minimum Viable Product- Measure real progress- Learn to persevere or pivot. The following steps are involved in this feedback loop:
- Leap of faith assumptions: Any startup begins with a set of assumptions. Some of these assumptions are more courageous-and the startup’s success depends on these courageous assumptions. These leap of faith assumptions are important for the early strategic plan around the startup. To convert these courageous assumptions into data, the entrepreneur needs to step out and test. In the Toyota Way, this is expressed as genchi gembutsu (go and see for yourself).
- Test the assumptions: An effective and fast way to test leap of faith assumptions is to build a Minimum Viable Product (MVP). An MVP differs from a concept test in the sense that the concept test checks product design or technical viability, but an MVP tests the business hypothesis (and courageous assumptions) of the startup. When Steve Jobs rolled out the first iPhone that did not have copy-paste, 3G and corporate email, he had rolled out an MVP that enabled him to test the value hypothesis. Early adopters loved the iPhone despite it not having some basic functions-thereby validating the value hypothesis. Popular services like dropbox, craiglist and aardvark have used MVP formats like product concept video and multiple variants to test multiple hypotheses. Building an MVP, while helpful, has its own set of risks-the biggest one being that competitors get to know of the product –but all of these potential risks are solvable problems.
- Measure progress with innovation accounting: How does a startup answer the question, ‘Are you making the product better?’ The answer is not just a yes-the answer also needs to demonstrate a measurability of making progress. Innovation accounting helps measure progress by using an MVP to collect real data to establish a baseline, as seen above. This is then followed by tuning the engine so as to understand tuning which growth driver enables what extent of improvement in related metrics. It is important to ensure that these metrics are actionable (establish causality), accessible and auditable (credibility).
- Pivot or persevere: At the end of it all, the entrepreneur needs to answer the question, ‘Are we making sufficient progress or do we need to make a change in our assumptions?’ In hindsight, most startup founders believe that they should have pivoted earlier than they actually did. This delay happens because the entrepreneur tracks vanity metrics and does not realise that trouble has arrived, or when he has an unclear hypothesis which then leads to marginal failure-thereby the belief that things will look up. The third reason for delaying pivot is simply the fear of failure. Pivots come in different garbs and can be about pivoting from a feature in the product to the feature being the product itself (zoom-in pivot). The reverse will be a zoom-out pivot where the original product is just a feature in the new pivoted product. Similarly there are customer segment and customer need pivots as well as platform pivots.
PART THREE: Accelerate the startup so that the time taken in Build-Measure-Learn loop is minimised.
Part two was about going through the feedback loop of Build-Measure-Learn in terms of building MVP, measuring progress with actionable metrics and making the persevere or pivot decision. Speed and agility help startups go through the feedback loop faster, thus preventing wastage of precious resources. The following techniques help reduce time in the feedback loop.
- Building products with Just-in-time scalability: The Toyota Way has Just-in-Time (JIT) built into its core. Devastated after World War II, Japan did not have the ability and capital to build large scale assembly line platforms like the U.S. car manufacturers. Toyota worked, instead, in smaller batch processing units that enabled it to produce a diverse mix of cars with minimal changeover time and yet generate economies of (batch) scale. In entrepreneurship, smaller batches means identifying problems faster (validated learning). At IMVU, we would make, on an average, fifty changes to the product in a day! This enabled us to test features as and when they got developed rather than waiting for a consolidated change version, which would increase complexity. Instead of physical inventory, startups struggle with process incomplete and WIP product inventory. The pull from the Toyota Service Centre warehouse transforms, in the case of a startup, into the pull of designing experiments that will help decide if the right product is being built so that we do not end up making a product that no one wants.
- Identifying engines of growth: The operative words here are ‘engines of growth’ and ‘sustainable’. One-off surge in acquisitions cannot be a growth engine. In fact, there are three engines of growth (and they can operate in tandem):
- Engagement growth engine: Stickiness or engagement of the consumer drives this growth. Here the new user acquisition rate needs to be higher than the rate of users leaving (churn rate).
- Viral growth engine: Consumers using the product drive the growth of the product here. Think about Hotmail-the email signature ‘PS: get your free email at Hotmail’ was all it took to get Hotmail go viral. The more users used Hotmail, the more invitations went out to check the product out.
- Paid acquisition driven growth engine: Increasing revenue from users and reducing cost of acquisition of new users is the paid engine of growth. The revenue from the user needs to be seen in terms of Lifetime value (LTV) of the user for the entire duration that he will use the product. This LTV needs to be higher than cost per acquisition (CPA) to generate growth.
- Adapting to grow nimbly: Startups cannot afford to work in rigid structure when there is extreme level of uncertainty around their existence and future. Pivot or persevere decision requires the organisation to be flexible enough to adapt to current reality. The Toyota Production System uses the ‘5 Why technique’, where every breakdown is explored by asking Why (usually 5 times). This helps identify the root cause and typically leads to the (mostly human) gap that caused the breakdown. Using 5 Whys in startups helps build adaptive organisations and also slows down the pace in case the startup is moving at a reckless speed. As startups mature into larger organisations, the need to keep innovating becomes more important. Conversely, there needs to be a job title of ‘entrepreneur’ in larger organisations to enable these roles to create innovation within the larger, relatively inflexible and process heavy structure.
How Votizen used principles of Lean Startup
Riding on the success of setting up USA.gov in the early 1990s, David Binetti set out to build a business model around getting more people to participate in the political process. He decided to build Votizen.
David began with a couple of courageous leap of faith assumptions including one in which he believed that the average American is interested in participating in the political process. He rolled out his Minimum Viable Product in three months with $1200. The first MVP of Votizen got about 5% registration, 17% activation and close to zero retention and referral.
David used two more months and additional $5000 to make some changes in his product and add some features. Registrations moved from 5% to 17% and activation moved from 17% to 90%. Referral rate was at 4% and retention rate at 5%. The growth engine for Votizen was not kicking in.
David spent another three months with A/B experiments and talking to consumers. The referral and retention rates moved to 6% and 8% respectively. Eight months and $20,000 had gone into Votizen without major movement in actionable metrics (retention and referral). It was time for David Binetti to decide between persevere and pivot. The good thing was his persevere or pivot decision point came in just eight months with only $20,000 invested.
At this stage, David decided to pivot (zoom-in pivot) by converting one of his earlier product features into a complete product. He renamed Votizen in its new avatar as @2gov– which no longer tried to create a social network of people interested in political process, and instead connected citizens with their elected leaders. He spent a further four months and $30,000 on his new MVP of @2gov. This time around the registration rate was 42% activation 83%, retention 21% and referral 54%! His pivot had worked! But there was a problem. Less than 1% of consumers on @2gov were willing to pay. A core actionable metric of revenue was not kicking in, in terms of sustainable business growth.
David pivoted again-this time in customer segment. Instead of asking consumers to pay, he decided to reach out to organisations and fund raisers to pay for using the services of @2gov. These organisations had interest in political outcomes and they were willing to pay David to engage with the consumers who were willing to participate in the political process as activists. He moved from B2C to a B2B revenue model. But failure struck once more. While these organisations showed interest in paying @2gov, they actually did not!
David’s learning was not helping in bringing in revenue and he decided to pivot one more time-this time he pivoted the platform– he went back to B2C model but this time became a platform where people could form groups around political causes that they were passionate about. This MVP showed 51% registration, 92% activation, 28% retention and 64% referral. But more importantly, 11% of customers were spending money on the platform.
More resources on Lean Startup can be looked up on www.theleanstartup.com
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