INTRODUCTION TO
THE LEAN STARTUP APPROACH
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Introduction
“Start up success can be engineered by following the right process,
which means it can be learned, which means it can be taught.” (Eric Ries, 2011)
DEFINITION// The Lean Startup methodology is a scientific approach aimed at creating a
sustainable business model by validating business-hypotheses through experimentation,
thereby shortening the product development cycle and the risk of business failure.
“Lean Startup provides a scientific approach to creating and managing startups
and get a desired product
to customers' hands faster.” (Eric Ries, 2011)
·
The approach eliminates wasteful practices during the initial phase of a new venture,
which enables a higher chance of long-term success. The goal is to avoid building
products which are not needed.
•
The Lean Startup methodology was developed by serial entrepreneur Eric Ries based on
his experience in his own startup (IMVU). It draws heavily on Steve Blank’s Customer
Development, who was Eric’s teacher, mentor and investor to IMVU.
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The Lean Startup approach builds on
Design
Thinking
Product
Development
Agile
Development
Learn more here:
https://en.wikipe
dia.org/wiki/Desi
gn_thinking
refers to the stages
involved in the
creation of a
product from
identification of a
market need, over
conception and
design, to release.
refers to the
stems from software
functional
development and
management of
favours adaptive
an organisation.
planning, frequent
delivery, selforganisation and
continuous
improvement,
encouraging flexible
responses to change
(View: Agile Manifesto for
Software Development
and 12 Principles Behind
the Agile Manifesto).
Management
Customer
Development
Lean
Manufacturing
(see next slide)
is geared to deliver
quality and focuses on
customer satisfaction,
while cutting costs by
reducing all non-value
adding steps. It builds on
the Toyota Production
System (TPS)
pioneered by Taiichi
Ohno & Shigeo Shingo
which involves principles
such as “Just-in-time”
delivery and the
differentiation between
value and waste.
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Steve Blank lays out the importance of gaining customer insights to validate the business hypotheses of a new venture and find
a business model that works. He describes fours steps, of which each is iterative. The goal is to find a product-market fit of a
new product or service referring to proven viability, desirability and feasibility during the search phase and prior to execution.
Blank notes that “facts exist outside the building, opinions reside within” so it is important to “Get out of the Building”!
Translate ideas into business
model hypotheses (Business
model canvas)
Continue to test all hypotheses
fast, agile and opportunistic to
validate Business model
(Product-Market fit).
With a proven business model
and product in hand it is time to
launch and ramp up marketing
and sales to establish a
customer base.
The final step involves scaling the
business by reaching
mainstream customers and
establishing functional
department.
Customer Discovery (SEARCH) = Hypothesis → Test “Problem Hypothesis” → Test “Product Hypothesis” → Verify
Customer Validation (SEARCH) = Get ready to sell → sell to “Earlyvangelists” → Develop positioning → Verify
Customer Creation (EXECUTION) = Get Ready → Position → Launch → Create Demand
Company Building (EXECUTION) = Mainstream customers → management/culture → Functional departments → Fast Response Det’s
Entrepreneurs
are everywhere
The
Five Principles
of the Lean Startup
Entrepreneurship is management
Validated learning
Build-Measure-Learn
Innovation Accounting
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ENTREPRENEURSHIP IS MANAGEMENT.
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Entrepreneurship is management
o
Entrepreneurs work “under conditions of extreme uncertainty” which requires a new kind of management.
o
General management involving standard forecast, product milestones and detailed business plans is ill
suited for such circumstance.
· Management of new and uncertain projects involves:
•
•
•
Setting Learning Milestones
Management of teams and tasks including definition of competencies and roles
Agile management and independent development authority - leverage to experiment and open to
new ideas for example SCRUM or KANBAN
Useful tools for management of teams and tasks:
• Project time management: Gantt chart, Kanban, Microsoft Project
• Communication: Slack, Flock, Google Hangouts, Microsoft teams
• Task management: Trello, Asana, Podio, Basecamp
General management operates on the principle that the future can be planned for on the basis of current experience.
However, when approaching new entrepreneurial projects and ventures through Intrapreneurship conditions are
extremely uncertain as assumptions about the viability of the business idea can not be known yet. This matter of
uncertainty requires a different kind of management, a new kind, which is more agile and able to adapt.
→ Agile project management tools: https://thedigitalprojectmanager.com/agile-tools/
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General Management vs. Lean Management
Perspective
Top-down
Bottom-up
Focus
Revenue focus
Margin and people focus
Decision making
Separated from work
Integrated in work
Orientation
Sacrifice future for the present
Sacrifice present for the future
Values
Compliance and Coordination
Commitment and Collaboration
Approach
Firefighting
Fire prevention
Measures
Budget, targets, outputs
Progress, productivity, utilisation, added value
Behaviour
Direct and instruct
Enable, teach and ask questions
Attitude to customer
Contractual
Customer centred
General and Lean management are inherently different as they operate under different circumstances. General management operates
on the premise of large scale production requiring planning and forecasting, while Lean management operates under conditions of
extreme uncertainty making such planning and forecasting prone to failure. Under circumstances of extreme uncertainty, it is important
that a team is flexible and can adapt to unforeseen events and it is the task of management to enable this. The table displays
characteristics of Lean management in comparison to general management.
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VALIDATED LEARNING IS
ACHIEVED BY FOLLOWING THE
BUILD-MEASURE-LEARN CYCLE.
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Validated Learning
The goal is to of find a sustainable business model as fast as possible through validated learning.
DEFINITION// Validated learning is data driven and refers to those insights generated by
experimentation of an initial idea and measured against potential customers to validate the effect.
This draws on Leap of faith assumptions, which are beliefs about the customer and their wants
and needs without proof of validity. To avoid drawing false conclusions on the basis of these
assumptions, they need to be tested, which in turn leads to validated learning.
🡪 Assumptions are formulated as value and growth hypotheses and tested through
experimentation.
•
Value hypothesis tests whether a product or service really delivers value to potential customers once
they are using it. It contains the exact value and the customer group.
•
Growth hypothesis tests how new customers will discover a product or service. This should only be
tackled after the value hypothesis has been validated as it is possible that the delivered value will be
different after experimentation.
Validated learning is the key to discovering what customers actually want and need.
One should not ask if a product CAN be built but rather, “Should this product be built? Can we build a sustainable business model around it?”
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BUILD-MEASURE-LEARN
PRODUCT
BUILD
MEASURE
IDEA
LEARN
DATA
The Build-Measure-Learn cycle enables the testing of the
initial hypothesis. The principle of this cycle can be applied
early in the process testing the value hypothesis of a new
idea or product or later in the process to validate a growth
hypothesis. The goal is to generate validated learning as fast
as possible by minimizing the total time through the loop.
First, BUILD a product (Minimum Viable Product) which
captures the essence of the idea, product, feature or service
to test the underlying hypothesis.
Second, MEASURE relevant and actionable metrics to enable
the validation or invalidation of the hypothesis through
experimentation.
Third, LEARN from the experiment to apply insights to the
initial idea and either continue to optimize it or change the
course of strategy and adapt to customer needs.
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BUILD
Example MVP// Zappos
· Build a Minimum Viable product (MVP) and run
an experiment to test the value hypothesis
(Prototyping)
DEFINITION// Minimum Viable Product (MVP) is
a version of a new product which allows a team to
collect the maximum amount of validated
learning about customers with the least effort.
•
Remove any features, process, or effort
that does not contribute directly to
the learning you seek!
•
Test as fast as possible, quality is not
relevant for the first MVP!
· Bring to actual market, run an experiment and
get customer feedback
•
“Get out of the building”
In 1999 the founder of Zappos, Nick Swinmurn, used a
Minimum Viable Product to validate his assumption
that customers would be willing to buy shoes online
without trying them on. To this end he created a simple
online shop, but instead of building the actual
inventory and trying to sell it, Nick did something
much simpler and less expensive. He went to local shoe
stores and asked if he could photograph the shoes with
the promise that he would return to buy them if his
idea worked. Then he advertised them on his website. If
a customer bought a pair of shoes online, he went back
to the store and bought it to then mail it to the
customer. This approach is referred to as “Wizard of Oz
MVP” as the customer assumed his purchase was
based on a fully automated process, not knowing that
orders were processed manually. Nick’s idea turned out
to be very successful. (Source: Ries, 2011)
- Steve Blank
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MEASURE (1/2)
The MVP establishes the baseline measures; the
goal is to tune and improve these in further
iterations.
What to measure?
o Not just numbers but talk to people to
gain customer feedback!
o Metrics should enable data-driven
validation or invalidation of the leap of
faith assumptions.
Monitor over time
o To tune the engine, it is necessary to track
experimentation an progress over time. A
KANBAN board can help with this, as it
enables the visualization of workflows.
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MEASURE (2/2)
BUILD-MEASURE-LEARN
Vanity metrics are measures that make us feel good but do not capture the true health of the
business! Choosing the wrong metrics could thus not only prohibit validated learning but lead the
team to believe that there is progress where there is none.
Therefore it is important that metrics are ACTIONABLE, which means that the demonstrate clear
cause and effect! When choosing metrics it is recommended to consider the value of the three A’s.
ACTIONABLE: Metrics must demonstrate clear cause and effect to not be vanity metrics and it
must be clear what they are truly measuring.
ACCESSIBLE: It must be accessible and understandable to visualize what the metrics mean.
Furthermore, reports should be accessible for every employee to create alignment and
transparency.
AUDITABLE: Metrics and reports must be credible to employees. They must be comparable over
time. It is also important to make sure that reports are not too complex and that they are drawn
directly from master data so the source of information is traceable.
→ Kanban Template https://wiki.comalatech.com/display/CEX/Lean+Startup+Kanban+Board
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Testing
Split testing, also referred to as A/B testing, is a way to compare two
versions of a website, email or other product features by testing users’
response to variant A against variant B to determine which is more
effective. This is done by splitting the user group and giving version A to
one half, version B to the other, and comparing performance.
Cohort analysis divides the user group into smaller units related by
common characteristics, which are then observed over time. This enables a
behaviour analysis by for example investigating retention rate, meaning
how many users continue using the service or product after initial sign-up.
Funnel analysis constitutes the mapping and analysing of all the events
that go into achieving a specific goal such making a sale. This involves the
tracking of funnel metrics which are counts of leads gathered at every
stage of the funnel.
→ An example of Split testing is
Google’s “50 shades of blue”
When launching Google Ads the Google
team could not decide on which shade of
blue to use for the link button, so they used
split-testing, running 1%' experiments,
showing 1% of users one shade of blue, and
another 1% a different kind of blue. In fact,
they ran this experiment with 41 different
shades of blue identifying which shade of
blue was most popular by measuring how
many users clicked on the link. This datadriven approach lead them to choose a
more purple shaded blue as they learned
through experimentation that it invoked
more clicks than a more green-hued blue.
(Source: Hern, 2014 🡪 View the guardian
article here:
https://www.theguardian.com/technology/2
014/feb/05/why-google-engineersdesigners)
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Example // Vanity Metrics vs. Actionable Metrics
This Example from the Lean Startup book shows data collected in the early days of Eric Ries’ startup IMVU. The left graph
shows the aggregated metrics which look promising and suggest growth. The right graph however, depicts the funnel
metrics for the cohort of new customers which shows that despite constant effort for improvement by the team to improve
the quality of the product, the metrics were not changing. They eventually learned that quality was not a relevant factor for
customers to use the 3D avatars more. Comparing the two graphs underlines the difference between vanity metrics (left)
and actionable metrics (right).
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LEARN (1/2)
•
Insights and validated learning from
experimentation are applied to the product or
strategy.
•
The cycle is repeated until you have learned your
way to a sustainable business model effectively
addressing customer needs.
Ask - PIVOT or PERSEVERE?
DEFINITION// Pivot constitutes a structural course
correction, usually after many failed iterations of the
initial product, aimed at testing a new fundamental
hypothesis about the product, strategy and engine of
growth while maintaining the same overall vision.
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LEARN (2/2)
BUILD-MEASURE-LEARN
Learning involves generating insights from prior experimentation with a Minimum Viable Product
captured by actionable metrics. This is the point when the initial leap of faith assumptions are
validated/invalidated and become validated learning.
Depending on the outcome, this can mean that change is necessary. Change can take place on
the product level in the form of optimization or instead on the strategy level in the form of a pivot.
It is rare that the BML cycle will bring change to the vision of the venture as it is usually possible to
adjust to learnings while staying true to the overall vision.
Questions to ask: Do we need to change the experiment? Or change the hypothesis? Should we
switch certain product features or the whole product?
Pivot
Having achieved validated learning, it is the right time to ask, PIVOT or PERSEVERE: Should we
continue on the current path? Does our current strategy and product meet customer needs? If
not, maybe a Pivot is necessary.
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INNOVATION ACCOUNTING AND WAYS TO
IMPLEMENT THE LEAN STARTUP METHOD.
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Innovation accounting 1/2
DEFINITION// Innovation accounting is a way to evaluate progress when all the
metrics typically used in an established company (revenue, customers, ROI, market
share) are effectively zero by employing actionable metrics and continuous testing
instead.
Three learning milestones
1. Use a minimum viable product to collect real data on the current state of
the company to establish a baseline.
2. Must attempt to tune the engine from the baseline toward the ideal through
continuous improvement and iteration.
3. Pivot or Persevere - if you are not moving the target customers, you are not
making any progress and it is time to pivot!
Tools and templates for innovation accounting
• Dashboards
• Growth Machine
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Innovation accounting 2/2
A way to do innovation accounting is through the use of a Dashboards for Customer
Development, Leap of faith assumptions and Net present value.
→ Read about the three levels of innovation accounting here & find a template
https://upboard.io/innovation-accounting-learn-startup-venture-tools-templates/
https://upboard.io/wp-content/uploads/2018/01/Innovation-Accounting-Template-4.pdf
To track experiments it is possible to use a template for example as the one suggested by Ash
Maurya, entrepreneur and author of multiple books on lean methodology.
→ Read about Experiment approach here & find a template
https://blog.leanstack.com/how-we-use-lean-stack-for-innovation-accounting-b8a42cddeef3
https://cdn2.hubspot.net/hubfs/2442542/Blog/Lean-Stack-Experiment-Report.png
Innovation accounting and experiment tracking can be combined in a Growth Machine:
→ View templates for Growth Machine here:
http://growth.founders.as/growth-machine
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Catalogue of Pivots
Zoom-in pivot - A single feature of the initial product becomes the whole product.
Zoom-out pivot - The whole product becomes a single feature of an expanded product or
service.
Customer Segment Pivot - The product remains the same but is now targeted to a different
customer group.
Customer Need Pivot - Experimentation revealed that a different need is to be solved
potentially requiring a completely new product and strategy.
Platform pivot - A change from offering an application towards a platform or vice versa.
Business Architecture Pivot - A change of architecture, for example from complex system
mode targeting B2B towards a mass market on a volume operations model
Value Capture Pivot - Change of monetization or revenue model, which can have far reaching
on the business, product and strategy.
Engine of growth pivot - Switch from one growth engine to another (viral, sticky and paid
growth)
Channel pivot - Delivering the same solution more effectively through a different sales channel.
Technology pivot - Delivering the same solution with the use of a different technology.
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Catalogue of Pivots
→ Example: Zoom-In Pivot
Paypal initially supported payments via PDA as well as web. When
discovering that their customers were primarily using email, they
pivoted to focus on supporting email to deliver customer value.
→ Example: Platform & Customer needs pivot
Youtube’s beginning was a dating site, where users could upload
videos of themselves. However, the founders noticed that customers
interest was more in the video sharing than the dating aspect of the
site and adjusted to these needs accordingly.
Source: (“The name of the game is Pivot”, 2017)
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What to account for?
What to account for depends on the product or service. It can for example be number of active
members, number of transaction or retention rate. Often, conversion rate is a relevant measure.
Conversion rate refers to the percentage of visitors to a website that complete a desired action
(a conversion) out of the total number of visitors.
When accounting for growth it is important to compare how many new customers are using the
product or service (= growth rate) and how many customers are losing interest and stop using the
product (=churn rate). The churn rate should be kept as low as possible as it hinders growth.
🡪 Gaining new customers without being able to keep them is an indication that something needs to
be adjusted to improve retention and thereby secure success.
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Small Batches are at the core of a lean
approach.
“The one envelope at a time approach is called ‘singlepiece-flow’ in lean manufacturing. It works because of the
surprising power of small batches.” (Ries, 2011, p. 184)
•
The principle of Small Batches is the underlying logic of
continuous deployment, which refers to releasing
software code as soon as it has passed automated
testing, making visible changes for the end user.
Find the root cause through “The Five Whys”
→
find a solution for technical problems by discovering
the human managerial issues by asking “Why?” five
times.
Example // Small Batches – Letters
and Envelopes
“In the book Lean Thinking, James Womack and
Daniel Jones recount a story of stuffing newsletters
into envelopes with the assistance of one of the
author’s two young children. Every envelope had to
be addressed, stamped, filled with a letter, and
sealed. The daughters, age six and nine, knew how
they should go about completing the project:
“Daddy, first you should fold all of the newsletters.
Then you should attach the seal. Then you should
put on the stamps.” Their father wanted to do it the
counterintuitive way: complete each envelope one at
a time. They told him “that wouldn’t be efficient!” So
he and his daughters each took half the envelopes
and competed to see who would finish first. The
father won the race, and not just because he is an
adult.
The one envelope at a time approach is a faster way
of getting the job done even though it seems
inefficient. This has been confirmed in many studies,
including one that was recorded on video.” (Ries, 2011,
p. 184)
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The power of Small Batch size
Working in small batches means that each step in the manufacturing of a product delivers fewer
rather than more output at a time, so that the produce of one step can move faster to the next step.
This has the advantage that,
•
it shortens the cycle time and enhances control.
•
it allows adjustment for mistakes in time.
•
performance of the system is more relevant than individual performance.
•
it allows fast adjustment for changing customer needs.
The Wisdom Five Whys
This technique can help determine the nature of a problem as well as it’s solution. It involves asking
why a certain problem occurred 5 times in an iterative way which constitutes a fast method in finding
the root cause. The iteration can be shorter or longer than the suggested five as long as the last “why”
points towards a process, to which a solution can be found. At the root of any seemingly technical
problem is a human problem. The 5 whys was originally developed by Sakichi Toyoda -and it is part of
the problem-solving training for the Toyota Production System. (Ries, 2011)
🡪 Watch video here: https://www.youtube.com/watch?v=SrlYkx41wEE
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SUMMARY
Step 1: Identify leap-of-faith assumptions.
Step 2: Get out of the building.
Step 3: Build – Test your assumptions with a Minimum Viable Product.
Step 4: Measure – Establish baseline metrics.
Step 5: Learn – Tune the engine.
Step 6: Pivot or persevere.
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Useful tools for management of teams and tasks
•
Project time management:
Gantt chart, Kanban, Microsoft Project
•
Communication:
Slack, Flock, Google Hangouts, Microsoft teams
•
Task management:
Trello, Asana, Podio, Basecamp
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