[Book summary] The Lean Startup

As the name suggests, this is a book about startups. I have never worked for any startup, but thanks to being a fan of Paul Graham's writings, I find them interesting. [In the following text, all direct quotes from the book are wrapped in quotations like this. The rest of the words are based on my understanding.] So here I was wondering in Foyles trying to buy a gift for one of my friends. A copy of Lean Startup happened to be sitting right in front of my nose. I was aware that Eric Ries' "Lean Startup" is a best seller in Amazon at the moment, so I ended up buying a copy. This is probably the first book I have bought from a brick-and-mortar book shop in a few years :-) There is a quote from Randy Komisar (TiVo founder) about the book at the back cover - If you are an entrepreneur, read this book. If you are thinking about becoming an entrepreneur, read this book. If you are just curious about entrepreneurship, read this book. I guess I am in the "just curious" group. But I have to say that startup founders and corporate product managers should really read this book. The Lean startup way is to product development what Agile has been to software development. Both espouse short iterations backed up by customer feedback. My guess is both will remain influential for the foreseeable future. Just like Agile, Lean startup has already spawned a movement. The "Lean" of Lean startup is inspired by the Lean manufacturing practice. It is a method for identifying successful product concepts and then growing a sustainable business starting with that product. The Lean Startup method, in contrast, is designed to teach you how to drive a startup. Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop. Through this process of steering, we can learn when and if it's time to make a sharp turn called a pivot or whether we should persevere along our current path. Once we have an engine that's revved up, the Lean Startup offers methods to scale and grow the business with maximum acceleration. There are two currents running throughout the book:

• How to come up with a product that people actually want to use and pay for.
• How to build a sustainable business once you have found the product sweet spot.

The first theme is centred around the Build-Measure-Learn loop. Here a small product (AKA Minimum viable product) is created (Build step) as quickly as possible just to get a feel of (Learn step) whether customers are willing at all to pay for the product (Measure step). If this product is successful, then the sweet spot has been found, if not then the product idea will require change followed once again by the Build-Measure-Learn loop. This will go on until a good product idea has been discovered. It is perfectly okay to build throwaway products just to find the sweet spot as the greater goal is to identify the right product concept instead of building a shiny product that no body wants. we figure out what we need to learn and then work backwards to see what product will work as an experiment to get that learning. This is where the Lean Startup method differs from traditional management practices. Traditional practices usually build a complete shinny product and then hit the market only to find that no body wants it :-( The second theme promotes the small batch production (similar to Agile) alongside the Five Whys method to build a successful business once a successful product concept has been identified. A small batch for a startup consists of one full Build-Measure-Learn cycle. The duration of this cycle should be as short as possible. Build-Measure-Learn should not be kept limited to identifying a new product idea only. It can be used to decide whether or not to implement a major feature. This way a minimum new feature can be built, split-tested, and if customer reaction is positive, further work can be carried out. For example, Facebook introduced a feature called Places and then ditched it a year later in favour of another feature called Location. If they had tried Build-Measure-Learn in a small batch, they could have made this transition a lot earlier. There are almost equal coverage on the following topics in this book:

• Building a minimum viable product.
• Measuring customer reaction.
• To or not to change direction.
• Small batch development.
• Use of Five Whys to retain and increase productivity.
• Importance of innovation to remain relevant as a business.

This is not a book on raising capital or writing a business plan or startup marketing. Instead it covers stuff at a much higher level. I found the Build-Measure-Learn cycle to be a totally new concept. It is probably the first scientific approach to startup development. Mark Andreessen (Netscape fame) says best - Eric Ries has created a science where previosly there was only art. (from the back cover :) The only complain I have about this book is its binding. My copy is a paperback and it was a huge pain to keep it open. I have read many paperbacks, but none of them were so annoying. So I will suggest to any future buyer to get a hardback copy instead. I have tried to group the author's advices, suggestions and instructions into a few small sections. These come next.

Startup

• A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty. That "extreme uncertainty" bit is important. If an organisation is not launching under "extreme uncertainty" (e.g. a corner shop, a web design agency, etc.) then it is not a startup.
• Entrepreneurs can be self-employed or part of an established business.
• Traditional management practices are not enough for startups. The tremendous success of general management over the last century has provided unprecedented material abundance, but those management principles are ill suited to handle the chaos and uncertainty that startups must face. For example, in general management, a failure to deliver results is due to either a failure to plan adequately or failure to execute properly. - this way of thinking is not suitable for startups.
• The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. "Pivot" here refers to changing direction. This could be changing the business plan significantly, or totally abandoning it for a new one.
• Startups do not yet know who their customer is or what their product should be. There are of course assumptions about who the customer is and what the product should be, but assumptions are just assumptions, they are not facts.
• 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.

Customer

• Most of the time customers don't know what they want in advance. So directly asking them questions may lead to wrong answers. It is better to let them try a minimal product and measure their reaction. We could have conducted an experiment, offering customers the chance to try something and then measuring their behavior.
• We must learn what customers really want, not what they say they want or what we think they should want.
• There are two types of customers - early adopters and mainstream. Minimum viable products usually attract early adopters (think of the early iPhone users). But the goal of a startup is to reach the mainstream. making the transition to mainstream customers will require tremendous additional work.

Testing a new product plan

• Treat a new product launch like an experiment (or series of experiments). Ask Should this product be built? Can we build a sustainable business around this set of products and services?
• identify the elements of the plan that are assumptions rather than facts, and figure out ways to test them.
• Mark Cook of Kodak gallery says this, I try to push my team to first answer four questions: 1. Do consumers recognize that they have the problem you are trying to solve? 2. If there was a solution, would they buy it? 3. Would they buy it from us? 4. Can we build a solution for that problem?
• The two most important assumptions entrepreneurs make are what I call the value hypothesis and the growth hypothesis. The value hypothesis tests whether a product or service really delivers value to customers once they are using it. A good indicator is repeat usage of a product.
• the growth hypothesis, which tests how new customers will discover a product or service.
• the goal of a startup's early efforts should be to test them as quickly as possible. This is talking about testing the assumptions.
• A quote from David Morin of Path - We humbly test our theories and our approach to see what the market thinks.
• Customer reaction is tested using "Action metrics". An "Action metrics" measures actions that you want customers to take. For example, the main action the customers of a photo sharing website will take is to share photos. The opposite of "Action metrics" is "Vanity metrics" which measures things like total number of user sign up. Using "Vanity metrics" is an excellent way to deceive oneself and others knowingly or unknowingly. Google plus seem to be doing just that :-(
• Sometimes, the minimum viable product used to test an assumption may not be an actual product at all! For example, Dropbox's first minimum viable product was a video of what they actually wanted to build.

Apart from developing products, what does a startup exactly do?

• Acquires new customers.
• Serves existing customers.
• Improves product, marketing and operations.
• Innovate.

As companies grow, what changes is the mix of these activities in the company's portfolio of work.

Startup productivity

• Systematically figuring out the right thing to build.
• Success is not delivering a feature; success is learning how to solve the customer's problems.

Growth

• How startups grow:

  Viral

  existing customers become the vehicle of spread. For example, webmail companies become known as emails with their domain names reach other people.

  Repeat use

  The product should be good enough so that customers do not abandon it easily.

  Paid customer acquisition

  If it costs 1 GBP to get a new customer (usually through advertising) and the startup earns 2 GBP per new customer, then the company will keep growing.

  Startups should concentrate on one of the above growth method at a time.
• When a startup stops growing, The way to find growth is to focus on existing customers This goes against the standard intuition in that if a company lacks growth, it should invest more in sales and marketing.

Meaningful innovation

How does a company know that it is innovating successfully? Scott Cook and Brad Smith of Intuit measures useful product innovation this way - the number of customers using products that didn't exist three years ago and the percentage of revenue coming from offerings that did not exist three years ago. Think of Amazon Web Services. This did not exist when Amazon became successful in ecommerce. It came a lot later. So this is a successful innovation for Amazon.

Growing innovation teams inside an established organisation

• Three conditions must be fulfilled:
  • Team needs scarce but adequate resource.
  • Team needs enough independence.
  • Team (at least the leader) should have a personal stake at the project. It should be made clear to him/her that most credit/blame will belong to him/her and the team.
• Team's success should be measured by the value the team is creating for customers. To measure the value the team is creating, there has to be tests. True experiments are easy to classify as success or failures.
• Inside an organisation, People should be allowed to find the kind of jobs that suit them best. If someone wants to stick to new product and market development, they should be allowed to do so.

Adaptive organisation

• Successful organisations are good at adapting to the changing environment. Think of how IBM survived in the 1990s by changing from a hardware manufacturer to IT consultancy. Startups should adopt the Five Whys method of questioning to remain adaptable.
• The core idea of Five Whys is to tie investments directly to the prevention of the most problematic symptoms. the investment should be smaller when the symptom is minor and larger when the symptom is more painful. At the root of every seemingly technical problem is a human problem. Five Whys provides an opportunity to discover what that human problem might be.
• Startup teams should go through the Five Whys whenever they encounter any kind of failure, including technical faults, failures to achieve business results, or unexpected changes in customer behavior.
• When problems are identified through Five Whys:
  1. Be tolerant of all mistakes the first time.
  2. Never allow the same mistake to be made twice.
• There could be special meetings called "Five Whys session" to apply it. Five Whys session has two outputs, learning and doing.

Gems

There are many short great insights spread around the book that are too broad to group in a single section. Some of them follows:

• planning is a tool that only works in the presence of a long and stable operating history. That is why detailed planning is less useful for startups. However, we cannot ignore the fact that planning is an excellent tool for understanding the problem domain. But startups should not put much faith on the success of their plans.
• When good results are not forthcoming, business leaders assume that any discrepancy between what was planned and what was built is the cause and try to specify the next iteration in greater detail. The product plan is never to be blamed. I can vouch for this from my own experience :-)
• that which optimizes one part of the system necessarily undermines the system as a whole.
• New customers come from the actions of past customers.
• The ability to learn faster from customers is the essential competitive advantage that startups must possess.
• new employees will make mistakes while in their learning curve that will require assistance and intervention from other team members, slowing everyone down. The solution is to have a solid upfront training programme. Every new engineer would be assigned a mentor, who would help the new employee work through a curriculum of systems, concepts, and techniques he or she would need to become productive at IMVU. The performance of the mentor and mentee were linked, so the mentors took this education seriously. IMVU is the company where Eric Ries developed a large part of the Lean startup concept.
• shortcuts taken in product quality, design, or infrastructure today may wind up slowing a company down tomorrow. This is specially true at the early stage of a startup.
• it's human nature to assume that when we see a mistake, it's due to defects in someone else's department, knowledge, or character, That explains the classic marketing-vs-engineering feud :-)
• chronic problems are caused by bad process, not bad people, - this is a big one.
• There is something called the Net Promoter Score that is used by many firms (e.g. Intuit) to measure customer satisfaction with its products. This methods looks interesting.
• the first object of any good system must be that of developing first-class men. - this is from Frederick Taylor, the father of scientific management theory.
• 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, Cannot be truer :-) Yet, this mentality can be problematic for a startup as productivity is measured by their ability to create customer value and not just stay busy.

Summary of the summary

Use Build-Measure-Learn cycle to find products that people really want and once the product has been identified, use small batches and Five Whys to scale the startup. And do not use "Vanity metrics" to measure the success of any product :-) January 2012