What’s it about?
The Lean Startup (2011) helps start-ups and tech companies develop sustainable business models. It advocates continuous rapid prototyping and focuses on customer-feedback data.
The method is based on the concepts of lean manufacturing and agile development, and its efficacy is backed up by case studies from the last few decades.
About the author
Eric Ries is a successful entrepreneur. He co-founded IMVU, a social network that uses 3D avatars. Today he is a sought-after consultant and public speaker.
The management of start-ups differs from that of established businesses:
Traditional management entails two steps: creating plans and managing the people who carry them out.
A manager makes a plan, establishes milestones, and assigns work to her people, leading them to meet their deadlines.
This management style works best in well-established businesses with enough experience to know what has worked in the past and what might work in the future.
Start-ups, on the other hand, are unique in that they can’t forecast their future since they don’t have one, don’t know what their consumers want, and don’t know which strategies are ideal for attracting customers and building a long-term business. They must remain adaptable to discover what might work. It would be delusory to adopt fixed strategies with established milestones or to rely on long-term market forecasts.
Despite this, many entrepreneurs employ corporate-management tools like milestone plans and long-term market forecasts. They act as though they’re constructing a space rocket for launch, tinkering with it for years before finally launching it when everything is just right. In actuality, running a start-up is more akin to driving a jeep across rocky terrain, where the founders must continually change direction and react rapidly to unexpected impediments and dead ends.
However, start-ups should not fully forgo planning in favor of a chaotic “just do it” mentality. Driving erratically will not get you anywhere; someone must be behind the wheel to make informed decisions about which direction to take.
The management team should endeavor to keep an overview of the situation and push the company toward its overall purpose. As a result, they must identify the appropriate indicators to determine whether their trip takes them in the proper direction.
A start-up goal is to develop a long-term business model:
Any start-up’s primary goal is to develop a viable and long-term business plan.
Without a sustainable business model, even the most elaborate and precise milestone plans, the most effective implementation of those plans, or even the complete and devoted attention of the press won’t help in the least.
You must discover a way to recruit consumers and earn money by servicing them if you want your firm to be more than a passing fancy that will wane and perish sooner or later. Assume you wish to base your company on online kilt-knitting tutorials. Do you think these instructions will be useful to anyone? Is there any way to profit from them? If the answer is no in both circumstances, look for something else that people desire and pay for.
As a result, the single most important task for any start-up is to create a long-term business strategy that works now and in the future. In practice, this entails determining which products your potential customers demand and determining how to convert those aspirations into consistent revenue.
The primary role of every start-up’s management should be to focus the entire company, including everything that is done daily, on achieving this single major aim. The sooner a start-up develops a viable business plan, the more likely it is to succeed.
Validated learning will help you discover your long-term company model:
Start-ups must figure out what their customers want and make money from it to have a sustainable business model. They must identify the appropriate product for the appropriate audience and learn how to market it to them.
This does not imply that you must have a perfect plan from the start. Rather, it necessitates a continuous learning process: ideally, verified learning, which means learning using a scientific approach.
To start the process of validated learning, you’ll need to develop hypotheses about whether and how certain items will succeed in a certain market. “Customers in the United States will be willing to buy shoes online,” for example.
Such core hypotheses must be evaluated. The start-up can only know it’s on the right course to establish a viable business model if it can validate them by talking to customers.
Instead of using surveys or fictitious consumers, chat to genuine customers in a realistic setting. Offering your goods to individuals and seeing how they react is the most reliable way to determine whether or not they will buy it.
Take, for example, Zappos’ success story: it all began with a simple hunch that people would be ready to buy shoes online. To test this concept, the business photographed shoes in stores and showed them on a fictitious webshop. When individuals tried to buy the shoes online, Zappos discovered that their theory was correct.
This strategy created the groundwork for one of the most successful business strategies of the last ten years.
Test your value and growth hypotheses using the leap-of-faith assumptions:
Part of creating a product is taking a leap of faith: a founder believes in the future success of the product she wants to build despite the lack of evidence.
Every founder should create and test two essential assumptions to swiftly reduce the gap between believing and knowing:
The value hypothesis assumes that a product will provide its clients, i.e., that early adopters will discover and embrace it.
The growth hypothesis implies that the product will appeal to a larger market later than just a limited set of early adopters.
Both assumptions must be put to the test right away. It is only worth investing time and effort in building the product if it can be validated.
Consider Facebook: when the social network had only a few users, they were able to prove both the value and growth hypotheses.
First and foremost, the network’s registered users were extremely engaged. Moreover, half of the participants checked in at least once a day, providing compelling evidence for the value hypothesis.
Second, Facebook’s user-activation rates were phenomenal, implying that it swiftly grabbed market share. Without spending a penny on promotion, three-quarters of all students at colleges where Facebook was launched signed up within one month. As a result, the growth theory was also proved.
Such compelling statistics convinced investors of the new social network’s long-term viability, prompting them to spend millions of dollars at an early stage.
To test your idea in the market, create a minimum viable product:
Many entrepreneurs spend far too much time working on a product in isolation, without understanding whether or not the product has any genuine clients.
If you want to build a long-term business, you must determine whether there is a market for your product as soon as possible.
Making a simple version of your product is the quickest and easiest approach to collecting real-world user feedback on your concept. This minimum viable product (MVP) should be as simple as possible, containing only what is required to provide clients with a genuine experience of how your product will work – just enough for them to provide helpful feedback.
A simple, bare-bones prototype of your product, or even a smoke test, in which you pretend to sell a false product, can serve as the MVP. A good example is uploading photographs of shoes to an online shop even if you can’t sell them yet.
Consider Dropbox’s founders. They understood that turning their concept into a product would take a long time, so they came up with a quick and creative way to test their hypothesis that there was a demand for a new and user-friendly data-synchronization service: they made a film showcasing their concept.
The founders had anticipated a need for such a solution, and they were correct: 75,000 individuals had joined up for their waiting list in one night, indicating that Dropbox was on the right track. As a result, they could comfortably begin working on the actual product.
Build, measure, and learn as quickly as feasible:
The primary priority in the hunt for a long-term business strategy is education: every start-up must understand which items to produce and how to profit from them.
This can’t happen if you’re disconnected from reality. You must go out and demonstrate your product to clients, collect feedback, and then learn from it.
Set up so-called BML loops to help with this. BML stands for the build-measure-learn cycle:
You start by creating a basic version of your product, such as a prototype or a smoke test.
Second, you take this product to its target market and get feedback from customers. You may gauge interest in the product by collecting quantitative data from this experiment; for example, how many individuals hit the purchase button and attempted to buy shoes from your fake webshop.
When you’re measuring, don’t simply look at the stats; talk to your customers as well. If you want to understand your statistics, you also need to learn about your consumers’ particular impressions and ideas.
What you learn in one cycle should be applied to conceptualizing and building a new, optimized product in the next BML cycle. This approach is then repeated until a viable business plan is discovered.
It’s critical to be quick in this situation. Each BML loop aids in the improvement of your product and provides useful information about what your customers want. The more loops you can complete, the more likely you are to identify a viable company model.
Split-testing can help you improve your product:
Start-ups must distinguish between value and waste when developing and upgrading a product: they must determine which features are beneficial to their customers and which are not.
Features that help a corporation attract more clients or boost revenue are considered valuable.
Even if the founders or programmers think they’re the best thing ever, features that don’t do either are a waste of time.
Split-testing is a clever approach to distinguish between value and waste. Create two versions of your product whenever you consider adding a new feature or modifying an existing one: one with the new feature and one without. You’ll quickly realize which version is more enticing to buyers if you test both.
Mail-order companies were among the first to employ this strategy. To see if a new catalog layout would increase orders, they printed two versions: 50 percent of their clients received the old design, and 50 percent received the new one. Because the catalogs were identical in every aspect and the clients were divided at random, the companies only had to compare how many orders each group placed. This information clarified whether or not the new design was an improvement.
In the same vein, any start-up can put any change to the test before implementing it. Do you want to know if your website looks better in red or blue? Why not make two test versions and monitor client click-through rates for a few days?
This semi-scientific approach should be used to test any changes you want to make to your product before implementing them.
You’ll almost always have to pivot to discover the perfect business model for your company:
Many start-ups believe in the popular belief that having a bright concept and persevering through several setbacks is the secret to starting a successful company: a heroic entrepreneur has a fantastic idea and fights through numerous setbacks until the idea finally becomes a hit.
However, most start-ups fall into the “land of the living dead” due to this mindset. They can’t take a hint and will keep working hard to promote a product that the market doesn’t desire, like mindless zombies.
To avoid this, you should continue asking yourself how to improve your product and help it find its market.
It would be best to consider whether a pivot — a complete change of direction – is necessary regularly.
A pivot can take numerous forms, including reframing your product’s core value, pursuing a different consumer category, and switching your primary sales channel.
A pivot’s fundamental feature is that the start-up’s core assumptions have altered, necessitating testing new hypotheses.
Because pivoting might be difficult, many start-ups avoid and postpone making this decision. This is why holding pivot meetings once a month can be advantageous. In these meetings, you examine the information you’ve gathered and consider whether you’re a zombie in need of a pivot.
Many start-ups had to pivot several times before becoming successful companies. For example, Groupon began as a forum for activism and fundraising before evolving into the daily deals site it is now.
Every start-up should first concentrate on a single source of revenue:
Any business plan must include a growth engine to ensure that the company does not become stagnant.
Growth engines can be divided into three categories:
The sticky engine works by keeping consumers who are already generating a steady stream of revenue. The goal is not to acquire new customers through marketing but to encourage existing customers to use the product more frequently by providing additional features or excellent service.
The viral engine operates by enlisting the help of current consumers to handle the company’s marketing. Word-of-mouth raises product awareness among your target clients. This can save you a lot of money on marketing, so make it as simple as possible for customers to participate in viral marketing.
Hotmail’s automatic Gmail email signature, “P.S. Get your free email at Hotmail,” is a well-known example of a viral growth engine.
Finally, a paid engine generates revenue by investing in marketing, such as paid web advertising. Of course, this can only be sustained if existing customers generate enough income to keep acquisition costs below user lifetime value.
In general, you can use all three growth engines simultaneously, but it’s typically better to concentrate on just one of them at the start to get it up to speed as quickly as possible.
Focusing on a single growth engine also makes evaluating the effectiveness of new features easier: if they help the growth engine gain speed, they’re beneficial; if not, they’re a waste of time.
Vanity metrics are often flattering, but they’re also deceiving: they won’t help you develop a long-term business plan:
Without pausing to gather directions, no start-up can develop a sustainable business model, and these directions are determined from evaluating the correct metrics.
Examine the data you’ve collected along the road to see if you’ve made any progress toward your long-term goals.
Unfortunately, many start-ups use vanity metrics, which are flattering but useless or even destructive measurements that make a firm look good but don’t help it get closer to its goals.
Vanity metrics force start-ups to look into the business equivalent of a slimming mirror, making it difficult to confront and solve real challenges.
It may be flattering to receive a lot of media attention, and Facebook likes, for example, but never mistake these indicators for success. They don’t pay the bills, and you shouldn’t waste your time trying to influence such insignificant indicators.
Other vanity metrics include the number of hours you’ve previously invested in a product or the number of milestones you’ve reached. These figures may (but do not always) have anything to do with your start-up’s success. As a result, maximizing them should never be the goal. Even if someone works 100-hour weeks, those hours may be squandered on unproductive activities in the long run.
You can’t be successful unless you establish a long-term business strategy and build a client base that uses your product, and you can’t do either if you’re concentrated on the incorrect KPIs.
Every start-up must establish and correctly assess its main metrics:
For any start-up, defining the correct metrics to track and regularly assessing them is critical. Only when you see the KPIs increase will you know you’re on your approach to achieving your long-term aim of developing a viable business model.
The correct key metrics vary by start-up, but they frequently include improvements in the number of paying customers, average session length per client, and the number of suggestions per 1,000 consumers.
Each start-up must develop its metrics to guide it and provide a true picture of its success.
The use of so-called cohort analysis while examining data can be beneficial. Compare how new consumers act to how old customers behave instead of simply looking at how sales or user base have grown in general.
Let’s say one of your key performance indicators is your referral rate. You should look at the following criteria to see how it progresses: How many consumers who joined up six months ago recommended your product to their friends on average? What about consumers who have been with you for four months? What was it like two months ago?
You can see if you’re getting closer to your objective by comparing cohorts (in this case, groups of users who signed up at different dates) and their respective recommendation rates. You’re progressing only if the statistic is improving; otherwise, you’re stagnant.