It’s fair to say that The Lean Startup by Eric Ries transformed the world as we know it. A New York Times bestseller, the Lean Startup model is a global phenomenon, faithfully used by individual entrepreneurs and huge companies around the world – to astonishing results.
Given Eric Reis’ stunning credentials, he clearly knows what he’s talking about. Having worked as the CTO of the IMVUsocial network, the co-founder of FastWorks, the founder and CEO of the Long-Term Stock Exchange, and the entrepreneur-in-residence at Harvard Business School, IDEO and Pivotal, the Lean Startup business model is based on a wealth of lived experience.
To do this Lean Startup summary justice, we’ve mirrored the way Ries has structured the book which is split across three main sections:
So, let’s get to grips with the revolutionary Lean Startup model.
The Lean Startup model takes its name from the Toyota manufacturing revolution as lead by Taiichi Ohno and Shigeo Shingo. They transformed Toyota into a flourishing global company by focusing on the following principles:
This approach highlighted the difference between value-generating behavior, and waste – principles which the Lean Startup method carries across to the context of entrepreneurship.
Ries, therefore, firmly believes that startup success is not necessarily about having a great idea, or even being in the right place at the right time; it is about following the right processes. Consequently, the Lean Startup model is based on the following:
Thus, the Lean Startup business model is a novel approach to the development and innovation ofnew products which focuses on speedy iteration, customer insight, creative vision and sizable ambition, simultaneously.
The Lean Startup model boasts a unique concept that Reis refers to as “validated learning.” This approach to learning is more accurate, concise and quicker than traditional modes of market forecasting or corporate planning.
To first understand what validated learning means, we need to highlight which of our efforts are creating value, and which are creating waste. For example, rather than continually trying to update and improve a product, we should work out whether customers are interested in our product at all. Anything that isn’t providing value to the customer is waste.
But how can we know what our customers value in our product? The key is to ship out a version of the product as quickly as possible to obtain real data. Validated learning is the process of drawing conclusions from this data, based on actual customer behavior – not on the feedback customers may provide via a survey or interview about what they may hypothetically like about a product that they have not yet interacted with.
Essentially, don’t trust customers to know what they want ahead of time. Instead, trust the way they behave with a tangible version of the product and use this data to inform decisions going forward.
From the perspective of the Lean Startup, an experiment isn’t just a line of theoretical enquiry – it’s the first version of the product. As mentioned in the previous chapter, Reis emphasizes the importance of getting customers to interact with a product as quickly as possible as it is the results of this experimentation that determine the direction of the product.
Here, Reis brings in the fascinating example of Nick Swinmurn, the founder of Zappos, now the world’s biggest online shoe store. Before online shopping had really taken off, Nick systematically experimented with working out whether customers would be willing to buy shoes online by following this process:
This approach is indicative of the Lean Startup method of experimentation. Rather than getting caught up in organizing an entire product line with inventories, warehouses and distributors, Zappos started small and employed the quickest way possible to test his hypothesis that there was a demand for online shoes.
Further, in doing so, Zappos didn’t engage in traditional methods ofmarket research or customer surveys which would have asked what customers wanted rather than revealing their actual behavior. Instead, he was able to observe, interact with, and learn directly from the customers and distributors that participated in his small-scale experiment. In 2009, Amazon bought Zappos for $1.2 billion.
Therefore, validated learning and fast experimentation are integral to the Lean Startup business method. By the time the first iteration of a product has been distributed, it will have amassed a few customers and provided a wealth of data concerning what is and is not working in reality, rather than hypothesizing about what may work in the future. As Steve Blank, a Silicon Valley entrepreneur states, all of the data that we need to amass concerning customers, markets and suppliers, only exists “outside the building,” i.e. in the real world.
Minimum viable products (MVPs) are essential to the Lean Startup method as they facilitate the process of validated learning as quickly as possible. Not to be confused with the smallest product that could be brought to market, they are simply the quickest and most effortless way to zip through the Build-Measure-Learn feedback loop. The Build-Measure-Learn feedback loop is the fundamental basis upon which a startup grows. First, a product is built and tested in the real world, then its successes and failures are measured, and then, from the measurable data, validated learning can inform the next stage in the product’s development.
MVPs vary wildly in complexity from simple advertisements to early prototypes. However, entrepreneurs tend to include too many features on their MVP – if in doubt, always simplify. Any feature that doesn’t contribute to what you need to learn should be removed as time spent on it will be a waste.
One of the most significant challenges entrepreneurs , and indeed teams in general, face when creating MVPs are the traditional notions of what quality means. Getting an MVP to market as quickly as possible will often not feel like a good representation of a professional’s complete skillset. This is where a new perspective needs to be adopted where the MVP is seen as a vital step towards building a high-quality product and without which, doing so will prove difficult.
An additional stumbling block is that MVPs, more often than not, do not garner positive feedback from customers. Of course, while this data is still valuable for validated learning and the Build-Measure-Learn feedback loop, such results can be interpreted as disheartening by a team. The solution is to prepare employees for such results, and instead encourage a commitment to iteration, innovation, and to see such setbacks as part of the process. Indeed, the MVP is just the first step on the learning journey.
Often, startups measure their success by creating a milestone, interacting with a few customers and seeing if their overall numbers increase – but this is a flawed way of measuring progress. How can they be sure that the changes in numbers are related to the changes they’ve made? This is where Reis provides us with two excellent Lean Startup tools to effectively measure our results: Innovation accounting and actionable metrics. Let’s start by unpacking the former.
Innovation accounting allows startups to objectively prove that they are using validated learning to foster a sustainable business. It works in three steps:
In addition to innovation accounting, Reis presents actionable metrics as a further way to improve the way Lean Startups measure their outcomes. Actionable metrics must adhere to the 3 A’s. They must be: Actionable, Accessible, and Auditable.
One of the most difficult decisions an entrepreneur will face is to decide whether their startup needs to pivot or persevere. Indeed, one of the biggest blocks to creative potential is the poorly-made choice to persevere with a failing startup approach. However, a well-considered pivot in a new direction can help entrepreneurs move along the path to a sustainable, successful business.
Reis states that when talking to entrepreneurs who pivoted their business model, they will nearly always say that they wish they had pivoted sooner. The reasons why entrepreneurs delay pivoting is often threefold:
However, the Lean Startup model approaches pivoting as a structured form of change which is testing out a new hypothesis about the product, business model or the engine of growth. This is the very heart of the Lean Startup business model. It’s what makes companies who implement the method so robust as, if they need to pivot, they have all the tools (think validated learning, freedom to experiment, MVPs, innovation account and accountable metrics) in which to do so, with both dynamism and courage.
Although it may feel counterintuitive, working with small batch sizes is far more efficient than producing mass batches of a particular product. The reason? With small batches, quality problems can be identified and rectified much sooner than when producing big batches, saving a considerable amount of time in the long-run.
Indeed, Reis states that when he works with companies that adopt a large-batch approach, it is often the case that the team will need to redo their work 5 or 6 times for each product release. This goes against the core principle of the Lean Startup method, which is to stop unnecessarily wasting time.
However, many more traditional managers have a difficult time thinking about swapping from a large to a small batch mentality. This is because it is instinctively felt to be inefficient. Such is the blind belief that large batches are superior that often when a large batch system has gone completely awry, employees and managers are likely to blame themselves rather than the system itself.
The Lean Startup method focuses on formulating a hypothesis and getting an MVP on the market, using the smallest batch size possible, within the quickest time frame. Large batches do not allow for this kind of speed, and further, they prolong the validated learning process making it much more difficult to adapt and fine-tune a successful product. What’s more, small batches means smaller inventories which thus frees up an ample amount of warehouse space – this radical inventory reduction is where lean manufacturing, as pioneered by Toyota, gets its name.
Reis defines sustainable growth within a startup as being when “new customers come from the actions of past customers.” There are four ways in which past customers foster sustainable growth:
All of these forms of sustainable growth feed into different types of feedback loop which Reis refers to as “engines of growth.” He identifies three engines of growth through which a company can become successful:
While companies can employ more than one engine of growth simultaneously, Reis states that it is more often the case that successful startups will focus on just one and specialize in it.
A Lean Startup is defined by being adaptive. It must be able to adjust its performance and operations to match its current context. While Reis emphasizes the importance of speed throughout the book, he also states that it is vital for teams to find their optimal working pace as when a startup goes too fast, vital validated learning experiences are completely overlooked.
To work more adaptively, Reis introduces the concept of the “Five Whys.” The core of this method is to get a better picture of the reality behind why a particular process failed and to avoid jumping to quick, unsupported conclusions. This method quite literally means to ask the same “why” question five times consecutively in an attempt to uncover the truth. For example, imagine that a machine in the production line has stopped functioning, here’s how the Five Whys might look in practice, we might ask:
Notice how we went from a rather macro-perspective of an entire machine grinding to a halt to working out that the reason why is because we don’t have an operational system in which an employee regularly checks the internal wear and tear of the pump shafts? From this perspective, it’s now far easier to solve the issue and prevent such a large system failure from happening in the future.
The Five Whys also encourages validated learning as it promotes asking questions more thoroughly to get to a better understanding of the reality of a problem. However, to be really effective, the Five Whys must be asked within an environment of mutual trust as otherwise, they can quickly descend into a means of blaming different team members. To avoid this, Reis suggests that Lean Startups follow these two rules:
A traditional understanding of the way companies develop over time suggests that once they reach a certain size, they begin to lose the ability to innovate and grow – but this is a false belief. As long as companies are prepared to adapt to a more flexible management philosophy, innovation can fuel the direction of big, established businesses. For any company, large or small, to foster innovation, they require the following three structural attributes:
When a company reaches a certain size; however, innovation can be seen to be threatening as it requires a shift in operations and established managerial systems which demand a great deal of effort. Reis, therefore, suggests that in more established companies, an “innovation sandbox” should be created which will contain any impact of the experimentation and innovation within it, but in which the members of the startup team have full freedom. For an innovation sandbox to be truly effective, it must adhere to the following rules:
Thanks to the fact that the same metrics are being used each time, it’s simple to assess whether a sandbox experiment has been afailure or a success. Further, by consistently using the same metrics, the team cultivates a solid literacy concerning these metrics for the company as a whole. What’s more, the innovation sandbox embodies the Lean Startup method in that it promotes rapid iteration, small batches, quick outcomes and constant validated learning.
While implementing novel, dynamic approaches such as the innovation sandbox may cause a few teething problems; it can prove worthwhile to prepare managers that when such systems are introduced, it can feel worse before it starts to feel better. However, this is often the case because any problems caused by the original, old system are too intangible to grasp. In contrast, any issues caused by the new system are more glaringly obvious by comparison. The key is to persevere until a more innovative approach becomes the new normal.
At its heart, the Lean Startup method believes that waste is nearly always preventable once its real underlying cause has come to light. The age-old, flawed adage that employees should simply work harder to increase overall productivity is precisely part of the problem as it finds us often pouring all of our efforts into all of the wrong things. Instead, Reis invites us to imagine an organization in which each employee adopts the Lean Startup business method. He suggests that such a company would be a place in which:
Above all, however, Reis states that with the Lean Startup method, organizations can finally stop wasting so much time and start bravely testing their hypotheses out there in the real world at speed and with smart, validated learning processes in place which ultimately, help pave the way to success.
You can buy The Lean Startup by Eric Ries on Amazon .