The Lean Startup
About The Author
Eric Ries is a Silicon Valley entrepreneur and author of the New York Times bestseller The Lean Startup. He is an entrepreneur in residence at Harvard Business School and is on the advisory board to a number of technology startups. Previously he co-founded and served as CTO at his company IMVU, his third startup. He has also been named one of the Best Young Entrepreneurs of Tech by BusinessWeek and was honoured with the TechFellow award in the category of Engineering Leadership. The Lean Startup Methodology has been written about in The New York Times, The Wall Street Journal and Harvard Business Review as well as countless blogs.
I imagine it is quite clear that today’s book summary covers The Lean Startup by Eric Ries. This book is the closest thing you can get to an exact blueprint for creating your very own successful business. It covers a number of key principles throughout, from just starting up, all the way to becoming sustainable, with everything in between. If you could only read one book before starting your business, this should be it.
The 5 principles
The book has 5 main principles which are present throughout.
- Entrepreneurs are everywhere and you can be one even if you don’t work from your garage.
- The second principle is that entrepreneurship is management. This means that a startup is an organisation, not just a product, and so it requires a new kind of management, specifically geared to its context of extreme uncertainty. So as an entrepreneur you have to learn how to steer your ship in the right direction, in very unpredictable conditions.
- The third principle is Validated Learning. This is to say that startups are not just there to make money, products and serve customers. They are there so you can learn exactly how to become sustainable which is done through constantly running experiments to test each part of the business. If you see that something is not working you can drop it and move on.
- The fourth principle is Build Measure Learn. This is the process of turning ideas into products and then measuring how the customers respond to the products. Then based on the feedback from customers learn whether they should pivot or persevere. All successful startup processes should be geared to making this loop happen as quickly as possible. For creating a sustainable business this is such an important step, the quicker you learn to complete this loop the more likely your business is to be stable.
- The final principle is Innovation accounting: To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff. How to measure progress, how to set up milestones, and how to prioritise work.
To begin you need to know who your customer archetype is otherwise there is no point building your product. If you don’t know who your customer archetype is then you don’t know what a quality product looks like and if you can’t build quality there is no point building your product. So, to begin you need to identify who the customer is. The customer archetype will guide all of the decisions you make about product development and allocation of resources moving forward. So before you make anything, make sure you know exactly who you are making it for.
Second, you will at some point, regardless of what you do, take a leap of faith. No matter the amount of market research and your confidence in your product/service you will have to make assumptions on crucial things. The important thing is to know which part of your strategy is a leap of faith. Apple had no idea that people would pay for music downloads, they only knew from Napster that people would download it for free, that was their leap of faith and it definitely worked out.
Now you know who your customer is, you know what a quality product will be and you know that you will have to take a leap of faith at some point. Now is the time to actually build your first prototype. This is also known as an MVP (Minimum Viable Product) which is the most minimal product or service that you can build, the bare bones of your product. The reason you put this out there first before building the finished article is because you don’t know what your customer wants, it will take a lot of time to build something to completion that may not even work and if it is full of different features it is very difficult to measure what is and isn’t working. You need to start off with the minimum and gradually tweak it with customer feedback and metrics, which we will come onto shortly.
A great example of this is the online shoe retailer Zappos. Tony Hsieh started off by going into shoe shops and asking if he could take pictures of their shoes and then put the photos on his website. If people bought the shoes from his website he would come back and pay for the shoes in full. This was literally where he started off at, a simple website with a few different pairs of shoes on. This example puts into context how little you actually need to launch an MVP, it will more than likely be embarrassing to put out there as you know you can do much better but that is what early adopters are for. Early adopters are the people who will use your product to begin with and will understand that it has bugs in and is not the finished article. These customers will give you great feedback to help you make changes and refine the product to begin with. But in order for you to utilise their feedback you need to know exactly what your metrics are saying, what they mean to your business and what to look for.
Your metrics will help you find out exactly where your business is right now, this will provide you with a baseline to refer back to. When you put out your MVP the metrics you receive back will be your baseline metrics. The reason you set a baseline is so you can compare your metrics when you change a feature of your product, this enables you to see progress or a lack thereof. You can then cut what isn’t working and keep what is working one step at a time.
One of the biggest mistakes businesses make with their metrics however is that they look for vanity metrics rather than what actually matters. What I mean by vanity metrics is how many website views or even email signups you have. If you have a lot of visitors but people aren’t actually signing up or people are signing up and not paying for your service then you need to know why. By just measuring these two things nothing will be explained, you might feel good about yourself in the short term but in reality you are going to focus on actions that limit your success.
In order to get your metrics right you need to focus on hitting the 3 A’s.
Actionable – Your metrics demonstrate a clear cause and effect relationship so that you can take definitive action in response to it.
Accessible – They should be easy to understand and available to everyone in your company.
Auditable – You should be able to go back to the source of the data to prove that the metrics were telling the whole story.
A great example of this is Ries’ company IMVU who provided customers with a 3D avatar service where people could alter the appearance of their avatars and chat with others. Using $5 a day in pay per click advertising they were able to get 100 website visitors. They considered each days’ worth of website visitors as one cohort and then measured the metrics of each cohort on registration, so how many people signed up to the service, activation, so how many people actually logged into their account and retention, so how many people had one chat, how many people had 5 chats and how many people became paying customers. A good way to do this would be to have your metrics cover registration, activation, retention and referral information. The only way you can know if you are making the right decisions is through your metrics so if you make a change you can compare it to your baseline metrics to see if they improve or not, it is the only way to tell and the only way to know what you should and shouldn’t change.
Pivot or Persevere?
After improving your product through testing and measuring metrics you will need to make a big decision at some point and this will probably happen again and again. You will need to decide whether or not you should pivot (change the direction of your business in some aspect) or persevere (continue on with what you are doing.) Your metrics will help you make the best decision for your business. If you remember the whole process is about learning how to build a sustainable business, not how to make a single idea work, which is why you may need to pivot if the facts say. There is no shame in moving away from your original idea towards something that works. Here are a few different examples of pivots you can make:
Customer segment pivot: You started the process thinking you were solving a problem for a certain type of customer however now it looks like your product works best for a different type of customer.
Zoom in pivot: A singular aspect of your product becomes the entire focus of the business.
Zoom out pivot: Your product is too narrow for you to maintain a business so you broaden your product to do so.
Technology pivot: You realise that you could solve the problem much easier with a different or brand new technology and switch to that.
It is highly likely that throughout your startup journey you will make multiple pivots and it is equally important that you keep measuring everything, just like before, constantly comparing with the baselines. Each pivot is only the next hypothesis in your business just like everything in your business plan is a hypothesis, only over time will each segment of it become clearer and clearer. Even huge companies still need to measure and pivot from time to time otherwise they too will fail.
Now on top of all of this we need a growth engine, we will naturally be growing due to our constant tweaking and pivoting but we need a specific method to focus on for scaling up the business
Here are 3 growth engines that you can use to scale your business.
Sticky Growth Engine – This involves customers paying for the service over time, so if you are bringing in new customers quicker than your old customers are leaving then you will grow and make profit. An example of this would be a subscription model for a product.
Viral Growth Engine – This is reliant on your current customers bringing in new customers. The best example of this would be Hotmail which originally was struggling to make any traction until it began to provide a link at the bottom of each email for someone else to sign up. This is known as the viral loop, if you can get each new customer to bring in another customer every time then growth will be huge.
Paid Engine – The final engine is the paid engine which is literally paying for advertising. You take the profits you have made from your old customers and use them to pay for advertising.
If you have followed this guide you will have identified your customer archetype, built your MVP and then tested it on early adopters. You will have established your baseline metrics, made sure they are not vanity metrics and hit the 3 A’s. You will have taken a leap of faith but knew exactly what part of the strategy was a leap of faith and you will have at some point made a decision to pivot or persevere. You will have also selected a growth engine to scale your business. Now, if you take a look back at the 5 principles you will notice that they are present throughout the different steps you have taken to build a sustainable business. Throughout this process you have got better at managing your business throughout periods of extreme uncertainty, you have improved your validated learning and quickened the Build, Measure, Learn feedback loop as well as taking care of your innovation accounting through your metrics. Now there is still much to learn which I have not covered but this should provide you with the knowhow to grow your business sustainably. If you want to read it all you can find the book here.