Notes

The Lean Startup

Eric Ries


Part one: Vision Part two: Steer Part three: Accelerate

The five Principles of the Lean Startup method:

  1. Entrepreneurs are everywhere

  2. Entrepreneurship is management

  3. Validated Learning

  4. Build-Measure-Learn

  5. Innovation Accounting


Part one: Vision

Chapter 1

Start

Entrepeneurship is really management. Many entrepreneurs are afraid to apply strict principles in the beginning of a venture, as they are afraid of stifling creativity. At the same time, too strict planning in the beginning of a startup is inefficient as a startup is too unpredictable. Both leads to failures of startups and our society wastes time and other resources.

Lean Startup is takes its thinking from Lean, Design Thinking, Agile and other methodologies.

In stead of measuring productivity in production of goods, Lean Startup uses validated learning as a measure of productivity.

Lean Startup teaches you to run a startup where instead of creating plans based on assumptions, the Build-Measure-Learn feedback loop steers you in the right direction, whilst having a vision.

Chapter 2

Define

Once your team is set up, The Lean Startup methodology helps you define what process to use and defining performance milestones.

Definition of a startup:

A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.

The uncertainty is what makes traditional management techniques unsuitable for startups

Chapter 3

Learn

Avoid wasting time developing a product nobody wants by producing validated learnings in high frequency, early on.

Validated learnings act as guides for your business plans. These are findings that you wouldn’t get by setting up a business plan upfront the traditional way.

Validated learnings are measures of productivity in a startup, rather than looking purely at adoption, profits, etc.

Chapter 4

Experiment

The learnings of an experiment is a product:

Vision → Assumptions → Experiment ↕ Prove or Disprove (Fail) → Learn.

These insights and learnings can influence your business strategy, at the same time as it is being developed, if the small-scale experiments are launched early.

Not having a solid, set-in-stone plan is critical to a startup’s success.

(A startup can also be an initiative within a large, established company or institution. It is not necessarily a “garage” venture.)



Part two: Steer

Chapter 5

Leap

The most important hypotheses to test are the value and growth hypotheses. These are the ones that are most critical to the project’s success, the riskiest ones to get wrong.

The build – measure – learn cycle is the catalyst that the startup uses to produce a product. The minimum viable product – MVP, the version of the product that allows a full round of this cycle at minimal effort, can then be used to steer the strategy further.

There are no rules for which strategy will work, therefore we have to experiment.

The first challenge here is to find a way to test the product systematically, the second challenge is to do this cycle without losing sight of the startup’s vision.

It is also important to do field work to learn what customers want. From this we create a customer archetype. This archetype or persona is also a hypothesis, but it guides the decision making of what needs to be prioritised.

Chapter 6

Test

This chapter brings some good examples of success stories of companies that started with MVPs in different forms.

It can be the simplest website you can imagine. Or even humans doing the work of the product: a concierge MVP.

An MVP can also be a video demo describing the product, or even multiple MVP simultaneously solving end-user problems, and then the final one is developed from that.

It is tempting to do a high quality product to avoid bad news, but the danger is we build with our assumptions of what quality means to the end users. Quality might not even be important for them.

Common concerns about a MVP might be patent issues, getting the idea stolen and the MPV damaging the brand. Getting the idea stolen is unlikely and an option is to use an alternative brand to distance the MVP from the brand.

Chapter 7

Measure

Forecasts and milestones set the traditional way is not helpful for startups as they are too unpredictable. The challenge is to draw the right lessons from those milestones. Therefore we use innovation accounting with three learning milestones

  1. MVP - data (where are we now? Establish baseline)

  2. Tune the engine and attempt to move baseline :arrow_right: towards ideal

  3. Decide to pivot or persevere?

“The myth of perserverence is dangerous”

If you decide to pivot, you start this whole process over again. But you can 'tune the engine' with just enough customers to get data from it (for example by spending only $5/day on google ads…)

What is really important is to do a cohort analysis instead of looking at all the data as a whole. Separate users into customer flows. This enables you to ask the right questions to these users when doing qualitative research and in turn make more productive experiments.

Beware of optimising instead of learning (because you might optimise the wrong thing) and vanity metrics (boosting the numbers or not being able to see why numbers improve.

Metrics should be AAA:

Actionable (they should show a clear cause and effect), auditable (should be possible to test wether data is consistent with reality - one way is to talk to customers to check) and accessible (metrics should be genuine and based on people and their actions - numbers are people too! Metrics should also be accessible to the company as a whole, not hidden away on file.)

Chapter 8

Pivot

The more resources you have invested in the product, the harder it is to pivot (this is why you do the minimum in order to run your test cycle for your MVP).

Focus on actionable metrics for each hypothesis.

How much time do you have available to make the startup successful? The time is not calculated by when run out of money, it is calculated in pivots – how many pivots you can do.

Evaluate your budget cuts: If you make cuts that cause your feedback loop to run slower, you’re only slowing down the pace at wich your business is going under.

Pivoting can be a tough decision and needs to be handled with care.

You might fear damaging the morale of the team, a valid concern. It's a good idea to schedule in a meeting to discuss wether the project should pivot or persevere way in advance so that everyone is prepared for this discussion. This way the perception of the meeting is of a unavoidable discussion in the business lifetime, not as a result of a crisis.

A pivot can be done around the following areas:

A lot of big companies have pivoted drastically, but the stories we are told is that their journey was more direct (a heroic founder with a vision that remains consistent from beginning until reaching success). In reality many successful companies pivot to completely different areas.



Part three: Accelerate

Chapter 9

Batch

It might be surprising and counter-intuitive, but a single-piece-flow or small batch is more efficient than large batches:

This way of thinking is still controversial in some sectors.

A version of this way of thinking is the pull technique where parts produced on demand. For start-ups for example, this can be a hypothesis that needs to be run.

A pull technique can lead to less work in progress piling up.

Chapter 10

Grow

Sustainable growth is caused by past customers actions, that leads to new customers. There are four types:

  1. Word of mouth
  2. Awareness as an effect of usage
  3. Advertising
  4. Repeat usage/purchase (disposable items, subscriptions…)

All of these power feedback loops

A startup should focus on one engine of growth at a time. The choosing of which is a leap-of-faith hypothesis. There are three types:

  1. Sticky (customers are retained if they are happy, they are locked in and it is difficult to leave)
  2. Viral (users share the product with others, or recruit new users)
  3. Paid (ads, sales team, foot traffic in retail)

All of these engines can run its course with time, and you then have to change engine (no small task).

Chapter 11

Adapt

Companies face challenges with adapting to growing and also to adapting to the processes of Lean Startup. For example, it might be challenging to smaller teams and shorter cycles.

Companies also risk slipping into old habits and then not adapting their process from the previous one.

Culture change is not enough – the company needs new tools and processes.

Lean Startup champions speed and short cycles. However, a company should not rush just for the sake of it – it needs to find its own pace.

Small batches and the Five Whys is Lean Startup in a nutshell.

The Five Whys are five questions that are asked to circle in on the root cause of a problem.

Rather than fixing everything at once, Five Whys meetings should be held as new problems arise.

Investments can also be done proportionately on each of the five levels to improve the process and reduce errors.

The Five Whys can help a company find their own optimal pace (regarding speed mentioned above).

It is more efficient to stop entire process until error is resolved (reduces issues later).

Beware of Five Whys turning into Five Blames.

All team members involved should be present at a 5 Why meeting (those who spotted the error, those who diagnosed it, those who took decisions).

A Five Why master can also be appointed to run these sessions.

Chapter 12

Innovate

Companies might believe that it is difficult to innovate when they have grown to be a large company. How to balance needs of existing customers whilst finding new ones? How to manage existing business lines whilst establishing new business models?

There is a legitimate fear that experiments might damage the company (experiments with price might anger existing customers for example).

Ground rules should be set in place to:
a) protect the parent organisation,
b) hold entrepreneurial managers accountable,
c) reintegrate successful innovation into the parent organisation.

A solution to this is to establish an innovation sandbox. A supportive system for innovation. A successful sandbox should:

The supporting structure that needs to be in place in order to innovate has three “legs”:

  1. Resources (scare but stable – too much funding can actually be damaging)
  2. Independence and authority to make decisions without having to wait for approval (this slows down the feedback cycle)
  3. A personal stake in the outcome and a sense of ownership of the idea/experiment/project

Switching to validated learning often means productivity goes down at first. The problems with the old system are intangible, whilst the problems with the new system is too tangible.

To round off the main chapters of the book – switching to Lean Startup will inevitably cause challenges and pushback. This is best countered with theory and preparedness from the beginning.

Chapter 13

Epilogue

(The author discusses the history of management and looks to the future...)

In the beginning of the 1900s the way of management was to think of a company as a system and the worker as a cog in the machine. This enabled high productivity and prosperity. We have become so good at this that we over-produce without considering if we actually are producing the right thing (there is an imbalance) – “modern work is extremely wasteful”.

The science of project management went to large batch thinking while not acknowledging the worker as a human being.

Companies should learn to see the system rather than focusing on brilliant employees. However they should be aware of enforcing too rigid systems and instead take advantage of creativity and adaptability of workers.They should also not overly rely on careful planning, prevention and procedure.

To innovate, we should set up startup labs with small cross-functional teams, where experimentations and MVPs can be made.

Another idea the author suggests is a long-term stock exchange to get out of the short-term profit chase.