The Lean Startup by E. Ries, summary & review

Review

The Lean Startup by Eric Ries is a worldwide bestseller on how to make your startup succeed and why a lot of them fail. It gained over 1800 positive reviews on Amazon and an enormous 75000 of positive recommendations on GoodReads. People like Dustin Moskovitz (one of the Facebook co-founders), Tim Brown of IDEO design company, investor Marc Andreessen and publisher Tim O’Reilly strongly recommend this book.

Ries is convinced there are two major reasons for most startups to crash:

— relying too much on traditional management methods (tools), which can’t suit businesses operating under conditions of extreme uncertainty

— following a “just-do-it” approach, which equals a complete absence of management tools

Entrepreneurial success stories are usually presented as follows: a flash of genius combined with a strong character display followed a period of struggle and team assembly, leading to head spinning leap of success and abundance of deals. Eric Ries claims it to be false.

In his experience it is all about meticulous work, system, scientific approach, flexibility,  strong intent to work with feedback and having demand for constant learning.

After this book made it to the top of the sales in the world, it lead to a number of new authors emerging from its ideas. These authors ventured deeper into “lean startup” fundamentals and wrote books on certain aspects of it:

+ Pros

Valuable ideas, interesting examples and practical advice.

− Cons

Repetitions, meagre style of delivery.

Summary

When it comes to product, how do companies predict demand? Usually with the help of costly marketing researches and potential consumers inquiry. In reality, it doesn’t help. How can you save money and avoid adding your product to the list of losers?

If that question bothers you, you can

  1. read the book or
  2. our Lean Startup summary below, which covers the whole books anyway 🙂

Eric Ries developed his method from “lean manufacturing” concept introduced by Toyota into the factory production system. Ries extrapolated the concept to startups and innovative introductions within companies of any scale.

Eric Ries shares ideas on how to create a successful product under conditions of ultimate uncertainty and on a budget. Our solution ‘Hire a team to build you a Minimum Viable Product (MVP)’ was also inspired by writing review & summary for Ries’s book. However, we’d like to point out that approach described and our solution in particular are not solely designed for startups only – any bootstrapped business can benefit from it as well.

Idea № 1. Two ways to fail and how to avoid them

The reason why predictions, calculations, business plans and models do not help is because startups require non-traditional approach to business development. Startups exist in an environment of uncertainty and you need to avoid massive expenses during its early stages. Check every supposition, adjust if necessary. You have to be flexible and reactive. That’s the fundamental idea behind “Lean Startup”.

Two major failure reasons:

  • Number one: environment of uncertainty requires a different and unique management approach and traditional business tools don’t work as effective.
  • The second reason emerges from the first: entrepreneurs see that traditional tools of management are ineffective and decide to cast all management aside. The so called “just-do-it” approach will lead you nowhere. It is a straight path to failure and decline. Even as chaotic and uncertain as they are, startups need management too and “lean” method can explain you how to do it.

Sorry for too much ads, but I think you’d love our A CONTRACT FOR WEB DEVELOPMENT PROJECT USING SCRUM which is an excellent example of how modern management frameworks as SCRUM can be done along traditional paperwork.

What lies at the bottom of a business success? Persistence? Intelligence? Luck? It is thought to, along with the idea that routine and minuscule little things you do every day are of much lesser significance. Ries and his experience prove this wrong. Daily routine and boring tasks define success and separate thriving startups from others. Forget social myths and learn that success is not about fortune or misfortune it is about what you do.

Eric Ries developed his method when he was a VP of engineering at IMVU Inc. Based on numerous previous failures Ries and his colleagues started presenting consumers an unfinished product. That turned out to be a very effective method. It helped them to immediately gain tons of feedback and start developing product not only faster than before but also successfully satisfy consumer needs. Instead of guessing you just receive feedback and make all the right moves. No plans, no predictions, no failure.

“The Lean Startup” aims to help you avoid excessive expenses and prevent you from creating useless products.

Idea № 2. Five principles of “lean startup”

  1. Entrepreneurs are everywhere. “The Lean Startup” methods can be used by small businesses and large enterprises in any sector of economy.
  2. Entrepreneurship equals management. Every startup needs a special management approach that fits the conditions of extreme uncertainty. Checking out the term ‘intrapreneur’ can be a nice starting point to dig this one further.
  3. Stick to scientific approach. Your goal is to learn to create viable businesses, so use feedback (facts) to check your predictions and theories. Constantly monitor your startup and make decisions. Rely on numbers to approve hypothesis or cast it aside. That’s how you learn and grow.
  4. Build, measure, learnThis cycle is about creating a minimally viable product, analyzing consumer reaction and making further decisions, based on the reaction. Will you move on or do you need to change direction?
  5. Innovation accountingIt implies having a track record system based on actual numbers and results your startup has achieved.

Idea № 3. A special management

Traditional or not, management is the body of every business.

“Lean startup” method comes from “lean manufacturing” concept of the Toyota Production System. The concept was developed by Taiichi Ohno and Shigeo Shingo. The culture of personal responsibility, high involvement rate of employees and use of ever growing knowledge allowed Toyota to continually perfect its manufacturing cycle.

With “The Lean Startup” this concept migrates to the world of entrepreneurship. You shouldn’t evaluate your success based on ability to produce quality product. You should create a system that allows to receive feedback as quickly as possible, analyze it, make adjustments and perfect your product accordingly.

It helps startups to avoid unnecessary losses (reduce churn rate), which can lead to shutdown.

Plans, strategies, charismatic managers — nothing will help your startup thrive, if you are unable to quickly identify what consumers and market need (often referenced as ‘finding a market fit’).

Ries compares it to driving: pay attention to feedback, react, gain experience, learn to react quicker. Don’t forget the cycle: build, measure, learn.

Idea № 4. The goal of startup is learning

I don’t particularly agree with this idea since in GRIN tech sales and metrics as Return on Investment (ROI) are our religion. In bootstrapped business boringly generating revenue we trust.

That’s how Eric Ries defines startup: a new company, that develops innovative products or services under conditions of total uncertainty.

Following this definition you can say that “lean startup” method is applicable to any company — or its department — that works on innovations under conditions of uncertainty.

  • What is a product of startup? It is anything that presents value for consumers.
  • What are innovations? A lot of things: new tech, new methods of use, new business models, new markets and even new clients.

Copying existing business is not a startup. Startup is defined by uncertainty and new frontiers.

Eric Ries and his team used to argue a lot about one app they were developing: different features, what to include and what not to. The result? Nobody downloaded the app. The lesson is: it doesn’t matter what people say about your product, what matters is — what people do with it. That’s why strategic market analysis can lead to a failure.

How can you efficiently find out what people need?

Uncertainty shrouds your understanding of consumer value, because you don’t really know your consumer in the beginning. First divide actions into two groups: one that leads you to better understanding, and one that consists of actions that just drain your balance. Find out what actions help you understand consumer needs, make no vague suggestions, remember the scientific approach.

Minimally viable product (MVP) is where you start with this concept. MVP launch leads you directly to feedback pool and starts your engine. Pay attention, make adjustments if necessary. Learn to analyse feedback, understand consumers and make adjustments swiftly. “Lean startup” is not about launching a perfect product, but about steadily perfecting it after the initial launch.

This method is applicable to any business. Treat it as an experiment: it grants you the right to fail, learn and advance. It allows you to test every aspect of your business plan in real life conditions and make changes on the go.

It only matters what consumers do, not say. In early 2000s Nick Swinmurn had a hypothesis that people are going to buy shoes online. He went to local stores and took pictures of a variety of shoes. He published these pictures on the Internet (on his web site) to test the idea. Every time he received an order, he just went to the store and bought the actual pair for an actual price and sent it to his client. No market research, no major expenses — he just tested his hypothesis in action. He created a minimally viable product (a basic online store) and tested it. And he also found out the most important thing: if people will buy shoes online at all. As a result, Swinmurn founded zappos.com — the first and the largest online shoe store.

Idea № 5. Your vision is two-part

Constantly use scientific approach to evaluate viability of your vision as you move forward. You are going to need two boxes checked:

  1. value hypothesis
  2. & growth hypothesis

Value hypothesis is if consumers feel the value of your product. Inquiries and polls won’t give you the answer. You need to experiment (remember?).

Growth hypothesis is about evaluating how and through what channels information about your product is going to spread. How these people are going to act? Will they recommend your product? That is what’s important, not just words. Pay attention to actions in the infospace. You want to look for open-minded people — people who like to be ahead of time, innovators of sorts.

Since “lean startup” tends to equate product and experiment, fetch it to a small test audience, before throwing it into the market. That feedback is going to be helpful and valuable. If feedback happens to be positive, you can start expanding and hiring employees.

Don’t come up with ideas on what consumer problems you can solve. Ask yourself a couple of questions. First, will consumers admit that they have a problem that your product solves? Second, will they pay specifically you for it and will they pay for it at all?

So, be scientific and perform small scale reality checks.

Idea № 6. Build, measure, learn and make the cycle faster

There are two types of feedback: quality feedback (on what features people like and don’t like) or quantity feedback (on how many people use your product).

By the way, there is a COHORT ANALYSIS: GROWTH METRICS VS PRODUCT METRICS we happen to have on board. Digs into types of metrics and the essentials of cohort analysis.

One of the fundamental ideas behind “The Lean Startup” is making the feedback cycle (build, measure, learn) faster.

Build.

Create minimally viable product and harvest feedback. It will save you time, effort and money for future growth and development. Consumers get to test a product, you get to receive feedback.

Measure.

That’s where you evaluate if efforts result in creation of a product you want. “Lean startup” is not about numbers and money it is about creating a product that is useful and used. That’s where you evaluate and analyze the feedback.

Learn.

This step is about summarizing. After you analyze feedback you need to make decisions: whether you move on and just add new features, or you’re in dire need of a radical change of business model. Sometimes you need to pivot. If you don’t see significant success and result in your activity it’s better to stop moving and change direction.

Lean Startup summary: build, measure, learn cycle

Idea № 7. “Leap of faith” for assumptions validation

Facebook used to be a social network for students. Its competitors were bigger, had more options and more money. When first investments came to Facebook it didn’t have much daily visitors. Why invest then? Eric Ries notices that investors payed attention to two most important factors: value and growth. They saw value and growth hypotheses were proven: active users spent lots of time on Facebook (valued the resource) and number of new users emerging was high — Facebook was actively growing.

You should start with practical experiments instead of guessing.

Whatever your vision is, bring it to life and test as soon as possible. That’s why you need to create an environment for systematic testing.

What is your basis of your vision? Ries calls it “leap of faith”: make an assumption and go do it, test it.

Ries proposed method of analog and antilog to check your hypotheses. Randy Komisar, the author of the book on this method (“Getting to Plan B”), gives iPod as an example of a product emerging from it. Sony Walkman was analog, Napster was antilog. Sony answered the question if people are going to listen to music in different places, Napster answered a question if people want to download music for free. Studying analogs and antilogs will give you answers and help you pose new important questions. The leap of faith for Apple was in looking for an answer to a new question: are people ready to pay money to download music on their devices? They tried and succeeded.

Know your consumer. A manager from Toyota travelled all around the United States, meeting American families, talking to them just to find out what they prefer and what type of van they really want and need. This is a Genchi Genbutsu principle, which can be roughly translated from Japanese as “see for yourself”. Opinions of American families and their kids had a very positive impact on Toyota sales in the USA.

There are always live people behind numbers.

First contact with consumers is very important to find out if you understand them. Once you get the general idea of who your customer is, try to write this data into a file. Create a portrait, an archetype of your consumer so you would deal with a definite person, not an abstract entity.

Entrepreneurs have to be better than perfectionists: dare to submit your creations to public judgement on an early stage.

Create, perfect, test — is a wrong entrepreneurial sequence. Test as soon as possible, don’t be a perfectionist. Minimally viable product is much better that a product that nobody needs.

Let that sink in: the first iPhone lacked a lot of vital features and Google could only search for certain data. MVP is not only a way to test but sometimes a very important tool that shows you where and why you need to change the course. Sometimes people can’t notice a need for a change because a certain steady income already settled in.

Don’t be afraid that your idea gets stolen. Any successful product is going to make copycats appear all around. Startup is not about making a product as fast as possible. Your main competitive advantage is the ability to learn faster than anybody on the market. Keep the cycle (build, measure, learn) going.

Idea № 8. Innovation accounting

This is an alternative to standard accounting system. It allows to evaluate progress when all your metrics are not present or effectively zero. It is going to help you make decisions and choose directions.

Ries outlines three stages here:

  1. Create MVP, receive feedback, evaluate your actual status;
  2. Improve, if necessary. Move closer to perfection. It can take a lot of time and is not guaranteed to work on the first try;
  3. Find out if you need to move on or pivot. If you are steadily approaching perfect metrics, keep the course.

MVP gets you through the first stage. You get to know what your actual metrics are, what model of growth to choose. Eric Ries recommends to test the most risky assumptions first.

E.g. two questions for media site owners to benefit from ads:

  • Will a website be able to attract and sustain target audience’s attention for a necessary amount of time?
  • Can you sell this attention to advertisers?

The second question is less riskier: there is plenty of information about ad pricing. But the first question begs for leap of faith. Start creating content, putting it out and testing. See what works better to attract and sustain audience.

As an entrepreneur you have to be ready for negative results and negative feedback. Persistence and strength are good qualities, but you also need to be flexible to find alternative ways to bring your vision to life in case you fail.

Cohort analysis is one of the most important tools for startups. It evaluates different results of different researches done at different points in time. A cohort is a group of consumers sharing common features like transaction time, age or any other characteristic. You can form cohorts based on different criterias and evaluate behavioural tendencies of such groups. It will help you to know your consumer better and make all the right adjustments to your marketing strategy.

Eric Ries recommends avoiding “vanity metrics” — numbers, which only fuel your ego, but have zero positive effect on business development and don’t reflect on its efficiency.

Optimisation and marketing mean nothing, if nobody needs your product. Startups need to use metrics that help evaluating actual success and effectiveness (or the opposite). Standard numbers won’t work. You need to work with valid metrics.

Valid metrics represent results of cohort analysis and split metrics. Split metrics come from split testing. Engage split testing during an early stage of product development to have better understanding of its features’ efficiency. Give several groups of consumers different versions of your product to receive feedback on each and figure out which version is better.

The author outlines aspects of innovation accounting:

  1. Valid metrics have to demonstrate cause-and-effect relations, revealing what steps are necessary to make for desired results.
  2. Reports: clarity of statements and data delivery. Clarity of reports is important. Reports are made for humans, not robots. You better avoid piles of abstract data and make sure your metrics give a direct reflection on people and their activity.
  3. Verification capability means controlLearn to verify report data in real life, interacting with consumers. It is also important to leave your employees no room for doubt when it comes to gathered metrics.

Idea № 9. If it doesn’t work, pivot

There are also saying we love at GRIN tech and use as guidance for marketing solutions:

  1. If it doesn’t scale, it doesn’t work
  2. Conversions, or it didn’t happen

It is time for a cardinal change, when you realise the path you took doesn’t bring you closer to success.

Pivoting means taking all the experience and data you gained in consideration, while dramatically shifting your strategy to gain even more knowledge and experience. Keep scientific approach in mind.

A take-off runway analogy is used to evaluate a lifespan of a startup. It represents its bank account balance divided by its monthly expenses. So, having one million dollars on its bank account and $100000 expenses, a startup has a 10 month lifespan. Cutting expenses or attracting investors are two ways to increase a lifespan.

Eric Ries suggests to define this analogy through a number of pivots a startup can make, factoring in its balance. The author implies that the faster you pivot, the sooner you take off.

Pivots can vary:

  • Turning a feature into a product of its own: as an example, Votizen was meant to be a whole social network, but ended up becoming a service to contact voters.
  • Turning a product into a feature.
  • Changing monetisation model: online media platforms can switch from ad-revenue model to paid subscription or successfully combine both. 
  • Switching consumer segment: a company can realise that its product solves problems of a totally different group of people and decides to switch to a different consumer segment. Facebook was initially positioned as social network for students.
  • Changing a problem startup solves: you may find out that your target audience has a problem that is different from what you aim to solve. Fast food chain Potbelly Sandwich Shop started as an antique shop, which sold sandwiches to attract customers.
  • Changing distribution channel: e.g. from agents to direct sales or automated sales.
  • Technological change: a pivot for well established companies, which pay heed to innovations. Such pivots keep your old consumer base and attract a whole new one.
  • Changing business model: switching between high margin with low production volume and low margin with high production volume. That’s what Google once did.
  • Changing growth mechanism: a company chooses different strategy to boost its development.
  • Turning a product into a platform and vice versa: a company plans on a platform and releases an app, which makes it a product. Sometimes a company plans on a product, but releases a line of products, which become a platform.

Eric Ries insists that every developing business need pivoting.

Idea № 10. Use strategies for startup growth

Viability, growth and long term results are what startups need. Viability and growth means that existing clients attract new ones. Word of mouth is what comes to mind first. Eric Ries adds a bunch of other sources to the list: brand awareness, repeat purchasing and ads (only if ads are financed from startup’s own budget, not external investments).

Eric Ries outlines three growth mechanisms:

  1. The “sticky” growth mechanism: when consumer growth index is higher than its loss index. It leads to brand awareness and popularity. Companies, which choose this mechanism must keep track of consumer loss.
  2. The viral growth: you should keep track of how many new clients can one consumer bring you later. The higher the viral index, the better. If one client out of ten gets you a new client and it’s only one, prepare for decline.
  3. Paid growth mechanism: companies spend money to attract new customers. The key is to keep profit your receive from clients above the expenses you have on them. To boost growth companies need to either cut expenses on clients or make them pay more.

An example of IMVU Inc: the company attracted massive amount of customers introducing mobile payments and features like SMS purchases using your mobile phone account balance, while their competition only worked with credit cards.

Startup must be a system — an adaptive organisation capable of automatic process and action adjustments as a response to reality.

Startup not only needs to learn fast, but also regulate its development pace when necessary.

Eric Ries also suggests that startups use “the five whys” method to become truly adaptive.

This method is a series of questions, which help you reach better understanding of each problem you may encounter. State a problem and ask yourself “why?” five times until you reach the core of the issue. First answers are going to be too obvious, but try to dig deeper. It is much like stripping an onion of its layers.

Don’t use it to look for the guilty though. The key is objectiveness. Find weak spots and work on them, correct mistakes. Build a proper system and mistakes will not occur again.

Summary of Lean Startup summary

Digital environment offers an amazing opportunity to measure things and therefore get granular feedback for so many things: market fit, feature adoption, user segmentation, acquisition and distribution channels effectiveness etc.

Building a framework for working with feedback cycles is crucial to remain competitive in ever growing competitive environment of digital products and with so many traditionally offline businesses getting here as well.

Stay tuned

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