9 takeaways from Eric Ries’ The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, as embodied by the following excerpts…
Core principals & process
1. Validated Learning:
Startups exist not to make stuff, make money, or serve customers; they exist to learn how to build a sustainable business. This learning can be validated scientifically, by running experiments that allow us to test each element of our vision.
2. Innovation Accounting:
Since pre-revenue startups can’t use financial accounting to measure progress, establish milestones, or prioritize projects, they need a new kind of “innovation” accounting that holds founders accountable to investors, coworkers & users.
Such measurements include not only modern app usage metrics, but also meta project data (i.e. speed of the flywheel cycle).
The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop: the quicker a startup gathers and adapts to data, the better its chance of success.
4. Pivot or persevere:
Remember, entrepreneurs are trying to build sustainable businesses, not make a single idea succeed, so occasionally, you have to fundamentally change your business strategy to test a different hypothesis, such as the following…
i. Zoom-in: maybe your product is too broad, and a single feature should become the whole
ii. Zoom-out: maybe your product is too narrow, and you need to broaden it with new features
iii. Customer segment: maybe your product solves a problem for a different niche user
iv. Customer need: maybe your product solves a different problem than you intended
iv. Business architecture: maybe you should change from a high margin/low volume model to a low margin/high volume
vi. Technology: maybe your product can solve the same problem with different, less expensive tech
vii. Platform vs. product: maybe your platform should be a single app/feature instead, or vice versa
viii. Channel: maybe your product should be distributed through a different sales/marketing channel
ix. Engine of growth: maybe your product has a better means of growing (see below)
x. Value capture: maybe you should change how your revenue model or monetization strategy, which are fundamentally means of taxing those who leverage your product’s value
5. Engines of growth:
There are only three ways to create a sustainable business, and most businesses only have the bandwidth to focus on one, because it’s time-consuming to test & iterate:
i. Sticky growth: subscription model in which users pay a recurring fee for use; retention rate is most important metric
ii. Viral growth: old users refer new users; viral coefficient is most important metric
iii. Paid growth: reinvest profits from current users into acquisition of new users via advertising; Lifetime Customer Value (LCV) > Customer Acquisition Costs (CAC) is most important metric
1. The power of small batches (Kaizen):
Empirically, the lean-manufacturing techniques applied by the Japanese — known as “Kaizen” or “single-piece flow” — show the power of small batches, ideally a batch-size of one.
For example, if you have 100 envelopes to stuff, seal, address, and stamp, it’s far quicker to handle each envelope one-by-one, rather than stuffing all of them, then sealing all of them, etc. There’s a number of reasons for this, including…
i. Quality control: defects are detected early-on & therefore don’t waste effort
ii. The system is more important than its components: “It seems more efficient to repeat the same task over and over, in part because we expect that we will get better at this simple task the more we do it. Unfortunately, in process-oriented work like this, individual performance is not nearly as important as the overall performance of the system
iii. Drip release: a finished-product is launched frequently, as opposed to a massive dump (e.g. think of software upgrades with today’s SaaS apps deployed via cloud vs yesteryear’s Microsoft software installed by disk); this allows manufacturers to gather feedback and iterate before they’ve wasted time and money on massive batches
2. The dot.com era failures were a failure of business models:
These startups were a little more than intermediaries, paying to acquire traffic (i.e. Traffic Acquisition Costs), then making an incremental buck on advertising.
Facebook and a lot of social media changed that by organically acquiring users with products & services that users sought-out on their own volition.
3. Don’t let the fear of competition slow you down:
Unwittingly, entrepreneurs are afraid to build MVPs due to intellectual property protection paranoia — concern of having their idea stolen by a larger/incumbent competitor. In reality, a startup’s greatest challenge is getting noticed in the first place (i.e. marketing). It’s so unlikely that someone would rip-off a fledgling idea, considering that any startup can’t even get attention were they to shout it from the rooftops.
4. High-frequency feedback & iteration:
“The ability to learn from customers is an essential competitive advantage that start-ups must possess.”
That’s why an MVP is so important: it quickly tests whether or not an idea is worth developing. Thereafter, a startup’s greatest competitive advantage is nimbleness.
A startup isn’t hampered by the bureaucracies of larger incumbents. It doesn’t have millions of users across an amalgam of demographics. Gather quantitative data and solicit qualitative feedback from users, then iterate quickly.