Lean startup method:
- a startup is a human institution designed to create a new product or
service under conditions of extreme uncertainty
- uses steering wheel called Build-Measure-Learn feedback loop
- PRODUCT built with STRATEGY on top of VISION
- goal is to figure out the right thing to build
- figure out which efforts are value creating and which ones are
wasteful. see imvu example in real world examples
PART I: VISION
- learning:
- be the oldest excuse and storyline for failure
- provide comfort for team to follow founders into the unknown
- provide comfort for orgs that depend on innovation to survive
- most importantly, learning is the most vital function in a
startup
- need to be reshaped into VALIDATED LEARNING (IMVU example)
- lean thinking defines values as providing benefit to the customer,
anything else is a waste
- as opposed to manufacturing business, who the customer is and what
the customer might find valuable is unknown in startups, and part of the
very uncertainty that is an essential part of the definition of a startup
- measuring productivity: not how much stuff built but how much
validated learning from previous efforts
- true startup productivity: systematically figuring out the right
thing to build
- everything a startup does should be an experiment designed to
achieve validated learning.
- experiment:
- if you cannot fail, you cannot learn
- begins with clear hypothesis that makes predictions about what
is supposed to happen then test these predictions empirically. see zappos
example.
- Most important assumptions:
- Value hypothesis: tests whether product or service really
delivers value to customers once they use it.
- Growth hypothesis: tests how new customers will discover a
product or service.
- early adopters:
- feel the need for product most acutely
- tend to be more forging of mistakes
- eager to give feedback
- concierge minimum viable product:
Costly mistakes:
- successfully, faithfully, and rigorously executed failure based
on flawed belief
- not having a vision
Real world example:
- Intuit's Scott Cook using lean startup method to manage company
of thousands of employees, went from 1 major change per year to 500+
changes in 2.5 month tax season.Old model took 5.5 years to generate 50
mil, now 50 mil within 12 months.
- IMVU's Eric Ries (author) spent months improving features and
making the product better, but realized that their underlining assumptions
about the direction of product were wrong!
- AB test between avatar chat and 3d im. latter led to mroe
sign up and payment.
- launched low quality early prototype
- charged customers from day one
- used low volume revenue tartets as way to drive
accountability
- Zappos' Nick Swinmurn started by running an experiment with the
hypothese of customers were ready and willnig to buy shoes online without
warehouses, distribution partners set up. Instead he took pictures of
products in stores with the promise of buying them if customers place
order. By not following traditional route of market research with survey,
zappos used simple product and found:
- accurate data about customer demand by observing real
behavior
- interact with real customers and learn their needs
- allowed itself to be surprised with unexpected customer
behavior
PART II: STEER
- Build-measure-learn feedback loop
ideas -> BUILD -> product -> MEASURE -> data -> LEARN -> ideas
- Leap
- Reverse of traditional thinking:
figure out what we need to learn, use innovation accounting to
figure out what we need to measure to know if we're gaining validated
learning, and then figure out what product we need to build to run that
experiment and get that measurement
- Analogs vs antilogs (Randy Komisar - Getting to Plan B
http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2415)
- Analogs: look at similar things worked in the past
- Antilogs: looking at similar things that failed in the past
- Profit and value are not the same thing!
- high profit low value: ponzi schemes, enron and lehman
brothers
- growth does not indicate value either, often times growth fakes
the appearance of success
- get out of the building and meet your customers the Steve Blank
way.
- early customer contact is not to gain definite answer but to
craft customer archetype
- Test
- MVP: the fastest way to get through the BML feedback loop with
the minimum amount of effort
- addiional features or polish beyong what early adopters demand
is a form of wasted resources and time. when in doubt, simplify
- concierge MVP: see Aardvark and Food on the Table
- If we do not know who the customer is, we do not know what
quality is.
They care
contibute
Customers don't care how much time something takes to build.
only if it serves their needs.
MVP rule: remove any feature, process or effort thta does not
directly to the learning you seek.
- Speed bumps in building MVP:
- legal issues: patents are used primarily for defensive
purposes. If the new technology is at the heart of the startups
competitiveness, seek legal counsel first.
- fear of competitors: most competitors area already
overwhelemed by good ideas, and their challenge lies in prioritization and
execution. But if a competitor can outexecute a startup once the idea is
known, the startup is doomed anyway. The only way to win is to learn
faster than everyone else.
- MVP is risk to brand reputation: launch the MVP under
different brand name!
- MVP often result in bad news! if an mvp fails, teams are
liable to give up hope and abandon the project altogether.
- Other concepts:
- Six Sigma: technique for process management developed by
Motorola and popularized by GE. (Six Sigma does not guarantee Six Sigma
yield) Namely 5 Whys.
- Genchi Gembutsu: used by Toyota Production System, means "go
and see for yourself"
Real world example:
- Groupon's Andrew Mason: humble start with wordpress page and
manual email.
- Dropbox's Drew Houston: used video demo as MVP since the
product mvp would've taken much expertise and manpower to make. His leap
of faith assumption was hard to prove because customers couldn't tell you
what they wanted, even VCs couldn't understand his vision.
- Food on the Table's Manuel Rosso: concierge MVP, sering one
client at a time and focused on one supermarket at a time. Repeatedly
satisfied single customer then scaled up when ready.
- Aardvark's Max Ventilla and Damon Horowitz: Replaced backend
with human service, spent months on writing out business road map before
having an algorithm! By the time they knew they had something people
wanted, they built the technical side and got acquired by google for 50
million.
- Measure
- Startup job is to:
- measure where it is right now, confronting the hard truths
that assessment reveals
- devise experiments to learn how to move the real numbrs
closer to the ideal reflected in the business plan
- Rate of growth depends on:
1. profitability of each customer
2. cost of acquiring new customers
3. repeat purchase rate of existing customers
- marketplace company that matches buyers and sellers have a
different growth model than normal startups:
- success depends on network effects that make it the premier
destination for transaction where:
- buyers want it because the greatest competition between
sellers
- sellers want it for the highest number of potential
buyers
- if the marketplace have a high retention rate, the growth
curve will look like a compounding interest table, with the rate of growth
depending on the "interest rate" of new customers
- Standard accounting is not helpful in evaluating entrepreneurs,
so we turn to innovation accounting:
1. baseline: use MVP to establish real data on where the
company is right now
- build separate MVPs that are aimed at getting feedback
on one assumption at a time
- test the riskiest assumptions first
- first experiments should involve content production
rather than advertising sales
2. tuning: startups must attempt to tune the engine from the
baseline toward the ideal
- a good design is one that changes customer behavior for
the better.
3. pivot or presevere: (sign of successful pivot is that these
engine-tuning activities are more productive after the pivot than before)
- Tools:
- Google AdWords to bid on click, which measure the product
performance with a new set of customers
- Cohort analysis: looks at performance of each group of
customers that comes into contact with the product independently, each
group is called a cohort.
- Actionable metrics:
- avoid vanity metrics! (desperate attempt in success theatre)
- last minute ad buys
- channel stuffing
- whiz bang demos
- gross number of customers does not improve the yield on each
cohort, it only paints rosy colored picture
- Concepts:
- sprints: one-month iteration cycles
- user stories: describe the feature from customer point of
view and help engineers to focuse on customer's perspective
- product backlog: queue of stories yet to be built
- agile development: teams that employ it are able to change
direction quickly, stay light on their feet and be highly responsive to
changes in the business requirements of the product owner.
- A/B test or Split-test
- Kanban/capacity constraint: lean manufacturing principle
where one project can only be in one of the four states/buckets of
development, and no bucket can contain more than 3 projects at a time.
- in the product backlog
- actively being built
- done (feature complete)
- in the process of being validated
- Real world example:
- Grockit's Farbood Nivi: Ran a high efficient company but
using vanity (gross) metrics to measure their progress.
- They were using superficial aspects of Lean startup
milestone but focused on whichever metric that proved they were improving.
By using cohort analysis they were able to focus their efforts.
- Used A/B test to realize combination of features worked
best in getting student engagement. also what's considered industry's best
practice doesn't always improve registration rate.
- Three A's
Actionable: clear cause and effect so that you may take
definitive actions in response, otherwise it's a vanity metric.
Accessible: 1)use people based reports instead of complex
reports full of jargons. 2) wide spread access to the report and made part
of the product and accessibly on product website and available to all
employee accounts.
Auditable: credible to employees, can trace back to souce for
proof.
- Pivot (or persevere)
Avoid the land of the living-dead by making the decision to pivot
early on.
Categories:
- Zoom-in pivot: refocusing the product on what previously had
been considered just one feature.
- Zoom-out pivot: where single feature is insufficient to
support a whole product.
- Customer segment pivot: keeping functionality of product but
changing the audience focus because the product hypothesis is partially
confirmed, solving the right problem for a different crowd than originally
planned.
- Customer need pivot: because of customer intimacy, other
needs are discovered and can be solved by the team.
- Platform pivot: instead of selling an app to one customer at
a time, put it on a platform and sell to all at once. This can refer to a
change from application to platform or vice versa.
- Business Architecture pivot: companies usually follow 2
models:
1. high margin, low volume (mostly b2b)
2. low margin, high volume (mostly b2c)
this is used when startup switches architectures.
- Value capture pivot: changes the way a company captures
value/monetize.
- Engine of growth pivot: primarily 3 engines of growth:
1. viral
2. sticky
3. paid
This strategy is where a company changes its growth
strategy to seek faster or more profitabl growth.
- Channel pivot: delivering same result through using a
different channel with greater effectiveness
- Technology pivot: discovers a way to achieve the same
solutio nby using a different technology. This is a much more common one
that established businesses excel in because this is more about efficiency
and performance.
- Runway: usually defined as remaining cash divided by the monthly
burn rate or net drain on that account balance, and can be extended by
either raising fund or cutting cost.
- Lean startup way: true runway is measured by how many pivots
a startup has left: number of opportunities it has to make a fundamental
change to its business strategy.
- To extend runway, get to each pivot faster by achieving the
same amount of validated learning at lower cost or in shorter time.
Difficulties of making a pivot:
1. vanity metrics allow false conclusions to form
2. unclear hypothesis, it's impossible to experience failure
which leads to ambigous results
3. entrepreneurs are afraid, it takes much courage and
acknowledging failure may lead to low morale of team.
PART III: ACCELERATE
Batch:
- Small batches as opposed to economies of scale production:
design, develop and ship new features one at a time, aking advantage of
power of small batches.
- Key is to being able to operate quickly and check for defects
immediately, thus preventing bigger problems in the future.
- Although we write the feedback loop as build-measure-learn, our
planning works in the reverse order: we figure out what we need to learn
and then work backwards to see what product will work as an experiment to
get that learning.
- Immune system:
- Set of defense mechanisms that prevent the engineers from
accidentally breaking something important.
- Continuous deployment / When problem detected:
Defective change is removed immediately and automatically
Everyone on the relevant team is notified of the problem
The team is blocked from introducing any further changes,
preventing the problem from being compounded by future mistakes
Repeat until the root cause is found and fixed
- Continuous deployment beyond software:
Hardware becoming software
Fast production changes
3D printing and rapid prototyping tools
- Real life example:
- SGW worked in small batches to get feedback on design
decisions almost instantaneously.
- School of One: implements small batch idea to teaching by
assigning playlists based on each student's readiness and learning style.
Now we can modify each student's experience by adding 1 on 1 tutoring
session, small group actiity and receive feed back for each day.
- Pull not push: to avoid over stocking in inventory, deals
should send signal to restocking facility (PDC), who sends the dealer the
stock and create a signal to regional warehouse (PRC) so on and so forth.
the idea is to achieve small batches all the way down to single piece flow
along the entire supply chain, and each step in the line pulls the parts
it needs from the previous step. This is the famous Toyota just-in-time
production method used to reduce inventory (WIP inventory for work in
proress)
Grow:
- Sustainable growth is characterized by on simple rule: New
customers come from the actions of past customers.
- "Startups don't starve; they drown." - Shawn Carolan
- Methods:
1 Word of mouth
2 Side effect of product usage: when product is viral or
raises awareness
3 Through funded advertising: as long as marginal cost is less
than marginal revenue. more marginal profit = faster growth.
4 Through repeat purchase or use
- Engines of growth:
1 Sticky:
Rule: if the rate of new customer acquistiion exceeds the
churcn rate, the product will grow.
2 Viral: (I think this is why freemium is the way to go
because it promotes viral growth)
- Products that exhibit viral growth depend on person to
person transmission as a necessary consequence of normal product use.
Viruses are not optional.
- Viral engine is powered by feedback loop called viral
loop, its speed is determined by a single viral coefficient. Coefficient
must be greater than 1 for the product to grow exponentially.
- Most viral products do not charge customers directly and
rely on indirect sources of revenue because this cannot afford to have any
friction impede the product from spreading.
- It's difficult to test value hypothesis because we need
a test to see if there's a voluntary exchange of value between customers
and startup that serves them. But by making the customers pay in the
beginning might not prove their product to be on the right track but
derailed them. (Think if Facebook or Hotmail charged their customers in
the beginning.)
3 Paid:
- The margin between the LTV and CPA determines how fast
the paid engine of growth will turn (aka marginal profit). * David Skok
wrote one of the best pieces on metrics on his blog
http://www.forentrepreneurs.com/saas-metrics/
- Eric Ries recommends startups focus on one engine at a time,
and pivot to another engine only after pursuing one engine throughly.
- Marc Andreessen coined the term product/market fit to be
when a startup finds a widespread set of customers that respondate with
its product.
- What really matters is NOT the raw numbers or vanity metrics
but the direction and degree of progress.
Every engine is tied to a given set of customers and their
habitis, preferences, advertising channels and interconnections.
Eventually, every engine of growth will run out of gas.
- Concepts:
- Churn rate: fraction of customers in any period who fail to
remain engaged withed the company's product.
- Rate of compounding: natural grwoth rate minust the churn
rate.
Adapt:
- The key is to building an adaptive organization, one that
automatically adjusts its procses and performance to current conditions.
- One of the most important discoveries of lean manufacturing
movement: you cannot trade quality for time! Recall the Andon cord "stop
productino so that production never has to stop."
- How to deal with problems:
- Adaptive process force companies to slow down and invest in
preventing the kind of problems that are wasting time.
- Five whys:
- Core idea is to tie investments directly to the
prevention of the most problematic symptoms.
- It is an investigative method of asking "Why?" 5 times
to find the root cause.
- Make proportional investments:
Make incremental improvements to the process
constantly and those changes will compound over time.
- Speed regulator:
the 5 ways will act as natural speed regulator and
allow teams to find their optimal pace.
- Getting started:
- Start small and be specific. Take 5 whys out for a
spin on a smaller problem before delving into heart of the product.
- Appoint a 5 whys master for each area in which the
method is used, who must be just senior enough to have the authority.
- Requires an environment of mutual trust and
empowerment.
1.Be tolerant of all mistakes the first time:
encourages people to get used to being compassionate about mistakes,
especially mistakes of others. Most mistakes are caused by flawed systems,
not bad people.
2.Never allow the same mistake to be made twice:
gets the team started making proportional investments in prevention.
- Building an adaptive organization requires executive
leadershp to support the process: have someone with sufficient authority
be present to insist that the process be followed and to act as referee in
case of disagreement.
- If not the whole team is on board, follow the simple
two-rule version and ask yourself: How could I prevent myself from being
in this situation ever again?
- In action:
- IGN Entertainment (part of News Corporation): Tried
solving an overwhelming set of problems without knowing how to use the 5
whys. They neglected to:
1. Introduce 5 whys to the organization
2. Everyone who is connected to a problem was not
at the meeting.
3. Take a few minutes to explain what the process
is for the how it works for those who are new to it.
- Intuit's QuickBooks score dropped 20 points acording
to Net Promoter Score due to the waterfall methodology. Greg Wright made
the following changs in:
year 2
1. Smaller teams
2. Achieve shorter cycle times
3. Faster customer feedback
4. Enable and empower teams to make fast and
courageous decisions.
year 3
1. Teams were involved in creating new tech
process and systems
2. Cross functional teams were formed around
new great ideas
3. Customers were involved from the inception
of each future concept
Now QuickBooks allow customers to download updates
online on a quarterly basis, the product has higher customer ratings and
sold more units.
- Both successful startups and established companies alike must
learn to juggle multple kinds of work at the same time, pursuing
operational excellence and disruptive innovation.
- Curses of 5 whys:
It is very likely for 5 questions intended to find the
dysfunction to become 5 blames.
Tactics:
Make sure everyone affected by the problem is i the room
during analysis of root cause.
Have a systems level view as much as possible. The most
senior people should have a mantra: if a mistake happens shame on us for
making it so easy to make that mistake.
Innovate:
Startup teams require three structural attributes:
1. Scarce but secure resources: too much budget is as harmful
as too little, and also extremely sensitive to midcourse budgetary
changse.
2. Independent authority to develop their business: Ries
recommends startup teams to be completely cross functional. Approvals slow
down the BML feedback loop and inhibit both learning and accountability.
3. Personal stake in the outcome: does not have to be
financial, and sense of ownership is significant.
Create a platform for innovation:
Ground rules:
1. How to protect the parent organization: It's a constant
struggle to prioritize between testing out innovation or protecting
current business. How do you protect the parent organization from the
startup within?
2. How to hold enrepreneurial managers accountable:
Appoint a clear team leader for the cross functional team like the Toyota
Shusa (heavy weight project managers)
3. How to reintegrate an innovation back into the parent
organization if it is successful.
Sandbox of innovation:
1. Any team can create a true split-test experiment that
affects only the sandboxed parts of the product or service or only certain
customer segments or territories.
2. One team must see the whole experiment through from end
to end.
3. No experiment can run longer than a specified amoung of
time(weeks for simple feature experiments, longer for disruptive
innovatiosn).
4. No experiment can affect more than a specified number
of customers (percentage of the company's total mainstream customer base).
5. Every experiment has to be evaluated on the basis of a
single standard report of five to ten actionable metrics.
6. Every team that works inside the sandbox and every
product that is built must use the same metrics to evaluate success.
7. Any team that creats an experiment must monitor the
metrics and customer reactions while the experiment is in progress and
abort it if something catastrophic happens.
Four phases a company must manage: (Ries isn't very clear as to
the 4 phases here)
1. Development phase: focus on making a product that customers
want
2. Growth phase: the company will emphasize PR, marketing,
sales and business development and worry about copycats, followers,
imitators etc.
3. Optimization phase: emphasize operational excellence to
increase margin and lower cost: optimization, delegation, control and
execution.
4. Legacy phase: dominated by operating costs and legacy
products: outsourcing, automation and cost reduction are key, and
infrastructure is still critical.
Solution:
Manage four kinds of work differently, allowing strong cross
functional teams to develop around the area. When products move from phase
to phase, hand them off between teams where employees can choose between
whether to stay with the product or work on something new. Ideally the
sandbox will grow and reintegrated into the parent organization to
commercialize and scale.
Age old dilemma summarized by Deming: How do we know that the
problem is due to a special cause versus a systemic cause?
The lean startup is a framework not a bluprint of steps to follow.
It is designed to be adapted to the conditions of each specific company
and avoid doctrines and rigid ideology.