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The Lean Startup Definitions
The Lean Startup by Eric Ries covers how most new businesses fail and how to prevent such failures. Encompassing many case studies, techniques and ideas, the book is a useful tool in creating innovation in any institution large or small.
However, if you’re like me after reading The Lean Startup you find your mind drowning in a sea of jargon, concepts and case studies. So I decided to try and condense the book into a series of definitions to condense the book into its key elements.
Define Startup
Definition: “A human institution designed to create new products and services under conditions of extreme uncertainty”
Institution It is the responsibility of the institution to uncover new sources of value for the customer.
Innovation Startups can use any sort of innovation that involves anything new, from scientific discoveries, new applications of old technology to new business models.
The Lean Startup Method
This method builds capital-efficient companies because it allows startups to recognise that it’s time to pivot sooner, creating less waste of time and money.
This is achieved by doing traditional business product development in the reverse order: figure out what to learn, use innovation accounting to figure out what we need to know to gather validated learning, then figure out what product we need to build to run the experiment to get the measurement.
Five Principles
1. Entrepreneurs are everywhere
Not just limited to garages, but also any sized organisation in any industry.
2. Entrepreneurship is management
A start-up requires institution-building, not just a product. Therefore we need to also consider the management style.
3. Validated learning
Startups exist to learn how to build a sustainable business, this is done by running frequent experiments.
4. Build Measure Learn
Rather than make details plans and strategies which are based on assumptions, startups should use a short feedback loop that turns ideas into products, measures how the customers respond to the product, and then learn whether to pivot or preserve. This feedback loop should happen as quickly as possible.
5. Innovation accounting
To hold the entrepreneur’s progress accountable, we need a new kind of accounting to measure the progress, set goals and prioritise work.
Part 1: Start
Vision creating a thriving and world-changing business
Strategy the way to achieve the vision, which includes a business model, product road map, point of view about partners and competitors and ideas about who the customer will be.
Product The result of the strategy. The product sold to customers.
Tuning the Engine Changing the product constantly through the optimisations informed by the learnings made through the Build-Measure-Learn feedback loop.
Pivot Changing the strategy. If we uncover that a hypothesis is false, it’s time to make a change to a new strategic hypothesis. When a company pivots, the learning process starts all over again. A sign of a successful pivot is that the engine tuning activities are more productive after the pivot than before.
Innovation Factory Long term strategies of businesses should incorporate an innovation factory that uses Lean Startup techniques to create disruptive innovations continually.
Validated Learning Learning what the customers want. In a Lean startup, this is the only learning that should be conducted, since this will help you tune the engine of your product. Changes in metrics your business is tracking act as quantitive validation that the learning is real, not just anecdotal.
Should this product be built? | Can we build a sustainable business around this set of products and services? Systematically break does the business plan into its parts and test each part empirically to generate validated learnings.
Just do it A type of entrepreneurial approach which involves no validated learning. The entire approach just involves shipping the product and seeing what happens. However, ironically this plan always succeeds because if the plan is to see what happens, then you will always succeed at seeing what happens, but not necessarily gain validated learning. This is not a Lean startup technique.
Hypothesis A scientific experiment begins with a clear hypothesis that makes predictions about what is supposed to happen. The experiment then tests those predictions empirically.
Value Hypothesis tests whether a product or service delivers value to the customers once they are using it.
Growth Hypothesis tests how new customers will discover a product or service. In the initial stages, you will attract early adopters.
Early Adopters the customers who feel the need for the product most acutely. Generally more forgiving of mistakes and are eager to give feedback.
Experiment An experiment that takes a hypothesis and tests it is the act of creating a product.
Part 2: Steer
Build-Measure-Learn Feedback Loop The stages are: learn –outputs–> ideas –use-to–> build –outputs–> product –use-to–> measure –outputs–> data –use-to–> learn . Avoid the temptation to specialise in just one stage of the loop, the goal of the startup should be to minimise the total time for the loop.
Leap of Faith Assumptions The riskiest element of a startup’s plan, which is the part everything else depends on. The two most important assumptions are the growth hypothesis and value hypothesis
Minimum Viable Product This is what is built in the build phase of the Build-Measure-Learn Feedback Loop. MVP is the version of the product that enables a full turn of the feedback loop with the minimum amount of effort. This should lack features that may prove essential later on. It is also important that the MVP can measure its impact.
Innovation Accounting A quantitive approach that allows us to see whether the engine tuning efforts are bearing fruit. It works in three steps: first use an MVP to establish real data on where the company is right now, which will be used to track progress. Secondly, attempt to time the engine from the baseline toward the ideal across many attempts. Finally, the third step is to make a decision, to pivot or preserve. If the team is making progress toward the ideal that means it’s making validated learning and makes sense to preserve (ie. continue). If it is not making progress toward the ideal then they must conclude that the current product strategy is flawed and needs a serious change.
Learning Milestones Alternative to traditional business and product milestones, they use to hold entrepreneurs accountable.
Success Theater using the appearance of growth to make it seem that are successful
Genchi Gembutsu This translates to “go and see for yourself”. In LEAN startups, this translates to strategic decisions (and assumptions) that should be based on a firsthand understanding of customers. Startups who know enough about who and where their customers are should use genchi gembutu to discover what customers want. This can help inform what assumptions require the most urgent testing.
Concierge Minimum Viable Product Give the early adopter of your product (usually the first few customers) the concierge treatment. This is a low-fi, personal experience where the services are provided personally without sophisticated technology. Although this is very inefficient, it is intended to test the hypothesis without requiring building any products and also has the benefit of applying Genchi Gembutsu.
Cohort Analysis instead of looking at cumulative totals or gross numbers, look at the performance of each group of customer that comes into contact with the product independently. Each group is a cohort. For example, using a chat application, the cohorts would be: “registered but didn’t log in”, “logged in”, “had one conversation”, “had five conversations”, “paid”. Then you track the percentage of customers in each cohort over time.
Optimization vs Learning If you are optimizing a product when are building the wrong thing then you are wasting your time. You should not focus on blind optimisations, but instead, use innovation accounting to measure how you are tracking relative to your baseline.
Vanity Metrics When you look at graphs in absolute numbers (eg. number of new customers, dollars in sales etc) then you’ll be tricked into thinking your product team is making progress ad the company’s growth engine is working. Vanity metrics should be avoided and cohort analysis should be used instead to determine product progress.
Split Test Expermient is one in which different versions of a product are offered to customers at the same time. By observing the changes in behaviour between the two groups, one can make inferences about the impact of the different variations.
The Three A's Actionable, accessible, auditable. For a report to be actionable it must demonstrate a clear cause and effect, otherwise, it’s a vanity metric. For a report to be accessible it should be easily understood by the people who are supposed to use it to guide their decision making. For a report to be auditable the data should be creditable to employees.
Types of Pivot
Zoom-in Pivot what was previously a single feature becomes the whole product
Zoom-out Pivot what was previously a whole product becomes a single feature of a larger product
Product Segment Pivot The product hypothesis is partially confirmed, solving the right problem, but for a different customer than originally anticipated.
Customer Need Pivot As you learn the customer, you realise the need you are serving isn’t very important.
Platform Pivot change from an application to a platform or vice versa
Business Architecture Pivot Pivot between the two major business architectures: might margin, low volume and low margin high volume.
Engine of Growth Pivot three engines of growths are: viral, sticky and paid growth models
Channel Pivot the mechanism by which a company delivers its product to customers is the sales channel or distribution channel
Technology Pivot company discovers a way to achieve the same solution via a different technology.
Part 3: Accelerate
Small Batches Lean manufacturing discoveries found that smaller batch sizes can improve throughput.
Engine of Growth the mechanism the business uses to ‘grow’
Sticky Engine of Growth requires repeated usage from returning customers
Viral Engine of Growth require a person to person transmission as a necessary consequence of normal product use. Customers are not intentionally acting as evangelists, this is just a side effect of using the product. The success of the viral engine of growth is measured through the viral coefficient.
Paid Engine of Growth use of advertisements and marketing to attract customers. The cost per acquisition must be below the customer lifetime value for the business to sustain growth.
The Five Whys a method of investigating problematic symptoms to find the root causes. This is done by asking why five times.