The Lean Startup is a method to develop and manage startups. Standard business practices are not always applicable to startups. Therefore, based on scientific techniques and research, Eric developed the lean startup method.
The Lean Startup was inspired by Toyota’s lean manufacturing revolution. This revolution incorporated: attending to the ideas and knowledge of the workers, making smaller batch sizes, implementing just-in-time production, and accelerating cycle times.
Eric Ries uses real-life case studies from various businesses to illustrate the lean startup method’s principles. He then draws on his knowledge as a startup entrepreneur to guide readers towards developing their effective startup.
About The Lean Startup
The Lean Startup is a New York Times bestseller, having sold over one million copies. Additionally, the book has now been translated into more than thirty languages.
About Eric Ries
Eric Ries is an entrepreneur and creator of the lean startup method. He outlines some of the essentials of this method in his highly popular Startup Lessons Learned blog. His lean startup method suggests that rapid prototyping and frequent customer feedback are at the core of a successful startup. Eric is a co-founder and former chief technology officer of IMVU, an online social entertainment community, based in Mountainview, California. He now lives in San Francisco with his wife and two children.
PART 1: Vision
Chapter 1: Start
Technology has made the viability of startups far greater than it used to be. Subsequently, we have more entrepreneurs today than we have ever had. One of the essential skills for these entrepreneurs is management. With startups that are developing rapidly, new entrepreneurs have to quickly shift from working alone to managing dynamic teams. However, startups’ management should not be traditional. Traditional management practices can be very stifling. Startups need management techniques that complement a new company structure.
Startups have growth engines — processes and structures that help them grow. Every iteration of the product and every new feature is intended to improve the growth engine. Startups also spend a great deal of time tinkering with their ideas and improving them, so feedback is essential. Feedback helps startups catch problems as early as possible.
Startups use a strategy to achieve their vision, and the product is the result of the strategy. Products are always improving and changing, so sometimes, strategies must change (The vision, on the other hand, rarely changes.)
People usually measure their productivity based on how many things they produce, how efficiently they work, and how long they work. However, with a startup, you can be unaware of whether the consumers welcome your product. Hence, Eric Ries states that customer needs are just as important as speed and persistence.
The Lean Startup incorporates customer feedback into the productivity equation. After creating an initial product, further iterations must incorporate customer responses to the product. These iterations will help startups acquire new customers while existing ones are being served. Startup founders have to learn the best times to make significant changes, and when they should stick to their approach.
In addition to customer feedback, startups also need to utilize failures as opportunities to make changes. As the startup develops, products will be tested, and shortfalls identified. In established businesses, shortfalls are generally seen in a negative light. However, failure is integral to startup development and should be investigated rather than forgotten.
Chapter 2: Define
“A startup is an institution that creates new products or services in an atmosphere of uncertainty.” -Eric Ries
Eric places great importance on ensuring that startup managers understand the terms most relevant to their company. Here are the most important
- Institution – Startups are institutions built by entrepreneurs who hire employees and direct their activities. Startups revolve around innovative products, but it is also important to remember they are still an institution
- Product – For startups, your product must be something new and innovative
- Uncertainty – Most companies can adopt traditional management techniques. There is a degree of uncertainty with startups and the management techniques used should reflect this uncertainty
Chapter 3: Learn
“After more than ten years as an entrepreneur, I came to reject that line of thinking. I have learned from both my own successes and failures and those of many others that it’s the boring stuff that matters the most. 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 Ries
Traditionally, people measure progress by a company’s ability to stick to their plans, produce high-quality work, and stay within its budget. However, these measures of progress do not guarantee your customers will buy your product. Therefore, this is why learning from your mistakes is so important. Traditional companies will see mistakes as waste; startup companies should see mistakes as opportunities.
It is also crucial that startups learn from their company’s data. There is a tendency for startups to delay obtaining hard numbers. One reason for this is that people are more likely to invest in a startup when there’s no sales or revenue data. The lack of data can let investors’ imagination run wild. However, this does not mean startups should avoid obtaining this data. The most important data is your customers’ feedback. The sooner you can understand what your customers think about your product, the sooner you can improve your product. These improvements reduce the time spent in the development process.
With startups, there are many unknowns. Learning is essential to their development. Validated learning utilizes customers’ data to demonstrate progress in a chaotic and changing environment. It’s quick and easy.
Here are some of the tactics that Ries and IMVU used when developing their startup:
- Launched a low-quality early prototype
- Charged customers from day one
- Used low-volume revenue targets to drive accountability
Each of these steps is a good starting point, but you should also be adapting these steps depending on your company.
Chapter 4: Experiment
Launching a new product should be approached like a scientific experiment. As with scientific experiments, Eric recommends producing hypotheses and testing these predictions.
Directly testing our assumptions gives us a considerable amount of information. The two most important assumptions are the value hypothesis and growth hypothesis.
Value hypotheses ask whether the product delivers value to the customer. The best way to answer this question is through experimentation. Test the growth hypothesis to see how customers discover the new product. Test behavior to see if your assumptions are correct.
Build-Measure-Learn Feedback Loop
“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.” – Eric Ries
As well as developing hypotheses, it is also vital that a startup considers the fundamentals:
- Will consumers believe they need your product?
- If consumers need your product, why will they prefer your product to your competitors?
- Even if consumers need and want your product is it viable to create?
You want to check these fundamentals before you even consider building a product and testing its viability.
The Build-Measure-Learn feedback loop is crucial once you have established these fundamentals. Eric recommends starting this loop with your Minimal Viable Product (MVP). The MVP is the simplest version of your product that can be put through the build-measure-learn feedback loop.
Once you have identified your MVP, you have to be willing to plan with the expectation of pivoting. We can make predictions, but the world is ever-changing. Your startup’s strategy will need to pivot based on circumstances.
PART 2: Steer
Chapter 5: Leap
A startup builds a product, and customers interact with it. These interactions create information in the form of feedback. This feedback should be obtained and utilized to improve the next iteration of the product. Your customers’ feedback is far more critical than the money generated from early sales.
Eris suggests that many of us will be more skilled in one of the build-measure-learn feedback loop features. However, each of these steps is integral and must not be left out. The goal is to complete a feedback loop within the shortest possible cycle time.
Every startup contends with unique conditions. Therefore, Eric does not recommend copying what others do in the expectation of success. Instead, your startup’s strategy should be adapted to your specific circumstances. Eris states that every company’s strategy is built on assumptions. In traditional companies, these assumptions are challenged through data. However, at the beginning of a startup, there is a lack of data. Therefore, entrepreneurs often have to focus on their intuition. Eric describes this as the leap of faith.
As soon as data is available, entrepreneurs should be using it to test their intuitive assumptions. The minimum viable product is essential for this initial testing. The minimum viable product allows you to obtain data related to your assumptions. This is the build phase of the loop.
Eric recommends using innovative accounting to ensure that you are creating a product that people will want. Innovative accounting involves creating learning milestones to track your progress. After receiving feedback from consumers, you can identify if you are on track with your goals. If your company is not matching their initial goals, you need to make the active decision to pivot. Additionally, if one of our assumptions is false, we will need to develop a new strategy. One of the lean startup method’s fundamentals is that companies need to learn to pivot sooner rather than later. Changing your assumptions and approach early on will help save the company time and money.
It comes back to the value hypothesis and the growth hypothesis. You need to understand how the product creates or destroys value, as well as how it creates or destroys growth.
Chapter 6: Test
“The point is not to find the average customer but to find early adopters: the customers who feel the need for the product most acutely. Those customers tend to be more forgiving of mistakes and are especially eager to give feedback.” – Eric Ries
Your MVP should be geared towards the early adopters rather than the mainstream consumers. Your early adopters are going to be the first consumers for innovative products. Hence, they will have a good understanding of the intricate details that are holding the product back. For early adopters, the idea is more important than the MVP’s quality. Therefore, strip your ideas back for the MVP and only include the features the early adopters will care about.
One type of MVP that can be particularly useful is the concierge MVP. This type of MVP provides the opportunity for consumers to engage with the product fully. For example, you might develop a prototype of your product. This MVP type will help you better learn precisely what the customer needs and wants from your product. You can then make refinements based on the feedback of these consumers. The thoughts of your customers should always drive your design. Eric provides the example of Aardvark as a company that developed a prototype to test customer responses before releasing their social network.
Although creating MVPs is extremely important, they should also be approached with caution. It can be risky to launch an MVP without a patent as it can expose breakthrough innovation to competitors. Eric points out, though, that big companies very rarely care about the ideas of startups. As a startup, you are struggling for anybody to notice you, so having your ideas stolen should be the least of your worries.
Finally, Eric suggests that you must be persistent with your testing. It is easy to become impatient and release a product without thorough testing. However, you must gather this information to release the best version of your product based on the available information.
Chapter 7: Measure
The next stage of the lean startup method is to measure your company’s progress. However, standard accounting practices are not generally applicable to startups. Instead, the aforementioned innovative accounting should be used. Eric recommends:
- Use an MVP to establish your baseline data
- Improve and fine-tune your product based on this data
- If your product’s data improves you should establish a new baseline
- Start the process again
Your first MVP should be designed to test the riskiest assumptions you have placed in your business plan.
Beware of vanity metrics. Business can be measured in many ways, but we are all partial to numbers that make us look better. Be honest with yourself. Here are two analyses that can be useful for startups:
- Do a cohort analysis. A cohort analysis involves breaking your consumers down into cohort groups. Then, you look at the performance of your product within different cohorts. This type of analysis can help you to better understand whether real growth is happening
- Split tests can help. Giving different versions of a product to different people can help refine what the customer does and does not want. If you test extra features, but it doesn’t change customer behavior, ask whether those features matter.
Metrics should be actionable, accessible, and auditable:
- Actionable — It has to show clear cause and effect; no vanity metrics allowed.
- Accessible — People need to understand the data. Using cohort-based reports can help people better understand real-life behaviors and beliefs
- Auditable — Everyone in the company should have faith in the metrics. Additionally, the way that these metrics are created and displayed should be made fully available to everyone. Finally, managers should avoid only looking at the data and also talk to real customers
Chapter 8: Pivot (or Persevere)
If an idea isn’t working out, you need to change your strategy.
When you pivot, you don’t throw everything out and start over. Instead, you are using your current product as a foundation and utilizing the knowledge you have learned to pivot your product.
Eric describes knowing when to pivot as an art form. Telltale signs that you may need to pivot are less effective product experiments and unproductive product development.
Being willing to pivot is a courageous decision. Pivoting is an admission of failure, and this is something we all struggle to do. However, many startups fail because they are not willing to accept they need to pivot.
Deciding to pivot requires an empirical and impartial approach. Eric outlines the idea of pivot or persevere meetings. These meetings should be held regularly and attended by all of the product development and business leadership teams. These meetings should adopt the following structure:
- The product development team should report its metrics regarding previous performance. Plus, adjusted goals based on these metrics
- The business leadership team should provide a better understanding of the customers
- Other specialists and advisors can be added depending on the agenda of the meeting
Ries details a “catalog of pivots:” descriptions of different ways to change direction. However, it is also important to remember that there is no set formula to follow. These descriptions should be used as a starting point:
- Zoom in – Try and focus on a small part of your previous strategy or a feature of your product. Make this feature the entirety of your product
- Zoom out – Expand your scope to encompass different ideas of the product
- Focus on the good – Focus on the positive feedback given about your previous iteration and bring that forward to your next product
Eric also provides multiple other pivots. Here is a list of the remaining pivots:
- Platform pivot
- Business architect pivot
- Value capture pivot
- Engine of growth pivot
- Channel pivot
- Technology pivot
Despite the wide variety of pivots, the most important thing is the strategy behind the pivot. You must be pivoting at the right time and for the right reasons. Plus, do not be afraid to use more than one type of pivot.
PART 3: Accelerate
Chapter 9: Batch
Startup acceleration is reliant on the startup being able to identify the activities which are creating value and those that are creating waste. You can only begin placing activities in these activities once you know:
- Who your customers are
- What your customers like
- How to listen to your customer
- How you plan to grow your business
Classic companies focus on large batches as they can benefit from economies of scale. However, startups are fundamentally different. Small batch sizes are better for startups. This approach is more efficient and reduces costs, workload, and risk. Small batches are more conducive to pivoting, which is fundamental to startups’ success.
As well as improving efficiency, small batches shorten the learning cycle. It is easier to spot a mistake in a small batch. Subsequently, learning faster provides a competitive edge.
Large batches merely create more problems than they solve for startups. If anything slows down the process during large batches, then these delays and interruptions will affect everyone down the line. Some companies then go into death spirals, pursuing larger and larger batches that ultimately fail. Therefore, minimize this risk by utilizing small batches.
Large batches are useful for established companies, but they ultimately require demand. Large batches are not a viable option for startups as they lack demand. Instead, your production should be related to the testing of hypotheses rather than meeting high demand.
Finally, Eric states that Build-Measure-Learn occurs in this order, but should be planned in the reverse order. First, decide what you want to learn, then figure out how to measure it. Only then should you design the build to fit.
Chapter 10: Grow
Eric describes a concept called the engine of growth. The engine of growth is how startups achieve sustainable growth. To Eric, sustainable growth is any growth that exceeds one-time sources of growth.
Eric recommends the following ways to build sustainable growth:
- Word of Mouth – Customers talking about your product with friends, family, and colleagues
- Observation – People seeing the company’s customers using the company’s product
- Traditional Advertising – Advertising that focuses on ensuring that costs are less than the profit gained by additional sales
- Repeat Purchasing – Repeat business is an integral part of a startup’s business model as long as they are providing a relatively cheap product
Each of these approaches can be utilized to power engines of growth. Eric also provides the specific types of engines of growth. Each type stipulates a specific metric to focus on:
- Sticky Engines of growth rely on repeat business. Startups must pay close attention to the churn rate, or the percentage of customers who don’t stay engaged. If they can acquire new customers faster than they lose them, then they are growing.
- With Viral Engines of growth, people are exposed to the product as a result of customer use. The Viral Engine is powered by a feedback loop — the viral loop — and its productivity is measured with the viral coefficient. The higher the coefficient, the faster the product will spread. Small changes in the viral coefficient can have a dramatic effect on the growth curve.
- The Paid Engine of growth features traditional methods such as advertising. The cost of acquiring a new customer must be less than the potential profit.
Established companies can have more than one engine of growth working at any given time. On the other hand, Eric recommends that startups just stick to one at a time. Sticking to one engine of growth will make it easier to test things and make pivot decisions.
Chapter 11: Adapt
There are many ways for a startup to fail. It is easy for entrepreneurs to reject bureaucracy at the cost of not scaling the company enough. Similarly, other companies can get too buried in bureaucracy to the point that the company can no longer function effectively.
To make an MVP available to consumers, some startup managers will tighten the Build-Measure-Learn loop by taking shortcuts. They sacrifice quality. Shortcuts on quality and design will just create problems further down the line. Early adopters are tolerant of minor flaws, but eventually, you’ll want to go mainstream. The mainstream market is intolerant of flaws.
One way to regulate speed is to employ the “Five Whys.” This method prompts you to ask yourself, “Why?” five times. With each iteration, you burrow deeper into the root of a problem. You’ll find that behind every technical problem is a human problem. You should always prioritize your resources towards big problems. Little problems should not be eating into your startup’s time or energy.
The point of the Five Whys is to objectively analyze a problem, not to provide a method for assigning blame. When problems arise, you should have a Five Whys meeting with all concerned parties to understand them better. However, your team should not be using the Five Whys to talk about old mistakes. Only focus on the new problems that have surfaced. Talk about these problems, deal with them, then move on.
Chapter 12: Innovate
Innovation is frequently seen in young startups, but innovation can be seen in any company. The difference between startups and old companies, though, is that startups have the benefit of a culture of innovation.
There are specific structures and organizational qualities that facilitate innovation. While these aren’t the qualities that you see in established companies, such organizations can facilitate this environment.
Eric outlines some ways that startup teams can continue to utilize an innovative approach to business:
- Startups are likely to have scarce resources. Despite this, a startup’s resources should be secure. A steady income is vital for growth but also the company’s confidence
- Startups need to run many experiments without needing permission. Hence, startup teams must be autonomous if they are working within a larger, more established company
- Startup teams should be built of every functionally relevant individual in the company. This will allow the startup to work without the need for new experts to be integrated
As well as tools to develop internal startup teams, Eric suggests that startups must take the necessary steps to protect the parent company. Therefore, the startup team should only experiment with price points that are not undercutting the parent business. Avoiding undercutting is as important for the startup as the parent company. The startup relies on a steady and secure financial investment from the parent company.
One way to ensure that internal startups can experiment without damage to the parent company is setting up a sandbox where innovators can try new ideas. This option is more productive than a company hiding its innovation team. These sandboxes must have specific ground rules so that the parent company isn’t negatively impacted. Sandboxes involve creating a real product, but it will only be marketed to an extremely small, well-defined market.
It is better to have cross-functional teams that each focus on different stages of the growth cycle. As the product ages, it gets shifted from one team to the next.
“In my Toyota interviews, when I asked what distinguishes the Toyota Way from other management approaches, the most common first response was genchi gembutsu—whether I was in manufacturing, product development, sales, distribution, or public affairs. You cannot be sure you really understand any part of any business problem unless you go and see for yourself firsthand. It is unacceptable to take anything for granted or to rely on the reports of others.” – Eric Ries
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