Boiling Down the Lean Startup
“When we fail, as so many of us do, we have a ready-made excuse: we didn’t have the right stuff. We weren’t visionary enough or weren’t in the right place at the right time. After more than 10 years as an entrepreneur I came to reject that line of thinking.” – Eric Reis
It’s hard to boil down a book which is so broad – encompassing the issues facing very early stage ideas through to strategies employed by innovation units of large, deeply entrenched organisations. That said, there are a few universal ideas which underpin the methodologies adopted by a Lean Startup.
- Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.
- Waste should be eliminated all through the organisation, not just in manufacturing but in systems, processes, knowledge working, anything that holds human capital, resource capital and time capital.
- Business and marketing functions of a startup should be considered as important as engineering and product development and therefore require an equally vigorous methodology to guide them.
The Lean Startup penetrates any organisation looking to operate in conditions of extreme uncertainty. It lays out a clear methodology to engineer new product, marketing and operations functions within an organisation which will result in the company’s success.
Why The Lean Startup?
The Lean Startup targets startup businesses or business units which operate in conditions of extreme uncertainty, and it attempts to help develop product, marketing and operations functions which result in a sustainable business.
New businesses or new business units, especially ones which focus on innovation – bringing new things to the marketplace – commonly fail when they apply traditional management practices to their business or business unit.
In which case, we need a new way of managing business in these conditions of extreme uncertainty, hence The Lean Startup.
The Core Innovation Process of The Lean Startup Boiled Down
Although the devil is within the details and much was discussed within the book, there is a clear high-level path which Eric lays out to move your business towards success, and it starts with an idea.
- When you have an idea for a startup, you attach to that idea a heap of things you are assuming about its success.
- You need to be able to test those assumptions, and learn whether or not they are true or false.
- Therefore you convert your assumptions into hypotheses which you can test and learn from.
- You test your hypotheses by building a thing, measuring the results of customers using that thing and learning from the measurements (this is the build-measure-learn feedback loop).
- The first thing that you build is a minimum viable product (MVP).
- Your MVP is the thing that provides the most learning and goes through the build-measure-learn loop in the quickest way possible for the least amount of effort.
- If your MVP disproves your hypotheses, you can choose to take your learnings and pivot and build a different thing more in line with you’ve learnt, or you can close.
- If you proved your hypotheses, you then develop a set of metrics which will help demonstrate fundamental growth in the business.
- You then make modifications to your product or your marketing or your operations in order to improve those metrics.
- You continue doing so until you have achieved a sustainable business or you pivot because you realise you cannot make a sustainable business work for your budget, or you close.
Managing Our Assumptions
At its core, The Lean Startup identifies that everyone comes to new business with assumptions. If we can turn those assumptions into facts which have been validated by observing what real customers will pay for and use, we may actually be onto something.
If the assumptions stay assumptions and we throw the entire kitchen sink at building whatever we want to build based on those assumptions, the risk profile is much higher. If those assumptions can be proven to be facts, our risk profile becomes lessened and we have a higher chance of succeeding in bringing the product to market and building a sustainable business around it.
The only way we can turn those assumptions into facts is by learning, and the first step to learning is to develop hypotheses.
Learning in the Lean Startup
The Lean Startup applies the scientific method to testing our assumptions.
Utilising a build-measure-learn feedback loop, the Lean Startup aims to develop ideas, build or improve the product based upon those ideas, release the product and measure actionable metrics while the product is in use, learn how the product performed based on the result of the measurements and then decide what to change based upon those learnings.
The startup has higher chance to be successful the quicker it can iterate through this build-measure-learn loop.
It identifies that every startup has to identify 2 fundamental hypotheses about the business:
- The Value Hypothesis (What benefit or value will customers get out of this product?)
- The Growth Hypothesis (How will customers discover your product?)
These hypotheses are fundamental, and they affect your businesses product, strategy, business model and engine of growth. Deviations from these fundamental hypotheses are called pivots.
Once those hypotheses are developed, it is time to test them.
Beginning to Test in the Lean Startup
After you have developed your fundamental product hypotheses (the value and growth hypotheses), it is time to get to your first learning milestone.
A learning milestone is an opportunity to fill in significant validated knowledge gaps. These knowledge gaps are validated by observing what customers really want, and learning from their actions.
You need a powerful method of learning as much as you can a quickly as you can, and testing your hypotheses, hence bring in the MVP.
The MVP (minimum viable product) is the thing that provides the fastest run through one entire cycle of the build-measure-learn feedback loop with the minimum amount of effort possible. In the past businesses have used a video (i.e. think Drop Box), a full prototype, an extremely small batch run, a smoke test allowing customers to purchase before it’s even been produced, an unscalable concierge service (i.e. think early days of AirBNB), a crowd-funded project, or multiple mini MVPs all used to test separate assumptions. Producing it as quickly as possible for the absolute minimum of cost, while getting full validated learning (learning confirmed by customers actual actions), is where the key lies when developing your MVP.
Now, when looking to run through the build-measure-learn feedback loop, you start at the end and work your way backwards.
First, determine what you need to learn. Then, how you will measure it. And finally, what you will need to build to measure it.
It may look something like this:
“We believe busy professionals will pay for our meal planning app (value hypothesis) because they want to eat healthy but don’t have time to plan meals. They will discover us through fitness influencers and word of mouth (growth hypothesis).”
- The business here thinks they have a real problem (business professionals – the customer – want to eat healthy but don’t have time to plan meals), and they believe a meal planning app will help business professionals solve their problem.
- The business needs to learn whether or not busy professionals (the customer) will pay for a meal planning app.
- They believe their top-of-funnel discovery will happen through fitness influencers (a paid engine of growth) and word-of-mouth (a viral engine of growth).
- The business needs to learn whether or not paying influencers and/or word-of-mouth will be sustainable growth models that will work for the business.
They first need to learn that the busy professional will pay for their meal planning app, they therefore may choose to develop a prototype and get it in the hands of some business professional early adopters to see if they would pay for it.
Once they know busy professionals will pay for their meal planning app, they can start testing their engines of growth. Do the existing busy professionals tell others about their app? And if so, at a rate of greater than 0.9 persons for every person using the app (a viral coefficient of 0.9 or greater)? Or, they may decide to contact some influencers and ask them to run sponsorship for their app (is the cost of advertising through those influencers less than the revenue generated from the customers brought in?).
If any of their tests fail, the business is forced to choose to pivot or persevere. Either they persevere because they see some light at the end of the tunnel (which would be odd as their tests failed) or they pivot and choose to take the learning they have achieved (i.e. maybe busy professionals don’t pay for their prototype but busy stay-at-home mums are paying for their prototype) and pivot their business to go in a new direction.
The quicker you can move through this build-measure-learn feedback loop, the less cost you encounter when building your business (and also the more “Lean Startup runway” your business has, i.e. the more pivots it can take on) and the less risk you take on.
Side-quest, while learning, it is important to avoid relying on customer verbal confirmation of your hypotheses, although this can be a helpful initial indicator, customers aren’t entirely telling the truth until they are actually buying your product. It is easy to pay lip-service to an idea, it’s another thing to bring your wallet to the table and handover that hard-earned cash.
Once your business has validated learning that it has satisfied it’s fundamental value and growth hypotheses, it is time to tune the engine of growth.
Continued Testing in the Lean Startup
This is where Innovation Accounting comes in.
Innovation Accounting is a method of tracking progress in a Lean Startup. It works like this.
First, aim to identify key actionable metrics which demonstrate fundamental growth of the business and you can measure as you run your tests.
Then, run Innovation Accounting experiments by:
- 1 – Developing a set of actionable metrics and measuring your businesses current level of those metrics. That becomes your baseline.
- 2 – Attempt to tune the engine towards the ideal by making a series of micro changes and/or optimisations to operations, marketing and product.
- 3 – Once you have done all you can to tune the engine, you measure your now-level of metrics and compare them to your original-level of metrics and decide to pivot or persevere.
You continue to run these Innovation Accounting cycles ad infinatum or until you don’t believe there is any hope of creating a sustainable business. At that point you choose to pivot or close.
Concluding the Lean Startup
Alongside the core innovation process found within The Lean Startup, Eric Reis also establishes a number of other helpful tools for developing your business, like diving deep into establishing the real issues behind problems within your business and solving them at the lowest level (The Five Why’s), innovative customer testing methodologies (Split or A/B testing), agile product development methodologies (Kanban), helpful customer targeting methodologies (cohort analysis) and more.
The book will take a startup through the early product, operations and marketing development cycles and power them on to late stage innovation. It will help an established company “shake things up” and provide sustainable, tried and proven methods of innovating and highlight the ditches the company can get stuck in along the way.
All-in-all The Lean Startup provides methodologies for putting structures into your company that will help it innovate iteratively, sustainably, speedily and with the least waste of time, effort and finances possible.
Bonus: The Lean Startup Cheat Sheet
When going through the book I found Eric has coined a few terms of his own, or he adapts wide-spread terms into his own meaning.
I hope this cheat sheet helps you wrap your head around the book as you go through it: