The Lean Startup:
How Constant Innovation Creates Radically Successful Businesses
About Author:
Eric Ries (born September 22, 1978) is an American
entrepreneur, blogger, and author of The Lean Startup, a book on the lean
startup movement. He is also the author of The Startup Way, a book on modern
entrepreneurial management. After graduating, Ries moved to Silicon Valley in
2001 as a software engineer with There, Inc. He worked with the firm until the
2003 launch of its web-based 3D Virtual World product, There.com. The company
soon failed. In 2004, Ries left to join one of the founders of There.com.
Summary of Book
Here's the great startup myth of our time: "If you only
have determination, brilliance, great timing, and above all, a great product,
you too can achieve fame and fortune. A related misconception is that ideas are
precious. Generally, people hesitate to reveal their ideas in public - even
among friends! There's this nagging fear that someone can steal the idea from
you. Please ... Sorry, but an idea is never that great. I would bet my right
arm that during a lifetime, the average person has at least 20 awesome ideas
that could be turned into commercialized and successful start-ups and that's
even when removing Elon Musk from the sample, which otherwise would have skewed
the average upward by a disproportionate amount. The issue is not ideas,
determination, brilliance or great timing even - its execution. We will now
look at 5 advices regarding the creation of a successful business from
"The Lean Startup", that the multi successful entrepreneur Eric Ries
has written.
Takeaway number 1:
The build-measure-learn feedback loop:
Planning and forecasting are only useful when your
operations of business have been rather stable and where the environment is
static. Startups have neither of these. Planning for several months and
releasing a product only after many thousands of hours of perfecting it, is a
game of very high stakes. What if you build something that nobody wants
anyways? Many entrepreneurs have realized this, and as a consequence, they take
the approach of the opposite side of the spectrum: If you can't plan, then they
think that you can only operate in chaos. So they adopt the "just do
it" strategy instead. Nike might be correct when they tell you to put on
your running shoes and "just do it!", but in building a successful
startup, this plan is usually flawed. So what can we do instead? The solution
is the build-measure-learn feedback loop. Too much planning makes the process
rigid and very risky. "Just doing it" tends to turn everything into chaos.
Quickly going through cycles in the build-measure-learn feedback loop is the
solution. The goal of a startup is to figure out the right thing to build -
that customers want and will pay for - as quickly as possible. We must be able
to quickly kill off that which doesn't make sense, and double down on that
which does. Although the order of the actions in the build-measure-learn
framework is, well ... build, measure, learn, the planning happens backwards.
We must first figure out what we want to learn. We can do this by forming
hypotheses. Here are a few examples: "Commuters want to be able to order
food from their cars"(Mcdonalds) "People are willing to assemble
their own furniture at home"(IKEA) "People are willing to pay monthly
for being able to stream unlimited music online"(Spotify). In hindsight,
these hypotheses seem trivial, but before these companies proved them right -
they you weren't. After formulating these hypotheses that your startup revolves
around, it's time to validate or reject them, which is our next takeaway.
Takeaway number 2:
Everything is a grand experiment:
So learning as quickly as possible about your customers
needs and willingness to pay for your product is important, but how can you do
this empirically? The answer is experiments. Experiments are run together with
real or potential clients. The common denominator among the successful ways of
experimenting is this: Observe, don't ask. Customers usually don't even know
what they want! But if you show them a product and they are interested, well done!
Then you just gained some validated learning. First we should always ask
ourselves: Do we even have to build anything at all? An experiment can be as
simple as setting up a landing page, stating that you have a product that can
do something - say - improving your chances of getting a match on Tinder by
500%, driving some traffic to the site through Google Adwords, and then seeing
how many people that would sign up for it. At other times we must be more
rigorous, and develop a so-called MVP, which is short for "Minimum Viable
Product". In Lean Production, a concept that originally stems from
Japanese car manufacturers, waste is defined as something that doesn't create
value for the customers of the company. In Lean Startup, waste is defined in
another way: Everything that doesn't
lead to validated learning is waste. This is the reason why it's called a
"Minimum Viable Product". It should only contain the features of
utter importance, and it shouldn't be polished any more than what's absolutely
necessary for us to prove or reject our hypothesis. If you are embarrassed
releasing the product to your potential customers, you are on the right track.
Takeaway number 3:
Different types of MVPs:
There are many different types of MVPs that can be
constructed in order to learn what solves the problems of customers, and what
they're also willing to pay for. Eric Ries gives three different examples: The
video MVP. A famous example here is Dropbox. Drew Houston, the CEO of the
company, produced a video showing an extremely easy to use file sharing tool,
and published it online in communities with tech savvy members. The sign up
list for the product went from 5,000 to 75,000, overnight! The best thing about
this story is that the video was fake. It didn't even exist such a product yet!
The concierge MVP Another way of testing your initial hypothesis empirically to
gain validated learning about customers is to give them the concierge
treatment.This means focusing on a single or only a few customers, and develop
the product according to their preferences. Slowly - but surely - after being
certain that you solve the problem of a single early adopter (often manually)
you can expand to more customers and automate more and more of the process. The
Wizard of Oz MVP Aardvark, a search engine for subjective inquiries, such as:
"Which YouTube channel is best - PewDiePie or T-Series?" famously use
this approach with great success. Basically, it's all about pretending that you
have developed a fancy technical solution, while, behind the curtains, it's
operated by humans. In the case of Aardvark, they had employees who were coming
up with the answers to inquiries from customers in the beginning, before they
knew that the product was something that people actually wanted.
Takeaway number 4:
The three engines of growth:
Now, once we have confirmed that the product creates value
for someone, it's time to shift focus to growth. Eric Ries argues that there
are three different types of engines of growth that a company should
concentrate on. It should pick only one primarily, and try to improve the
metrics associated with that engine through iterations in the
build-measure-learn feedback loop. The "sticky" engine these types of
businesses are designed to attract customers for the long term and never let
go. A company of this type should focus on two variables primarily - the new
customer acquisition rate, and the so called churn rate, which is the fraction
of customers that failed to stay engaged with the company's product. The sticky
engine of growth is used by, for instance, repeat purchase companies like
Gillette, and also by pretty much all online gaming companies. The viral engine,
these are businesses that focus on spreading like epidemics. For every new
customer joining, the idea is that that person should invite one or more
friends as well. Success in growing a company of this sort depends on something
called the "viral coefficient". This is calculated as the number of
customers recruited on average by every recruited customer. If every customer
on average attracts half a new customer, it's not an efficient engine. On the
other hand, If every customer can attract 1.1 new customers - the product will
spread like a virus. The viral engine of growth is used by all social networks
and by multi-level marketing businesses, among others. The paid engine, A
company using the paid engine of growth realizes that primarily, it will have
to focus on advertising in some form to reach customers. The two most useful
metrics to a company of this kind are CPA (short for cost per acquisition), and
LTV (short for lifetime value). It's simply the difference between how
profitable a customer is over its entire lifetime, minus the cost of acquiring
a customer that will determine the growth rate of such a company. An example is
e-commerce businesses. Eric Ries mentor used to tell him the following: "Start-ups
don't starve - they drown" He's referring to that there's so much that a
start-up CAN do, but it's much more difficult to determine what a start-up
SHOULD do. The three engines of growth are a way to focus the energy of the
startup in the right place.
Takeaway number 5:
Pivot or persevere?
Successful entrepreneur does not give up after facing a
little bit of headwind, but at the same time, he doesn't stubbornly hold on to
his idea until he crashes either. You must possess both perseverance and
flexibility. Sometimes a pivot is necessary, or in other words, a change in
this strategy on how to achieve the overall vision that you have for the
startup. But how do we know when to pivot? It's a three-step process. 1. Establish a baseline of the current
situation using an MVP. 2. Attempt
to tune the MVP towards the ideal, through multiple iterations in the
build-measure-learn feedback loop. 3.
Pivot or persevere? The issue is that there will always be a grey zone. If our attempt
to tune the MVP into something that is improving our engine of growth is not
helping, it's a sure sign that we need to pivot. But is a 10% improvement per
year enough? Unfortunately, there's no clear-cut threshold here, intuition is
needed, and that we can only gain from experience. Here are some of the most
common pivots to make: Customer segment
pivot, The initial group of customers that you intended to focus on, might
not be as interested as you thought. But maybe another group showed a lot of
enthusiasm? Let's focus on those people instead. Value capture pivot Deciding to give away the product for free, and
then charge through advertising instead, is a typical pivot that many companies
using the viral engine of growth tends to do. Engine of growth pivot Perhaps your hypothesis that the product
would spread virally like an epidemic was rejected, but in the meantime, you
discovered that the lifetime value of every customer is much higher than the
cost of acquiring a customer. Then you may pivot from the viral engine of
growth, to the paid engine of growth instead. One thing that is important to
notice here is that a pivot is not a failure. Discovering that something
doesn't work, might not be as useful as discovering that something does, but
it's way better than trying to dig yourself out of a hole. Time to wrap it up!
The goal of a startup is to figure out the right thing to build, that customers
want and will pay for, as quickly as possible. To confirm or reject your
hypothesis, experiments must be run to gain validated learning about potential
customers. An MVP usually forms the basis of such experiments. Three popular
types of MVPs are: video, [bloopers], and The Wizard of Oz. Every startup
should focus on an engine of growth, either the sticky, the viral or the paid
one. Successful entrepreneurship is about perseverance and flexibility at the
same time, pivoting an idea does not equal failure. In fact, almost every
successful startup has done a major change to its strategy at some point. Have
a good one!
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