I shared these notes on The Lean Startup here on Google+ a little over three years ago (wow). I was just going over them again as part of something I’m writing right now, and thought it would be worth sharing them again. It’s a great book that’s well-worth the read, but if you don’t have time, hopefully these notes will help you get the gist of the book.
What I Learned by Reading “The Lean Startup”
I just finished reading Eric Ries’s book, The Lean Startup and I want to recommend it heartily to anyone who’s involved in a startup right now or seriously considering it.
Here’s a link to his site:
When I run across books that leave this kind of an impression on me, I’ve taken to writing up notes to help me remember some of the key takeaways. I’m going to share those notes here. Just know that what I’m capturing here is just a fraction of what’s in this very useful book.
For every startup, there are two essential challenges: 1) building the right product; and 2) building an engine of growth. The Lean Startup is a book about taking the principles of the “lean manufacturing” revolution started by Toyota and others in Japan, applying those principles to quickly and efficiently move the startup onto the best path for answering these two challenges. In essence, the Lean Startup framework is about applying lean principles to learning.
This is an immensely practical book. I kept finding myself thinking “right, of course” over and over as I read it. It’s one of those books that provides a framework for thinking about things in a new, but in a way that doesn’t feel too theoretical.
Here’s one of my favorite quotes:
“A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.”
It’s that uncertainty that underlies Ries’ approach. Established company, in theory at least, know what to build because they’re working in established markets where there’s data to back assertions about product and distribution. Startups don’t have that luxury; they’re working in conditions of “extreme uncertainty” and so their main tasks are about learning – learning what to build and how to grow. Learning is the essential unit of progress for startups, and this book outlines a special type of learning, called “validated learning” to bring the equivalent of the scientific method to rapidly testing assumptions of value and growth with a series of structured experiments. It’s a kind of feedback loop, and the goal is to move through them as quickly as possible. This is a very different way of thinking about startups, actually, and I think it is a very valuable contribution to the field of startup management.
Ries also believes that startups have a true north or vision for how they are going to change the world. They can’t get that vision by simply asking customers. Why? Because in the extreme uncertainty of the markets that startups play in, customers don’t necessarily know what they want. To Ries, new businesses that merely copy existing business models are not true startups; they’re more about executing efficiently than about learning how to do things differently. For true startups, who the customer is and what the customer finds valuable are unknown, and the faster the firm gets to those answers, the less likely it is to build a product nobody wants – and building a product that nobody wants is the original sin of most unsuccessful startups.
To understand what the customer values as rapidly as possible, Ries recommends using what he calls a “minimum viable product” (MVP). This is the simplest possible version of your product that can get you solid feedback on whether it is valuable to customers. It’s not a prototype; it’s an actual product, stripped down, but still with enough appeal to attract a base of early adopters. Yes, there is a risk that these initial customers might be disappointed with a lack of features or quality problems, but getting that feedback on a real product is far more valuable and concrete customer intelligence that more traditional forms of market research might provide.
Once the firm is getting real feedback from the market, it then begins some of the hardest work – the true art within entrepreneurship: knowing whether to “pivot or persevere.” These are the ongoing decisions along the way to knowing whether one is actually getting closer to finding real customer value and a real engine of growth. Ries outlines an approach called “innovation accounting” to help startups build some discipline into manage the ongoing questions associated with pivoting or persevering. It eschews traditional “vanity metrics such as aggregate customer growth in favor of truly actionable metrics that answer very specific questions about each experiment in learning that the company runs. Ries includes a handful of different types of pivots that companies may make:
Customer Segment Pivot
Customer Need Pivot
Business Architecture Pivot
Value Capture Pivot
Engine of Growth Pivot
On the question of growth, Ries notes that sustainable growth always comes from the actions of past customers. There are three engines of sustainable growth: paid, viral, or sticky.
A sticky engine of growth growth comes from satisfied customers continuing to use the product. Customer churn rate is a critical metric with this engine and retention is absolutely key. When the rate of new customer acquisition exceeds the churn rate, the product will grow.
With a viral engine of growth, customers bring in new customer merely by using the product. In most cases, customers are not explicitly going out of their way to promote the product; it just happens as result of their using it in ways that are visible and attractive to others. The key metric here is viral coefficient, which measures how many new customers each customer brings in as a result of their using the product.
A paid engine of growth acquires new customers through advertising or sales. Each customer represents a certain amount of revenue for the firm over his or her “lifetime” as a customer – this is their “lifetime value” (LTV) and a key metric for this growth engine. When the LTV is greater than the cost per acquisition (CPA), the product will grow.
OK – that’s it for the summary. As I note above, there is much, much more to this book. I’m just scratching the surface in these notes, but hopefully it’s enough to spark your interest if you’re on, or considering getting on, the startup path.