The Lean Startup by Eric Ries provides tips and guidelines for start-up companies and existing companies launching new products with less risk and more efficiency through the Lean Startup Methodology (LSM). Eric Reis co-founded and served as CTO of IMVU and used the company to describe a lot of his methods throughout the book. He is also a frequent speaker at Harvard Business School.
Ries begins by describing the five main principles of the LSM and spends the rest of the book going in depth of these methods while also giving examples of ways companies, such as his own, were able to utilize them successfully. He describes the five facets as entrepreneurs are everywhere, entrepreneurship is management, validated learning, innovation accounting, and build-measure-learn. He then further divides his book into three parts: vision, steer, and accelerate to have the company use these principles to make a case for a new way of entrepreneurial management, go into detail of the method, and how to do it in the quickest/most efficient way possible.
Reis defines entrepreneurship in a very broad aspect, as it encompasses “a human institution designed to create new products and services under conditions of extreme uncertainty.” This goes along with his notion that entrepreneurs exist within large companies too as there is a need for innovation to keep up with competition and keep customers happy.
Reis stresses LSM’s necessity for management, process and discipline and how they are often ignored by entrepreneurs, which eventually leads to chaos rather than success. A new concept he defines is validated learning, which is “the process of demonstrating truths about a startup’s present and future business prospects.” Instead of diving right into a new project/concept the entrepreneur should demonstrate progress by testing the original idea and using metrics to approve/disprove the accuracy of the initial idea.
The specifics of validated learning is to pilot the product through experimentation to test and see if the product will be wanted by customers. To pilot a product, an entrepreneur should have a minimum viable product (MVP) which is very cheap, basic version of the product to gain valuable feedback from customers (most likely first-adopters who will not be too critical of the lack of quality). Once the feedback is analyzed, the entrepreneur is faced with the challenge of if they want to pivot, change the assumptions about the product, or preserve the current path of the product. Ries heavily believes in extensive contact with potential customers because the vision one has for their product may not be solving a problem that the customer truly has. The MVP helps entrepreneurs learn very quickly about their usefulness of the product without spending a fortune having to scrap and fix the product if they need to pivot due to information from their build-measure-learn feedback loop.
Another way to measure a startup is not through standard accounting, “as startups are too unpredictable for forecasts and milestones to be accurate.” Instead, he focuses on innovation accounting, which enables startups to prove objectively that they are “learning how to grow a sustainable business.” The steps of innovative accounting are to one use the MVP to see where the company is right now, then make any adjustments to the ideal and finally reach a decision point whether to pivot or preserve their product. A company can build separate MVP’s that are aimed to get feedback at one assumption at a time. He also mentions that when presenting data it is best to not look at cumulative totals or gross numbers (he calls these vanity metrics) and rather look at “performance of each group of customers that comes into contact with the product independently. This graph is an example of innovation accounting: they were making constant improvements and releasing new features daily. This graph allows them to use cohort analysis to see each group of customers (cohort) that came in contact with the product
He discusses again and again how poor quantitative results do not allow the entrepreneur to see and distinguish what changes are being productive and what are unnecessary or harmful. He also makes the point that these reports need to be as simple as possible to have everyone understand them, and must be accessible by all employees to foster feedback and mutual understanding.
Innovation accounting leads to faster pivots because they are able to see specifically what changes are beneficial/harmful to the development of the product. He cites specific pivots such as a zoom-in pivot, which is “refocusing the product on what previously had been considered just one feature of a larger whole.” There are many other types of specific pivots such as changing the audience focus or changing the platform of which the product is sold. Pivots require courage and a lot of the time entrepreneurs make the problems worse by waiting too long to pivot the product. He also notes that it is not necessary to throw away everything that came before the pivot, it is more about repurposing what has been built and what has been learned in order to move forward.
Reis dives into many of the questions that startups face and how many are not clear-cut. He believes in any transformation in the startup should first ask the critical question: “which activities create value and which are a form of waste.” Once this question is asked, people are able to specify their actions and move towards productivity.
For the production side, Reis believes in producing small batches to maintain high quality can save lots of money if a fault is found in the production.
For growth, he believes sustainable growth is characterized by one simple rule: “new customers come from the actions of past customers.” Past customers drive growth by word of mouth, as a side effect of product usage, through funded advertising, and through repeat purchase or use. He also believes in asking “Why?” Five times in problem solving, to uncover the root problem and correct it.
Interesting Topic: Five Why’s
The Five Why’s problem solving method I think is very interesting and relates to this class because it delves deeper from a superficial problem and goes to the root problem. If one just asks one simply why, the real problem will not be solved and this “fix” will only be temporary. The Five Why’s helps build adaptive organizations because it acts as a “natural speed regulator”, as you have more problems you should equally invest in solutions to these problems. I think this concept will relate to our class/trip because when we visit these startups, they all have had problems it would be interesting to see the methodology they used to solve them. Asking questions is the only way that something can be solved and this method is a very simple way to find the true cause of the problem by ensuring that this solution is going to be long-term. Another aspect of the Five Why’s is to make sure that everyone affected by the problem is in the room to ensure that no one is blamed, and I would like to see in the companies that we visit if they are very open and cooperative between different groups, as it seems that is the trend in newer companies and how effective that actually is.
Overall I thought that this book was really informative and had very good techniques to solve many of the problems that startups face. I liked his idea that this is not a formula, but a set of guidelines to adapt to one’s individual company/product because they are all not the same. One of the critiques I do have is that competition is barely mentioned in the book which I find to be a big struggle of startups with copycats and imitators quickly following a popular product. He claims with the MVP that the company would have an early start, but I feel he could have given more information on how to combat other imitators.