The Lean Startup summary. Methodology overview

If you don’t have time to read the whole book, we have prepared for you a short overview of the Lean Startup book by Eric Ries.

The Lean Startup is a lean manufacturing concept. This technique helps you use a scientific approach to build a growing business and avoid unnecessary costs. Highly recommended book for entrepreneurs and anyone involved in innovations and product launches.

Summary

Despite serious business plans, well-thought-out business models, detailed go-to-market strategies, and large investments, most startups fail.

Why is this so? Eric Ries, the author of the Lean Startup Methodology, is sure that the traditional approach to business development does not apply to startups.

Startups operate in an environment of extreme uncertainty, and this must be taken into account when launching it. At the initial stage of development, a startup needs to remain flexible to learn from mistakes and test the founders’ hypotheses as quickly as possible, which means that it is necessary to avoid large investments and costs. This is the heart of Lean, aiming to help entrepreneurs improve a startup’s chances of success.

Why do startups fail?

According to Eric Ries, there are two main reasons for startup failures:

1. Passion for traditional business calculations, plans, strategy building, comprehensive market research. But the problem is that in the conditions of complete uncertainty in which startups operate, these classical management methods do not work.

2. The second reason may seem completely opposite to the first one — seeing that traditional management approaches do not work, entrepreneurs generally abandon any management tools. They let things go by themselves and are guided by the “just do it” principle. But as Eric notes, this approach will not lead to anything good either. Even such a chaotic and unpredictable phenomenon as a startup (can) should be managed. And this is what the Lean method is used for.

CB Insights made own research “The Top 20 Reasons Startups Fail”

What is a Lean Startup?

Many people share the opinion that entrepreneurial success is a combination of perseverance, intelligence, a good product, and the luck of being in the right place at the right time. Routine, small things, and boring details do not matter. From his experience of working with hundreds of entrepreneurs, Eric Ries knows that it is nothing more than just a myth, partly imposed by pop culture. It’s exactly the boring little things that are critical to a startup’s success.

“Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.”

Eric Rees invented his method in practice when he was the CTO of the company he founded, IMVU. Learned from the experience of previous failures, Eric Rees and his partners began to give to users for testing, not perfectly built, but a very crude product.

After they attracted early users and received feedback from them, the product developers quickly changed options and created new versions, sometimes even several times a day. And the most fantastic thing is that this method worked effectively and helped to move quickly in development. The approach to creating innovation invented at IMVU became the basis of the Lean methodology, which absorbed, among other things, lean manufacturing methods, design thinking, customer development, and agile development methodology.

The Lean Startup is a new approach to continuous innovations.

The Lean Startup method’s goal is to help entrepreneurs avoid the risk of spending a lot of money and efforts to create a product that nobody needs. Over time, the Lean methodology has become very popular and is applied not only in startups and not only within the IT industry.

Five Principles of the Lean Startup:

1. Entrepreneurs are everywhere. Eric Ries calls anyone with a startup an entrepreneur. A startup is a venture whose goal is to create new products and services under conditions of extreme uncertainty. It means that the Lean Startup approach can be applied to companies of all sizes, even large enterprises, in any sector, and any industry.

2. Entrepreneurship is management. Startups need a new type of management that will handle the conditions of extreme uncertainty. Eric is convinced that any modern company, whose development depends on innovation, needs the position of “entrepreneur”.

3. Confirmation by facts. The task of a startup is not only to produce goods and make money. A startup needs continuous learning through a scientific approach and empirical hypothesis testing.

4. The cycle “build-measure-learn”. First, create a minimum working version of the product, evaluate consumers’ reaction, and then decide whether to continue on the chosen course or change your direction.

5. Innovation Accounting. This is what is commonly referred to as dull detail. But accounting for innovations is essential to improving startup performance. Innovation Accounting is a system of criteria and indicators that help evaluate a startup’s success (or failure).

What kind of management do startups need?

Although traditional management approaches do not work well in the conditions of complete uncertainty in which startups operate, without management at all, entrepreneurs will not be able to use their opportunities effectively.

Neither strategy, nor plans, nor a charismatic manager will help a startup if its product nobody needs.

But no one will say whether the market needs a product before launching a startup. Therefore, the most important task of a startup is to develop the ability to very quickly understand what the market needs, what customers want, and what they are willing to pay for.

The author compares running a startup to driving a car, when you can quickly change course to adjust to the traffic situation. And opposes this approach to a rocket launch when you need to calculate and plan everything in advance. He regrets that many entrepreneurs prepare their startup business plans as if they are about to launch a rocket into space. But for conditions of complete uncertainty in which they will have to act, this is not suitable.

“Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop.”

Sitting behind the wheel of a car, we know exactly where we are going. If we are going to work, we will not give up the trip just because we made a wrong turn, or because the road was blocked and we have to look for a detour. We are determined to get to our destination. Startups also know where they are going and their destination: a thriving business that can change the world. The startup vision. To make this vision a reality, it is necessary to develop a strategy that includes a business model, a product roadmap, competitors research, as well as hypotheses on the topic of whom new products or services are addressed to.”

How to define a startup

The ingredients of any startup are people, product, innovation, and conditions of extreme uncertainty.

As you remember, Eric Ries defines a startup as a new company that develops innovative products (or services) in an environment of complete uncertainty.

In fact, startups can be attributed not only to what we usually understand by them but also to anyone who creates a new product or business in conditions of complete uncertainty. And it does not matter in which sector of the economy and where, — in a business incubator, in a government institution, or in a subsidiary of a large company.

What is a startup product? Ries defines it broadly as any source of customer value. Everything that customers experience in the process of interacting with the company should be considered part of its product.

What is the startup’s goal?

Eric Ries reveals that he and his colleagues spent a lot of time arguing about different options for their product at the beginning of his career. Still, in the end, when they released the product, not a single person downloaded it. Launching products that nobody needs is a common problem for startups. Strategic analysis of the market will not help here, since you cannot rely on customers’ words because sometimes they do not know what they want. The actions of people can say more words.

How to understand what people need without wasting time and money?

An important question is which actions create value for customers, and which lead to wasted resources. When applying this concept to a startup, it is essential to understand its features and differences from production, namely that a startup operates in an environment of extreme uncertainty.

Uncertainty obscures the understanding of which actions have value since the startup does not at first know who its client is and what it needs.

Applying Lean to a startup requires a refined approach. It is based on learning how to learn about what actions lead to understanding customers’ wishes and, accordingly, to improve the performance of the startup. Entrepreneurs don’t just need to be able to make assumptions about what customers want. They need to establish a process for obtaining empirical data — that is, learn how to test their hypotheses in practice, figuring out the real needs of customers, and quickly adjusting their product based on this knowledge.

You can polish the product as much as you like, coming up with more and more new options, but reality usually corrects everything itself. The Lean Startup method initially focuses not on creating an ideal product but on releasing a Minimum Viable Product (MVP) and continuously receiving customer feedback to understand their real needs. If the initial assumptions are not confirmed by practice, they are wrong, and therefore, you need to make a pivot — radically reconsider the direction of movement. This approach ultimately reduces the risk that a startup will create a product that no one needs.

The Lean Startup approach can be used in various areas — both in manufacturing and in services. The key is to think of everything a startup does as an experiment and create learning opportunities in advance. This method allows you to test each element of a business plan empirically, and in this, it is similar to the scientific method of testing hypotheses through experiments. This approach helps to give yourself the full right to fail in advance, because if an approach does not provide such a right, then the entrepreneur cannot learn anything.

As an example, Eric Ries tells the story of the most successful online shoe store Zappos, which began with the hypothesis of its founder Nick Swinmurn that people would buy shoes online. Swinmurn did a little experiment to test his hypothesis by photographing several shoe stores’ assortment and posting the photos online. If a customer placed an order on the site, Swinmurn would buy the store’s shoes at regular prices and send them to the customer.

Break the vision apart

The first step for an entrepreneur is to break down their vision into its parts. The most critical assumptions for any entrepreneur are the value hypothesis and the growth hypothesis.

The value hypothesis seeks to understand whether customers will feel the value of a product or service when they start using it. Surveys will not give a reliable answer to this question, unlike an experiment that will help find more accurate indicators.

Testing the growth hypothesis is possible by assessing how information about the project will spread after its launch and how early adopters will behave and talk about it.

How to go into practice?

The feedback that a startup receives in its experiments can be qualitative (which product options they like and which they don’t) or quantitative (how many customers use the product, the number of registered users).

Understanding what helps create a working business for a startup is far more important than awards and press coverage.

The Lean Startup concept is based on a Build-Measure-Learn feedback loop. The most important challenge of startup management is to strive to reduce the feedback cycle time. But all the elements of this cycle deserve equal attention.

Build

For a startup, you need to start creating a Minimum Viable Product (MVP) as soon as possible. MVP is a version of a product that allows you to start the Build-Measure-Learn cycle with minimal effort, spending as little development time as possible.

Such a crude product may be devoid of the options that will be most appreciated by customers in the future. Still, at the same time, enough to be usable and understandable by first users.

Measure

“Measure” means determining whether the efforts to create a product are producing the desired results. And this is the key difference between Lean Startup valuation and standard methods, where deadlines and budget utilization are assessed, but it may not be considered that the startup has created a useless product (a product that nobody needs). The primary assessment method in Lean startup is innovation accounting (the details below).

This is a quantitative approach that allows us to find out how successful our attempts to trigger the growth mechanism are. It also helps identify intermediate learning outcomes.

Learn

It means figuring out whether to move on the same path or whether you need to make a pivot — a radical overhaul of the business model. When an entrepreneur sees that the chosen path does not lead to success, he must be ready to find a new strategic hypothesis and stop spending money on following the unnecessary direction.

Leaps of Faith

Facebook started as a social network for students. The company already had competitors with a lot of options. When the company raised its first investments, the number of people visiting the site was small. But, as noted by Eric Rees, investors were attracted, firstly, by the fact that active users spent a lot of time on the site. That is, the value hypothesis was confirmed — active users considered the service valuable. And secondly, the speed with which new users came was very high. That is, the second most important hypothesis was confirmed — the growth hypothesis.

But trying to replicate Facebook’s success and wondering what made it successful, it’s easy to fall into the trap. Instead of guesswork, it is better to start conducting experiments that will show what will work and what will not in your case.

Genchi Genbutsu

Strategic decisions must be based on customer knowledge. Eric Ries advises adopting the Japanese principle of Genchi Genbutsu, which is translated as “go and see.” This principle is guided, in particular, in Toyotа. A manager responsible for the development of the Sienna minivan traveled around all the US states and talked with families, finding out which minivan Americans want to see and taking into account their children’s opinion, which had a positive effect on the sales of this car brand.

There are always people behind the numbers. You need to get knowledge first-hand, literally going out into the street. And the first step is to find out if potential customers really have a serious problem to solve. The main goal of the first contact with clients is to find out if we understand them.

Do what scares perfectionists

It is not uncommon for entrepreneurs to first create a product and then find out consumers’ reactions. But the point is to do the opposite.

The goal of creating a Minimum Viable Product (MVP) is to start learning and testing in practice as soon as possible. An MVP is needed to test the hypotheses of entrepreneurs. It should not be perfect. It should be quality enough to attract the first customers, but no more.

Innovation accounting

As we have already mentioned, Innovation accounting is a systematic approach to figuring out if you are making progress and getting evidence from the facts. It is an alternative to the traditional reporting system for companies operating in conditions of uncertainty. This is a new type of reporting system that allows you to assess whether changes lead to improvements or not. Keeping track of innovation allows startup founders to make sure they are actually getting a business going.

You need to start by turning leaps of faith into a working financial model.

Three stages of innovation accounting:

1. Create MVP and get feedback to understand the real state.
2. Try to bring metrics closer to ideal ones. It can take a lot of trying.
3. Decide whether to move in the same direction or make a pivot.

If you are close to the ideal metrics, you need to move in the same direction.

Cohort analysis

One of the most important analysis tools for a startup is Cohort analysis.

It may sound complicated, but it is based on one simple premise. Rather than looking at aggregate metrics such as total income and total customers, we measure the metrics separately for each consumer group that interacts with the product independently of the rest of the groups. Each such group is called a cohort.

Vanity metrics

If nobody uses your product, then optimization or marketing will make no sense. A startup must be very clear about making clear and well-founded predictions to prove that a good business can be built with the product. The necessary indicators are often replaced by those that look nicer but are useless (“vanity metrics”). These metrics usually include ad views, page visits, app installs, and more. Real metrics should prove the value of your project, that it really solves user problems.

Key aspects of Innovation Accounting:

1. Effective indicators. Effective metrics should show causality, show what needs to be done to get the results you want. They help to learn from the results of their actions. People have an innate talent for learning; they just need a clear and objective assessment. Otherwise, it will be vanity metrics.

2. Simplicity of presentation. Reports should be presented simply and clearly. It is worth remembering indicators are the results of people’s work. Reports should be related to people and their actions. It is better to avoid abstract data arrays.

3. Data Verification and accountability. Employees mustn’t question the accuracy of the data. You have to verify the reported data in practice in the real world, communicating with customers.

When should you make a pivot?

When it becomes clear that the initially chosen path will not lead to success, the entrepreneur is required to make a pivot — to radically change the strategy, create and test a new hypothesis about the product.

The pivot’s essence is to take into account everything that you have learned earlier, but at the same time radically change the strategy to get even more grounded knowledge.

It is a combination of the scientific method of hypothesis testing and vision, intuition, and creativity.

Startup runway

Typically, the “runway” is the amount of money in a startup’s bank account. For example, if a startup has a million dollars in the bank and spends $100k per month, its runway is 10 months. Based on this definition, the “runway” can be extended in two ways: by reducing costs or raising additional funding.

However, Eric Ries suggests defining the runway in a different way — through the number of pivots that a startup can make. Then, to extend it, you need to learn how to make turns as quickly as possible. The need to make a pivot is indicated by a decrease in the effectiveness of product experiments.

How to get traction?

Small batch approach
The Lean Startup methodology is based on a small batch approach, borrowed from the concept of lean manufacturing.

When working in small batches, the finished product is produced every few seconds. When working in large batches, all the finished goods are produced simultaneously, at the very end. Imagine what this means when it comes to hours, days, weeks. What if a customer suddenly decides they don’t need a product? Would we like to know about this earlier? In the small batches approach, this risk is minimized.

The Three engines of growth

“The engine of growth is the mechanism that startups use to achieve sustainable growth. I use the word sustainable to exclude all one-time activities that generate a surge of customers but have no long-term impact, such as a single advertisement or a publicity stunt that might be used to jump-start growth but could not sustain that growth for the long term.”

“Sustainable growth is characterized by one simple rule: New customers come from the actions of past customers.”

1. Sticky engine of growth. The rules that govern sticky growth are pretty simple: if the acquisition rate exceeds the loss rate, then the popularity of the product rises. Therefore, companies need to track consumer losses.

2. Viral engine of growth. It’s called the viral loop, and its speed is determined by the viral rate. The higher this coefficient, the faster the product will gain popularity. The viral ratio shows how many more customers each new customer can bring. Each of his friends is also a potential client, and he can also bring his friends. If the viral rate is 1, then only 1 in every 10 customers will bring a friend with them. Such a cycle is not viable. Let’s say 100 clients come to the company. They will bring 10 friends with them. These 10 friends will bring only one person, and this will end the cycle.

3. Paid engine of growth. For a company to grow steadily over a long time using a paid-growth tool, it needs a differentiated ability to ‘monetize’ a particular group of users.

For example, at IMVU (Ries’ ex-company), this was due to introducing the ability to get off funds from mobile phones, which helped the company attract more customers than competitors who focused only on bank cards.

Adaptation

A startup cannot afford to operate without a system. To be successful, a startup needs to be an adaptive organization in which processes and actions are quickly and automatically adjusted in response to reality.

In addition to the speed, which was mentioned above, a startup needs to have its regulators, with which it can find the pace it needs.

IN CONCLUSION

A lean startup is a method used to found a new company or introduce a new product on behalf of an existing company. The lean startup method advocates developing products that consumers have already demonstrated they desire so that a market will already exist as soon as the product is launched. As opposed to developing a product and then hoping that demand will emerge.

Key takeaways:

  • The lean startup is developing a product based on the expressed desires of the market.
  • The lean startup uses validated learning, which is a process by which companies assess consumer interest.
  • Lean startup methods focus heavily on customer-related information such as customer churn rate, lifetime customer value, and product popularity.
  • In lean startup practices, experimentation is favored more than adherence to a rigid plan.
  • Lean startup standards will involve releasing a small form or early concept products to assess the customer reaction to the product.

Why did we make this short book overview?

Quite often, startup founders don’t read this essential book. Our overview was done specially for them, keeping the key points to explain the Lean approach in 15-min-read article.

We at molfar.io are Lean Startup evangelists. We help clients research market, build prototype/MVP, test market, find product/market fit. The main idea — building not six months, but six weeks and ship a product to customers asap. And already working with first clients, and doing initial marketing — will give you a real vision of the situation and market outlook.

This is what makes traditional outsourcing difficult in the early days of a startup. That’s why we made molfar.io to help entrepreneurs build in the right way. With the right team.

Drop us a line with your idea, and we will offer a personalized solution for your product. It’s completely free.

Originally published at https://www.molfar.io

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