The Lean Startup shows entrepreneurs an empirically proven method for building a business by first finding a profitable business model using a three step build-measure-learn feedback system; and then scaling that model into a viable business. Key insights:
The role of a startup is to quickly learn how to build a sustainable business around the founders’ vision
Fast-track customer feedback by taking a minimum viable product (MVP) to market so that key value creation assumptions can be tested
Use repeated hypothesis testing – build/deliver, test/measure, learn/adjust – to refine all aspect of the business until you have a sustainable business that can be scaled up
Scale the business by focusing on repeat business, viral growth, or paid growth through advertising
Where possible use small batches with planned upgrades as you evolve your product/service
Use the ‘5 whys’ questioning technique to get the root cause of problems
As you scale build an adaptive organization that continues to test and improve the key business value drivers
Your MVP includes the product, as well as the platform for delivering the product
Be tolerant of first time mistakes – they are an opportunity to learn
Be intolerant of making the same mistake twice – they waste valuable time and precious capital
Full title: The Lean Startup: How Constant Innovation Creates Radically Successful Businesses. By Eric Ries.
Length: 336 pages, or 8 hours and 38 mins on Audible
Introduction to The Lean Startup
All businesses must go through the startup phase. So what is unique about startups? From Eric:
“Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business around the founders’ vision.”
“A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.”
The three key insights below follow Eric’s three key steps around 1) building a product to take to market, 2) having a systematic approach to learning, and 3) deciding on next steps based on the results of your learning experiments.
Key insight 1: Learn by taking a Minimum Viable Product based on the founders vision to market
All new businesses have a vision in mind and most have employed a business strategy or growth plan to scale up the new venture.
The problem is that the founders may be committing precious capital against two untested hypothesis that require testing. First, the Value Hypothesis – test whether a product actually provides value to customers who use it (i.e. does it solve their problem at a price they’re willing to pay). Second, the Growth Hypothesis – test how new customers will find your product and if they will help spread the word to other potential customers (i.e. does your marketing/sales system work at a cost your business can afford).
The best way to test the Value and Growth Hypothesis is to take what Eric calls the Minimum Viable Product to market and measure customers’ actual behavior. So what is an MVP?
Concierge MVP. This is a service that is delivered manually at low volume initially to replicate a service that is to be run at scale and/or automated later. The focus is on learning more on Value and Growth, knowing full well that the cost of service deliver isn’t sustainable long term.
Wizard of Oz MVP. This MVP uses manual process for some of the difficult or expensive parts of a technology solution; however this is not visible to the customer. It enables learning without having to build the complete technology solution.
A landing page MVP. This is a webpage describing the features and price of the product prior to the product (or service) actually being available. The entrepreneur can track website activity and attempted ‘purchases’ or downloads to assess market interest in the product.
An email MVP. This simplest of them all, this MVP involves emailing existing and potential customers information on your product to see if the response is favorable. You can measure whether the email is opened, read, and if any of the call-to-action buttons (i.e. ‘buy now’, ‘find out more’) are clicked.
Regardless of the type of MVP chosen, the MVP main purpose is to support validation of the Value and Growth Hypothesis through learning. More from Eric:
“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.”
It’s easy to convince yourself that you know what the market wants and ‘if you built it they will come.’ Eric states this is high risk, and instead you should focus on the minimum 20% of features that deliver 80% of value to the client, then grow from there. As examples, Groupon started as a coupon for the pizza place downstairs; and AirBnb began renting an air mattress in an apartment.
Key insight 2: Hypothesis testing – build, measure, learn, (repeat)
Here is Eric’s three step model for hypothesis testing:
Step 1 – Build. Develop your MVP and take it to market.
Step 2 – Measure. Develop actionable, accessible, and auditable metrics for your product and measure real customers against them. Experiment with split A/B tests to see which features are most valuable to your customers. Avoid what ‘vanity metrics’ as Eric calls them and focus on ‘actionable metrics’. From Eric:
“When you hear companies doing PR about the billions of messages sent using their product, or the total GDP of their economy, think vanity metrics. But there are examples closer to home. Consider the most basic of all reports: the total number of “hits” to your website. Let’s say you have 10,000. Now what? Do you really know what actions you took in the past that drove those visitors to you, and do you really know which actions to take next? In most cases, I don’t think it’s very helpful.
Now consider the case of an Actionable Metric. Imagine you add a new feature to your website, and you do it using an A/B split-test in which 50% of customers see the new feature and the other 50% don’t. A few days later, you take a look at the revenue you’ve earned from each set of customers, noticing that group B has 20% higher revenue per-customer. Think of all the decisions you can make: obviously, roll out the feature to 100% of your customers; continue to experiment with more features like this one; and realize that you’ve probably learned something that’s particular valuable to your customers.
For example, here’s a pattern I’ve witnessed in companies large and small. The company launches a new feature or new product, and a few days later, traffic (or revenue, or customers) starts going up. Everyone involved with that product celebrates. In fact, I’ve noticed that people tend to believe that whatever they were working on that preceded the metrics improvement probably caused the improvement itself. So the product guys think it’s the new feature, the sales guys think it’s that new promotion — I’ve even seen customer service reps be convinced it’s due to a new customer-friendly policy. In many cases the fluctuations are random or caused by unrelated external events. Unfortunately, the same mental trickery doesn’t apply when the numbers come back down. Human beings have an unfortunate bias to take credit for positive results and pass the blame for negative results.”
Step 3 – Learn. The entrepreneur should establish regular reviews of measured data as part of a systematic learning process. These might be daily, weekly, or monthly depending on how fast you are able to make changes to your MVP, and have enough customer volume to measure any changes. Note the review of measured data will require human intuition and judgement to interpret in order to decide what actions to take. Here are five options:
Hold. The measured results don’t provide conclusive evidence to make a decision one way or the other. More data is required.
Fold. The measured data, perhaps at the end of a long series of experiments, indicates that the MVP fails the Value and/or Growth Hypothesis. If true it might be time to exit the business before you spend more capital.
Pivot. The measured data indicates a fundamental change in the business model (MVP or marketing strategy) is warranted. This might be a change in product scope, customer segment, platform or technology, distribution channel etc.
Persevere. The measured data indicates you’re on the right path and your B-M-L experimentation loop is generating more value. Think of the split A/B testing example above that generated 20% higher revenue per-customer. Generate more experimental options and persevere in validated learning. As Eric says, ‘tune the engine’ some more.
Scale. The measured data indicates that you’ve proved your Value and Growth Hypothesis and you have the basis for a profitable business. Now you need to invest and scale up the product offering and marketing system.
A final word from Eric:
“The goal of a lean startup is to move through the build-measure-learn feedback loop as quickly as possible.”
Key insight 3: Scaling up a proven business model – 3 Engines of Growth
Eric introduces a growth model based on 3 Engines of Growth as described below. He states that startups should focus on just one engine at a time, iterating and learning to make sure it is working before progressing to another.
The Sticky Growth Engine: This model relies on repeat purchases or high customer retention. Think of customers maintaining their Netflix subscription. So long as the rate of new customers joining is higher than current customers leaving, the business will grow.
The Viral Growth Engine: This model relies on current customers sharing product information with their network and thus bringing new customers to purchase the product. Assuming there is no repeat purchases, you need a viral coefficient greater than 1.0 to growth the business. This means each customer purchases a product, then tells their network about it, and more than 1.0 of these people on average purchase the product. A viral coefficient of 1.1 grows the business; at 0.9 sales will decline.
The Paid Growth Engine. This model relies on paying to acquire new customer through advertisements. With incremental revenue from customers acquired through advertisements greater than the cost of the advertisements, this model can scale up well.
After going through the B-M-L model and developing a valid growth engine, it’s time for the entrepreneur to commit more resources to the business to increase customers, sales, and profits. Here’s the final word from Eric:
“Only 5 percent of entrepreneurship is the big idea, the business model, the whiteboard strategizing, and the splitting up of the spoils. The other 95 percent is the gritty work that is measured by innovative accounting: product prioritization decisions, deciding which customers to target or listen to, and having the courage to subject a grand vision to constant testing and feedback.”
Other insights from The Lean Startup
4. Use small batches. If you’re developing a physical product, build in smaller batches (say 100 not 10,000), so you can incorporate customer feedback into follow on production.
5. Investigate with the 5 Whys. Not sure why a customer did something strange, ask why five times to get to the core reason or reasons.
6. Be careful not to avoid problems. Small problems in a small operation can become big problems in a big operation when you scale up. Don’t move so fast or so optimistically that you are overlooking problems.
7. Build an Adaptive Organization. One that continues to tune the current value engine while developing new sources of growth.
8. MVP = Product + Platform. The MVP needs include not only the product the customer gets, but also the platform through which it is delivered.
9. Be tolerant of mistakes the first time. These are learning opportunities that can reveal powerful insights.
10. Never allow the same mistake twice. They sap precious time, money, and learning opportunities from your business.
Why you should read this book if you’re under 30
Building a business can be a hugely rewarding and profitable undertaking – one that many folks are inclined to attempt.
However, with some figures indicating that 80% of all business fail after 5 years it can also be a very stressful and expensive undertaking. By applying the methodologies in The Lean Startup you can maximize your chance of entrepreneurial success, while limiting your downside if you are not successful.
Relationship to other Eruditeable books
#1 – The Algebra of Happiness. This book will help you situate entrepreneurship alongside other life goals from a successful entrepreneur.
#2 – Factfulness. This book shows how to think about the whole world including the third world– and therefore potential markets – in a more logical and fact-based manner.
#12 – Loserthink. This book will help you with different ways of thinking (frames) about a problem which might reveal new MVP opportunities to pursue or pivot to.
#16 – The Personal MBA. This book will help the inexperienced (i.e. young) entrepreneur by introducing them to all the key aspects of running a business. These are the areas the entrepreneur will need to build as the business grows.
#17 – Crucial Conversations. This book will help manage all the difficult conversations with co-founders, venture capitalists, bankers, employees, and perhaps customers that will happen during the early days of your startup.
#20 – Influence. This book introduces the six key marketing techniques so you can leverage them as appropriate as part of your MVP.
#21 – Leaders Eat Last. This book will help with the leadership aspects of running a startup business – which by necessity will entail dealing with ambiguity, change, and stress on levels well above established businesses.
About the author
Eric Ries (born 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 from Yale as a software engineer, Ries worked with There, Inc, and then co-founded social network IMVU. While at IMVU Ries combined Steve Blank’s ideas on fast customer feedback with Lean thinking to generate his early thesis.
After leaving IMVU, Ries joined venture capital firm Kleiner Perkins as a venture advisor, and six months later started advising startups independently. Based on his experiences, he developed a methodology based on select management principles to help startups succeed. The lean startup methodology originates from a combination of ideas such as lean manufacturing, which seeks to increase value-creating practices and eliminate wasteful practices, and Blank's customer development methodology.
He was invited to speak at the Web 2.0 Expo by Tim O'Reilly, and was offered a position as entrepreneur-in-residence at Harvard Business School. Ries began to devote all of his time to the lean startup movement, and held conferences, gave talks, wrote blog entries, and served as an advisor to companies.