Book Summary: The Lean Startup by Eric Ries

My notes on “The Lean Startup: How Constant Innovation Creates Radically Successful Businesses” by Eric Ries

I’ve only made notes on the sections I found most interesting, so to get the full benefit of this book I urge you to read a copy for yourself

The Five Principles Of The Lean Startup

Entrepreneurs are everywhere
- You don’t have to work in a garage to be in a startup.
- The concept of entrepreneurship includes anyone who works within my definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty.
- That means entrepreneurs are everywhere and the Lean Startup approach can work in any size company, even a very large enterprise, in any sector or industry.

<br />

Entrepreneurship is management
- A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty.
- In fact, as I will argue later, I believe “entrepreneur” should be considered a job title in all modern companies that depend on innovation for their future growth.
Validated learning
- Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business.
- This learning can be validated scientifically by running frequent experiments that allow entrepreneurs to test each element of their vision.
Build-Measure-Learn
- 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.
Innovation accounting
- To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.
- This requires a new kind of accounting designed for startups—and the people who hold them accountable.

The Goal Of A Startup

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.

Testing and Changes

Over the course of the year, the marketing and product teams would conceive one major initiative that would be rolled out just in time for tax season. Now they test over five hundred different changes in a two-and-a-half-month tax season. They’re running up to seventy different tests per week.
The amount of learning they get is just immense now. And what it does is develop entrepreneurs, because when you have only one test, you don’t have entrepreneurs, you have politicians, because you have to sell.
Out of a hundred good ideas, you’ve got to sell your idea. So you build up a society of politicians and salespeople. When you have five hundred tests you’re running, then everybody’s ideas can run.
And then you create entrepreneurs who run and learn and can retest and relearn as opposed to a society of politicians.
Lean thinking defines value as providing benefit to the customer; anything else is waste.

Value vs Waste

What if we simply had offered customers the opportunity to download the product from us solely on the basis of its proposed features before building anything?
This is different from asking customers what they want. Most of the time customers don’t know what they want in advance.

Minimum Viable Product

Food on the Table (FotT) began life with a single customer.
That one early adopter got the concierge treatment. Instead of interacting with the FotT product via impersonal software, she got a personal visit each week from the CEO of the company.
Feedback from the customers was very consistent: they wanted the ability to move their avatars around the environment. We used a simple hack, which felt almost like cheating. The avatar would teleport there instantly.
Customers don’t care how much time something takes to build. They care only if it serves their needs.
Our customers preferred the quick teleportation feature because it allowed them to get where they wanted to go as fast as possible. In retrospect, this makes sense. Wouldn’t we all like to get wherever we’re going in an instant? No lines, no hours on a plane or sitting on the tarmac, no connections, no cabs or subways. Beam me up, Scotty. Our expensive “real-world” approach was beaten handily by a cool fantasy-world feature that cost much less but that our customers preferred.
The most common objection I have heard over the years to building an MVP is fear of competitors – especially large established companies – stealing a startup’s ideas. If only it were so easy to have a good idea stolen!
Part of the special challenge of being a startup is the near impossibility of having your idea, company, or product be noticed by anyone, let alone a competitor.
In fact, I have often given entrepreneurs fearful of this issue the following assignment: take one of your ideas (one of your lesser insights, perhaps), find the name of the relevant product manager at an established company who has responsibility for that area, and try to get that company to steal your idea. Call them up, write them a memo, send them a press release—go ahead, try it.
The truth is that most managers in most companies are already overwhelmed with good ideas. Their challenge lies in prioritization and execution, and it is those challenges that give a startup hope of surviving.
If a competitor can out execute a startup once the idea is known, the startup is doomed anyway.
The reason to build a new team to pursue an idea is that you believe you can accelerate through the Build-Measure-Learn feedback loop faster than anyone else can.
If that’s true, it makes no difference what the competition knows. If it’s not true, a startup has much bigger problems, and secrecy won’t fix them.
Sooner or later, a successful startup will face competition from fast followers. A head start is rarely large enough to matter, and time spent in stealth mode – away from customers – is unlikely to provide a head start. The only way to win is to learn faster than anyone else.

Metrics

The three A’s of metrics:

Actionable
Accessible
Auditable

Cohort Analysis

To read the graph, you need to understand something called cohort analysis.
This is one of the most important tools of startup analytics. Although it sounds complex, it is based on a simple premise. Instead of looking at cumulative totals or gross numbers such as total revenue and total number of customers, one looks at the performance of each group of customers that comes into contact with the product independently. Each group is called a cohort.

Cohorts and Split-tests

Grockit changed the metrics they used to evaluate success in two ways. Instead of looking at gross metrics, Grockit switched to cohort-based metrics, and instead of looking for cause-and-effect relationships after the fact, Grockit would launch each new feature as a true split-test experiment.

Vanity Metrics

Vanity metrics wreak havoc because they prey on a weakness of the human mind. In my experience, when the numbers go up, people think the improvement was caused by their actions, by whatever they were working on at the time.
Unfortunately, when the numbers go down, it results in a very different reaction: now it’s somebody else’s fault.

A Catalog Of Pivots

Pivots come in different flavors. The word pivot sometimes is used incorrectly as a synonym for change. A pivot is a special kind of change designed to test a new fundamental hypothesis about the product, business model, and engine of growth.

Zoom-in Pivot

In this case, what previously was considered a single feature in a product becomes the whole product. This is the type of pivot Votizen made when it pivoted away from a full social network and toward a simple voter contact product.

Zoom-out Pivot

In the reverse situation, sometimes a single feature is insufficient to support a whole product.
In this type of pivot, what was considered the whole product becomes a single feature of a much larger product.

Business Architecture Pivot

This pivot borrows a concept from Geoffrey Moore, who observed that companies generally follow one of two major business architectures: high margin, low volume (complex systems model) or low margin, high volume (volume operations model).
The former commonly is associated with business to business (B2B) or enterprise sales cycles, and the latter with consumer products (there are notable exceptions).
In a business architecture pivot, a startup switches architectures. Some companies change from high margin, low volume by going mass market (e.g., Google’s search “appliance”); others, originally designed for the mass market, turned out to require long and expensive sales cycles.

Customer Segment Pivot

In this pivot, the company realizes that the product it is building solves a real problem for real customers but that they are not the type of customers it originally planned to serve.
In other words, the product hypothesis is partially confirmed, solving the right problem, but for a different customer than originally anticipated.

Customer Need Pivot

As a result of getting to know customers extremely well, it sometimes becomes clear that the problem we’re trying to solve for them is not very important.
However, because of this customer intimacy, we often discover other related problems that are important and can be solved by our team.
In many cases, these related problems may require little more than repositioning the existing product.
In other cases, it may require a completely new product.
Again, this is a case where the product hypothesis is partially confirmed; the target customer has a problem worth solving, just not the one that was originally anticipated.
A famous example is the chain Potbelly Sandwich Shop, which today has over two hundred stores. It began as an antique store in 1977; the owners started to sell sandwiches as a way to bolster traffic to their stores. Pretty soon they had pivoted their way into an entirely different line of business.

Platform Pivot

A platform pivot refers to a change from an application to a platform or vice versa.
Most commonly, startups that aspire to create a new platform begin life by selling a single application, the so-called killer app, for their platform.
Only later does the platform emerge as a vehicle for third parties to leverage as a way to create their own related products. However, this order is not always set in stone, and some companies have to execute this pivot multiple times.

Value Capture Pivot

There are many ways to capture the value a company creates. These methods are referred to commonly as monetization or revenue models. These terms are much too limiting.
Implicit in the idea of monetization is that it is a separate “feature” of a product that can be added or removed at will.
In reality, capturing value is an intrinsic part of the product hypothesis.
Often, changes to the way a company captures value can have far-reaching consequences for the rest of the business, product, and marketing strategies.

Engine of Growth Pivot

As we’ll see in Chapter 10, there are three primary engines of growth that power startups: the viral, sticky, and paid growth models.
In this type of pivot, a company changes its growth strategy to seek faster or more profitable growth.
Commonly but not always, the engine of growth also requires a change in the way value is captured.

Channel Pivot

In traditional sales terminology, the mechanism by which a company delivers its product to customers is called the sales channel or distribution channel.
For example, consumer packaged goods are sold in a grocery store, cars are sold in dealerships, and much enterprise software is sold (with extensive customization) by consulting and professional services firms.
Often, the requirements of the channel determine the price, features, and competitive landscape of a product.
A channel pivot is a recognition that the same basic solution could be delivered through a different channel with greater effectiveness. Whenever a company abandons a previously complex sales process to “sell direct” to its end users, a channel pivot is in progress.
It is precisely because of its destructive effect on sales channels that the Internet has had such a disruptive influence in industries that previously required complex sales and distribution channels, such as newspaper, magazine, and book publishing.

Technology Pivot

Occasionally, a company discovers a way to achieve the same solution by using a completely different technology.
Technology pivots are much more common in established businesses. In other words, they are a sustaining innovation, an incremental improvement designed to appeal to and retain an existing customer base.
Established companies excel at this kind of pivot because so much is not changing.
The customer segment is the same, the customer’s problem is the same, the value-capture model is the same, and the channel partners are the same.
The only question is whether the new technology can provide superior price and/or performance compared with the existing technology.

Batch or Single Piece Flow?

The one envelope at a time approach is called “single-piece flow” in lean manufacturing. It works because of the surprising power of small batches.
When we do work that proceeds in stages, the “batch size” refers to how much work moves from one stage to the next at a time.
For example, if we were stuffing one hundred envelopes, the intuitive way to do it – folding one hundred letters at a time – would have a batch size of one hundred.
Single-piece flow is so named because it has a batch size of one. Why does stuffing one envelope at a time get the job done faster even though it seems like it would be slower?
Because our intuition doesn’t take into account the extra time required to sort, stack, and move around the large piles of half-complete envelopes when it’s done the other way.
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.

Where Does Growth Come From?

Sustainable growth is characterized by one simple rule: New customers come from the actions of past customers. There are four primary ways past customers drive sustainable growth:

Word of mouth
As a side effect of product usage
Through funded advertising
Through repeat purchase or use

The Three Engines Of Growth

“Startups don’t starve; they drown.”
There are always a zillion new ideas about how to make the product better floating around, but the hard truth is that most of those ideas make a difference only at the margins.

The Sticky Engine of Growth

The rules that govern the sticky engine of growth are pretty simple: if the rate of new customer acquisition exceeds the churn rate, the product will grow.
The speed of growth is determined by what I call the rate of compounding, which is simply the natural growth rate minus the churn rate.
Like a bank account that earns compounding interest, having a high rate of compounding will lead to extremely rapid growth—without advertising, viral growth, or publicity stunts.

The Viral Engine of Growth

Products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use.
For example, one of the most famous viral success stories is a company called Hotmail. “P.S. Get your free e-mail at Hotmail” along with a clickable link.

The Paid Engine of Growth

Imagine another pair of businesses. The first makes $ 1 on each customer it signs up; the second makes $ 100,000 from each customer it signs up.
To predict which company will grow faster, you need to know only one additional thing: how much it costs to sign up a new customer.
Imagine that the first company uses Google AdWords to find new customers online and pays an average of 80 cents each time a new customer joins.
The second company sells heavy goods to large companies. Each sale requires a significant time investment from a salesperson and on-site sales engineering to help install the product; these hard costs total up to $ 80,000 per new customer.
Both companies will grow at the exact same rate. Each has the same proportion of revenue (20 percent) available to reinvest in new customer acquisition.
If either company wants to increase its rate of growth, it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer.
That’s the paid engine of growth at work.

The Wisdom Of The Five Whys

When confronted with a problem, have you ever stopped and asked why five times?
It is difficult to do even though it sounds easy.

A Personal Stake in the Outcome

Entrepreneurs need a personal stake in the outcome of their creations.
In stand-alone new ventures, this usually is achieved through stock options or other forms of equity ownership.
Where a bonus system must be used instead, the best incentives are tied to the long-term performance of the new innovation.
However, I do not believe that a personal stake has to be financial.
This is especially important in organizations, such as nonprofits and government, in which the innovation is not tied to financial objectives. In these cases, it is still possible for teams to have a personal stake.
The parent organization has to make it clear who the innovator is and make sure the innovator receives credit for having brought the new product to life – if it is successful.
As one entrepreneur who ran her own division at a major media company told me, “Financial incentives aside, I always felt that because my name was on the door, I had more to lose and more to prove than someone else. That sense of ownership is not insignificant.”

The Dangers of Hiding Innovation inside the Black Box

There are examples of one-time successes using a secret skunkworks or off-site innovation team, such as the building of the original IBM PC in Boca Raton, Florida, completely separate from mainline IBM.
But these examples should serve mostly as cautionary tales, because they have rarely led to sustainable innovation.
Hiding from the parent organization can have long-term negative consequences.
Consider it from the point of view of the managers who have the innovation sprung on them. They are likely to feel betrayed and more than a little paranoid.
One reason why companies such as IBM lost their leadership position in the new markets that they developed using a black box such as the PC business; they are unable to re-create and sustain the culture that led to the innovation in the first place.

Creating an Innovation Sandbox

Any team can create a true split-test experiment that affects only the sandboxed parts of the product or service (for a multipart product) or only certain customer segments or territories (for a new product). However:
One team must see the whole experiment through from end to end.
No experiment can run longer than a specified amount of time (usually a few weeks for simple feature experiments, longer for more disruptive innovations).
No experiment can affect more than a specified number of customers (usually expressed as a percentage of the company’s total mainstream customer base).
Every experiment has to be evaluated on the basis of a single standard report of five to ten (no more) actionable metrics.
Every team that works inside the sandbox and every product that is built must use the same metrics to evaluate success.
Any team that creates an experiment must monitor the metrics and customer reactions (support calls, social media reaction, forum threads, etc.) while the experiment is in progress and abort it if something catastrophic happens.

Entrepreneur Is a Job Title

Some people are natural inventors who prefer to work without the pressure and expectations of the later business phases.
Others are ambitious and see innovation as a path toward senior management.
Still others are particularly skilled at the management of running an established business, outsourcing and bolstering efficiencies and wringing out cost reductions.
People should be allowed to find the kinds of jobs that suit them best.
Entrepreneurship should be considered a viable career path for innovators inside large organizations.
Managers who can lead teams by using the Lean Startup methodology should not have to leave the company to reap the rewards of their skills or have to pretend to fit into the rigid hierarchies of established functional departments.
Instead, they should have a business card that says simply “Entrepreneur” under the name.
Of course, any innovation system eventually will become the victim of its own success.
As the sandbox expands and the company’s revenue grows as a result of the sandbox’s innovations, the cycle will have to begin again.
The former innovators will become guardians of the status quo.
When the product makes up the whole sandbox, it inevitably will become encumbered with the additional rules and controls needed for mission-critical operation.
New innovation teams will need a new sandbox within which to play.

Becoming the Status Quo

This last transition is especially hard for innovators to accept: their transformation from radical outsiders to the embodiment of the status quo.
I have always been a bit of a troublemaker at the companies at which I have worked, pushing for rapid iteration, data-driven decision making, and early customer involvement. When these ideas were not part of the dominant culture, it was simple (if frustrating) to be an advocate. All I had to do was push as hard as humanly possible for my ideas. Since the dominant culture found them heretical, they would compromise with me a “reasonable” amount. Thanks to the psychological phenomenon of anchoring, this led to a perverse incentive: the more radical my suggestion was, the more likely it was that the reasonable compromise would be closer to my true goal.
Those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed. I had to learn this the hard way. In a startup situation, things constantly go wrong.
Functional specialists are accustomed to measuring their efficiency by looking at the proportion of time they are busy doing their work. A programmer expects to be coding all day long, for example.
That is why many traditional work environments frustrate these experts: the constant interruption of meetings, cross-functional handoffs, and explanations for endless numbers of bosses all act as a drag on efficiency. However, the individual efficiency of these specialists is not the goal in a Lean Startup.
Instead, we want to force teams to work cross-functionally to achieve validated learning. Many of the techniques for doing this—actionable metrics, continuous deployment, and the overall Build-Measure-Learn feedback loop—necessarily cause teams to suboptimize for their individual functions. It does not matter how fast we can build. It does not matter how fast we can measure. What matters is how fast we can get through the entire loop.

Waste Not

In the twenty-first century, we face a new set of problems that Taylor could not have imagined. Our productive capacity greatly exceeds our ability to know what to build.
Although there was a tremendous amount of invention and innovation in the early twentieth century, most of it was devoted to increasing the productivity of workers and machines in order to feed, clothe, and house the world’s population.
Although that project is still incomplete, as the millions who live in poverty can attest, the solution to that problem is now strictly a political one.
We have the capacity to build almost anything we can imagine. The big question of our time is not Can it be built? but Should it be built?
Peter Drucker said, “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”
It is insufficient to exhort workers to try harder. Our current problems are caused by trying too hard—at the wrong things. By focusing on functional efficiency, we lose sight of the real goal of innovation: to learn that which is currently unknown.

The Lean Startup: How Constant Innovation Creates Radically Successful Businesses by Eric Ries