The Lean Startup

5 Key Takeaways

• There is a process to entrepreneurship that can be learned.
• The goal of a startup is to figure out the right thing to build – the thing customers want and will pay for – as quickly as possible.
• Customers do not tell us what they want. They reveal the truth through their action or inaction.
• Test and validate your value and growth hypothesis.
• Use MVPs to cycle through the Build-Measure-Learn feedback loop as fast as possible.

1. Introduction

• Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.
• Entrepreneurship is a kind of management.

2. Start

• Learning milestones feel less productive because learning is intangible. But learning is what a startup needs to focus on the most.
• The goal of a startup is to figure out the right thing to build – the thing customers want and will pay for – as quickly as possible.
• Instead of making a complex plan and then trying to implement it, get into the Build-Measure-Learn feedback loop as quickly (and cheaply) as possible.
• It starts with vision. Your true north. The change you want to see in the world.
• Strategy is what you use to achieve the vision. Strategy includes the business model, product road map, opinions about the competition and assumptions about who the customer will be.
• The product is the result of the strategy. Products change constantly through the process of optimization.

3. Define

• A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.
• Innovation is a bottoms-up, decentralized, and unpredictable thing, but that doesn’t mean it cannot be managed.
• Leadership requires creating conditions that enable employees to do the kinds of experimentation that entrepreneurship requires.

4. Learn

• Customers do not tell us what they want. They reveal the truth through their action or inaction.
• Any action that does not contribute to learning about what creates value for customers is a form of waste.
• Can you validate your hypothesis without building anything? Run an experiment and measure customer behavior.
• The question is not, “Can this product be built?” Almost anything is possible. The better questions are, “Should this product be built?” and “Can we build a sustainable business around this set of products and services?”

5. Experiment

• Don’t follow the “Just do it” line of thinking. E.g. launch and see what happens. You will not gain validated learning this way. If you cannot fail, you cannot learn.
• Test a small idea to answer a big question.
• E.g. Zappos took pictures of another store’s inventory and sold shoes on their website to test the assumption that there was a demand for buying shoes online.
• Do not find the average customer, but 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.
• An experiment is more than just a theoretical inquiry; it is also a first product.
• Success is not delivering features; success is learning how to solve the customer’s problem.
• Planning is a tool that only works in the presence of a long and stable operating history.
• The 2 Most Important Assumption Entrepreneurs Make
• Value hypothesis: Does a product or service really deliver value to customers once they are using it? Design experiments that prove this by their actions. Don’t use surveys.
• Growth hypothesis: How will new customers discover a product or service?
• 4 Questions For Product Development (In Order)
• Do consumers recognize that they have the problem you are trying to solve?
• If there was a solution, would they buy it?
• Would they buy it from us?
• Can we build a solution for that problem?

6. Steer

• The products a startup builds are really experiments; the learning about how to build a sustainable business is the outcome of those experiments.
• Focus our energy on minimizing the total time through the Build-Measure-Learn feedback loop.
• Test the most important assumptions (value and growth hypothesis) first with a minimum viable product (MVP).
• The MVP is the version of the product that enables a full turn of the Build-Measure-Learn loop with the least amount of time and effort.
• If we’re building something that nobody wants, it doesn’t much matter if we’re doing it on time and on budget.

7. Leap

• Facebook case study: More than half of the users cam back to the site every single day. This is how a company can validate its value hypothesis – that customers find the product valuable.
• For startups, the role of strategy is to help figure out the right questions to ask.
• The goal of a startup’s early efforts should be to test their assumptions as quickly as possible.
• Many entrepreneurs were in the “right place at the right time” but still failed. What differentiates the success stores from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapted their strategies accordingly.
• Customer archetype describes the target customer. It guides product development and aligns the team to make decisions based on whom you aim to appeal.

8. Test

• A minimal viable product (MVP) helps entrepreneurs start the process of learning as quickly as possible.
• First products aren’t meant to be perfect. Early adopters are suspicious of something that’s too polished.
• Additional features beyond what early adopters demand is a form of wasted resources and time.
• The complexity of an MVP depends on the idea and industry. It could be as simple as an ad, or a complex working prototype. It just depends on what assumption you need to test.
• If we do not know who the customer is, we do not know what quality is.
• Always ask: what if they don’t care about the design in the same way we do?
• We must be willing to set aside our traditional professional standards to start the process of validated learning as soon as possible.
• As you build an MVP, remove any feature, process, or effort that does not contribute directly to the learning you seek.
• The only way to win is to learn faster than anyone else.
• Types of MVPs
• Video MVP: Explain the concept and ask people to sign up.
• Concierge MVP: Do everything yourself to create an awesome personalized experience. Caution – you need to have a growth model, otherwise, you might become satisfied with a small profitable business when a pivot may have lead to more significant growth.
• Wizard of Oz MVP: Simulate the technology you would need to develop by doing it yourself behind the scenes while you test your assumptions.

9. Measure

• Are you making your product better? How do you know?
• A good design is one that changes customer behavior for the better.
• You need a clear baseline metric, a hypothesis about what will improve that metric, and a set of experiments designed to test that hypothesis.
• A startup has to measure progress against a high bar: evidence that a sustainable business can be built around its products or services.
• Use split-test experiments where different versions of a product are offered to customers at the same time.
• Split-tests help you quickly identify what features matter to customers and which do not.
• Measure your productivity according to validated learning, not in terms of the production of new features.
• The 3 A’s of Metrics
• Actionable: Clear cause and effect between experiment and metric.
• Accessible: Make the reports as simple as possible so everyone understands them.
• Auditable: You must be able to test the data by hand.

10. Pivot (Or Persevere)

• The true measure of a runway is how many pivots a startup has left: the number of opportunities it has to make a fundamental change to its business strategy.
• When an entrepreneur has an unclear hypothesis, it’s almost impossible to experience complete failure, and without that failure, there is usually no impetus to embark on the radical change a pivot requires.
• Start now! E.g. if Wealthfront had not launched its first product, the team never would have learned what it needed to know to pivot.
• Low-quality MVPs only work for early adopters. Mainstream customers have a different set of requirements and are much more demanding.
• Optimizing, tuning, and iterating all serve one purpose: Testing a clear hypothesis in the service of the company’s vision.
• A pivot is best understood as a new strategic hypothesis that will require a new minimum viable product to test.
• Type of Pivots
• Zoom-in: A single feature becomes the whole product.
• Zoom-out: What was considered the whole product becomes a feature of something much larger.
• Customer segment: We have built a product that solves a real problem for real customers, but they are not the customers we originally planned to serve.
• Customer need: The problem we were trying to solve turns out to not be very important. However, we discover related problems that are important in the process.
• Platform: Change from an application to a platform or vice versa
• Business architecture: High margin, low volume versus low margin, high volume. Or B2B versus B2C.
• Value capture: How you decide to make money.
• Engine of growth: Change in strategy to seek faster, more profitable growth.
• Channel: Change your distribution channel.
• Technology: Achieve the same solution with a different technology.

11. Accelerate

• Startups need organizational structures that combat extreme uncertainty.
• The value in a startup is not the creation of stuff, but rather validated learning about how to build a sustainable business.
• What products do customers really want?
• How will our business grow?
• Who is our customer?
• Which customers should we listen to, and which should we ignore?

12. Batch

• Small batches = faster learning.
• Continuous deployment is releasing small new features all the time. Testing them and having a system in place that can pull the andon cord if something breaks.
• The ability to learn faster from customers is the essential competitive advantage that startups must possess.
• It is not the customer, but rather our hypothesis about the customer, that pulls work from product development and other functions.

13. Grow

• The engine of growth is the mechanism that startups use to achieve sustainable growth.
• Sustainable growth = when new customers come from the actions of past customers.
• A startup can evaluate whether it is getting closer to product/market fit by measuring the direction and degree of progress.
• 4 Ways Past Customers Drive Sustainable Growth
• Word of mouth
• As a side effect of product usage
• Through funded advertising
• Through repeat purchase or use
• 3 Engines of Growth
• Sticky Engine: If the rate of new customer acquisition exceeds the churn rate, the product will grow. Growth rate = natural growth rate – churn rate.
• Viral Engine: Feedback loop is determined by the viral coefficient. How many new customers will use a product as a consequence of each new customer who signs up? Viral coefficient >1 means that each person who signs up will bring, on average, more than one other person with them.
• Paid Engine: A portion of revenue is spent on advertisement. Customer lifetime value and cost per acquisition are important metrics.

14. Adapt

• Training is important to focus on with incremental improvements.
• Use the “Five Whys” to work through any kind of failure.
• Most mistakes are caused by flawed systems, not bad people.
• Whenever something goes wrong, ask yourself: How could I prevent myself from being in this situation ever again?

15. The 5 Whys

• Use it whenever new problems come up.
• Everyone who is connected to the problem needs to be at the meeting.
• Explain what it is and why the team will benefit from it.

Behind every supposedly technical problem is actually a human problem. Applied to a start-up, here’s how it works:

1. A new release broke a key feature for customers. Why? Because a particular server failed.
2. Why did the server fail? Because an obscure subsystem was used in the wrong way.
3. Why was it used in the wrong way? The engineer who used it didn’t know how to use it properly.
4. Why didn’t he know? Because he was never trained.
5. Why wasn’t he trained? Because his manager doesn’t believe in training new engineers, because they are “too busy.”

What began as a purely technical fault is quickly revealed to be a very human managerial issue. Traditional TPS would emphasize fixing the root cause, but I advocate a slightly different approach. It calls for making a proportional investment at each of the five levels of the hierarchy. In other words, fix the server, change the subsystem to make it less error-prone, educate the engineer, and yes, have a conversation with their manager.

That conversation is always hard, especially in a start-up. When I was a manager, if you’d told me I needed to invest in a training process, I would have told you that it would be a waste of time. In order to avoid it, I’d probably have said something like “sure, I’d be happy to do that — if you can spare my time for the eight weeks it’ll take to set up.”

That’s where the proportional

16. Innovate

• You want teams to work cross-functionally to achieve validated learning.
• The Lean Startup is a framework, not a blueprint of steps to follow.
• Startups Need 3 Structural Attributes
• Scarce but secure resources
• Independent authority to develop their business
• A personal stake in the outcome

17. Epilogue

• Waste comes not from the inefficient organization of work but rather from working on the wrong things.
• “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.” – Peter Drucker
• We must avoid the caricature that science means formula or a lack of humanity in work.