Lean Startup Principles
Most new businesses don’t work.
The vast majority of new ventures, up to 80% depending on whose stats you believe, will close within two years.
This is a shame, you hate to see people’s dreams not work out, especially when they’ve committed huge amounts of money to starting their new company.
One of the big reasons for the failure rate is the the old way of launching a business.
It went like this:
· Have an idea
· Convince yourself that it’s a work of genius
· Write a 70 page business plan, full of wild projections
· Convince an investor to fund your establishment
· Build a full-size business
· Launch it with great fanfare
· Cross your fingers and hope people show up
· Discover what customers actually think about your idea
· The moment of truth: you make a profit or you don’t.
The danger with this approach is that guessing what customers want is tremendously difficult.
Worse still, the founder only discovers the truth after they’ve sunk lots of time and money into the idea, making it too expensive (financially and psychologically) to change the business if it is met with indifference.
Over the last 20 years, a new approach has emerged and grown in popularity.
It’s called The Lean Startup, made famous by Eric Ries and his 2011 book of the same name.
It’s probably best described as a set of principles and philosophies, rather than rules or steps, and these principles are generally self-evident; there are lots and lots of stories from the past decade of companies who have used them to great effect.
The book The Lean Startup is good, as is Eric Ries’ talk on YouTube.
I’m also aware that the audiobook is 8 hours long and that talk is an hour, and you’re probably looking for a summary of these principles that can be read on the train, so this post will offer an introduction.
Eric might be the famous name but he’s certainly not alone; you can find a lot of gold from Rob Fitzpatrick and The Mom Test, Tim Ferriss and The Four Hour Work Week, Strategyzer and Testing Business Ideas, and Patrick van der Pijl and Design A Better Business.
Product-Market Fit
“We must learn what customers really want, not what they say they want
or what we think they should want”
– Eric Ries
At the core of any good idea is a match between a customer and a product that they adore.
We’ll use the term “product” to refer to services as well, and “customer” to refer to the person making a purchase decision, even if they don’t always use it themselves.
A business needs to have a decent sized pool of customers, who have a set of desires and needs which are met by a particular product.
When it works it seems obvious, but without it you don’t really have a business.
For example, Spotify went out to the market and said “Hey, what if you could have all the music in the world,
on demand, for one flat price?”, and the market adored them.
Tidal went to the same market and said “Hey, what about the same thing but more expensive with super high quality audio?”, and the market collectively shrugged.
I have no idea about the tech behind each product, I’m sure the Tidal system is genuinely innovative.
It’s just that I’ve never met anyone with a Tidal subscription.
The offer to the customer hasn’t seemed to catch on.
And that right there is the cruel truth that devastates and surprises new entrepreneurs.
The best technology doesn’t win.
The best product doesn’t win.
The cheapest service doesn’t win.
The first to market doesn’t win.
It’s the first one to find product-market fit that wins.
In other words, a large number of customers have to hear your pitch, see that it would make their lives better, decide to commit some money to trying your product, experience the results, and choose to buy from you again.
That’s what makes a startup able to grow and remain sustainable.
If customers don’t understand the pitch, or won’t take a risk, or don’t pay you, or don’t come back, then your startup won’t succeed.
We want to determine if we have this product-market fit as soon as possible.
Minimum Viable Products
“Ok Isaac, I’ll build a factory to manufacture my products, then take them to customers to see if I have product-market fit.”
This sounds good at first, but it’s needlessly expensive.
We don’t actually have to create the entire business, we just need to learn about our offer and what customers think of it.
This can seem like a funny concept, but it’s the basis of testing a new business idea.
You don’t have to build the thing, but rather build something cheap that lets you learn about your market.
A fantastic example of this is Kickstarter, where creators can list a product concept, which is essentially a pitch, a promise and a tentative plan, then customers can place pre-orders.
Again, no product actually needs to be manufactured in order to test the market’s interest.
If people like it, they vote with their wallet, and that gives entrepreneurs the funds and confidence to then launch into full-scale production.
If people don’t like it, they hold onto their money, and the founders learn a lesson without having sunk all their cash into this version of the idea.
“As you consider building your own minimum viable product, let this simple rule suffice: remove any feature, process, or effort that does not contribute
directly to the learning you seek.”
- Eric Ries
A minimum viable product might be a brochure for a product.
It might be a landing page and an email signup form.
It might be a market stall.
It might be a concierge service, where you offer the same services that your product would normally do.
You’re checking to see if customers perceive themselves as having a need.
You’re checking to see if the Value Proposition is compelling enough.
You’re checking to see if the price point seems fair or appealing.
You’re checking to see if customers are going to be satisfied or delighted.
Once you have built a Minimum Viable Product, you get to design a test…
Tests
“If we do not know who the customer is,
we do not know what quality is.”
– Eric Ries
A test is a short-yet-diligent experiment, designed to confirm or refute a suspicion.
That doesn’t mean “try a bunch of stuff and then decide if we like what we find”.
Let’s say you have an idea; selling gourmet vegan hot chocolate through cafes.
What most people naturally would do is say “We’ll talk to our friends and see what they say, then send a short survey to a few cafes to see if they like the idea.”
There are a few issues with this:
· There’s no measurement, no pass/fail criteria, and most importantly: no genuine data or evidence.
· Your friends aren’t necessarily your customers, and they’re unlikely to be honest.
· Surveys aren’t worth much because people don’t have to tell the truth.
· Talking to fewer than three people is a skewed sample.
· Customers have no ‘skin in the game’.
· You’ll probably end up ignoring the true feedback and doing what you were always going to do.
The testing process is about starting with your assumption, thinking up a way of checking if it’s true, picking a measurement device, setting a pass/fail line, then running the experiment.
My personal favourite approach to a test is the Strategyzer Test Card.
For example, it may go like this:
We believe that cafes will want to use and sell our new vegan hot chocolate.
To verify that, we will go and talk to 10 café owners.
And measure the number of owners who will give us a no-risk 6-week trial.
We are right if at least 4/10 café owners say yes to the trial.
What’s great about Test Cards is they make the assumptions brutally clear – there’s nowhere to hide.
There are lots of ways you can run a test.
You can talk to customers about their past experiences and past behaviours – read The Mom Test by Rob Fitzpatrick for the best system for these conversations.
You can run a shadow test online, sending customers to a website and measuring how many of them click “Buy Now” (no money needs to change hands) – Tim Ferriss talks about this in The Four Hour Work Week.
You can run a pop-up market stall, a Facebook ad, or incorporate your idea into an existing project with a customer.
Metrics
In order to understand if their startup idea is a winner, an entrepreneur needs to become obsessed with a few key numbers.
These are called Metrics, meaning “a way of measuring something”.
You use metrics all the time in life.
Let’s say you’re choosing a movie to watch, there is an abundance of choice, so you can look at:
· You local paper’s review out of 5 stars
· IMDb’s score out of 10
· Rotten Tomatoes score out of 100
· Metacritic’s score out of 100
· The runtime in minutes
· The classification to see how “age appropriate” it might be
· The cast and their past work
· The cost of the ticket to see if it’s “worth it”
· The session times at the cinema
· Which streaming platforms it appears on
There’s a good chance that some of those metrics mean a lot to you, and the others are irrelevant.
So when a movie like The Irishman comes out, you can use different metrics to determine if you are going to watch it:
· It’s 3 hours and 29 minutes
· It has a score of 96% on Rotten Tomatoes
· It has an IMDb score of 7.9
· It has a highly regarded cast
· It received a lot of media coverage
· It’s available on Netflix
· It’s rated MA15+ in Australia
What’s interesting is that some of those metrics are meaningful, others are irrelevant.
Some people watched it for the cast, even going so far as to pay to see it in cinemas.
Some people watched it because it was a hot topic in popular culture.
Some people were attracted to the long running time.
Some people were put off by the long running time.
Some people were attracted to the positive reviews from critics.
Some people were put off by the mixed reviews from viewers.
The point here is that no single metric is a perfect indicator – it’s highly subjective.
The metrics that you look at will be different to the metrics that Netflix looks at.
You want a captivating movie, but they want to hook people into their service.
I bet they’re more focused on the amount of people who watched the whole movie, rather than what critics said.
Want the proof?
Look at how they use Adam Sandler – they recently gave him $275m for four new movies, claiming that their audience have already streamed 2 billion hours of his content – and let’s be honest, most of those recent movies are garbage.
They didn’t cite his IMDb scores, they focused on user behaviour and retention.
So for your test, you can easily get caught up measuring the wrong things.
· The number of people who went to your landing page
· The number of compliments from your friends and family
· Survey scores
· The award your idea won at a pitch day
We call these “Vanity Metrics”, because they make you feel good without actually being useful.
If lots of people went to your landing page and didn’t click on anything, that’s not necessarily good.
If you got compliments but not from your target audience, that’s not necessarily good.
If people gave high survey scores, but didn’t follow it up with a purchase or pre-order, that’s not necessarily good.
If your idea wins an award but you can’t find interest from real customers, that’s not necessarily good.
The question becomes: what measurement is genuinely meaningful to us?
What will prove that we have product-market fit?
Iteration and Pivots
“Ask most entrepreneurs who have decided to pivot and they will tell you that
they wish they had made the decision sooner.”
– Eric Ries
Once you’ve run a test and looked at your metrics, you essentially have three options.
1. Double down on what’s working, and build the next version – this is called iterating.
2. Keep part of the idea and throw out the rest – this is called a pivot.
3. Abandon the whole concept – this is called folding.
Iterations and pivots are similar, but different in their severity.
The latest iPhone or Galaxy is an iteration of an earlier business model – a smartphone.
A pivot is when the app Burbn deleted all their features except photo sharing and then changed their name to Instagram.
In the past two weeks we’ve seen a whole lot of businesses pivot because of COVID-19; restaurants moving to meal delivery or takeaway models, craft spirit distillers making hand sanitiser, Dyson making ventilators.
Bear in mind these might not all work in the long term, but it’s a good idea to at least test the response to the new idea and make a decision after a few weeks, which is probably what will happen.
For this reason, bad feedback on a MVP isn’t the end of your startup, it might lead you to pivot instead.
Every business model has an expiration date, and every company has the option to either proactively iterate before their competitors outpace them, or wait and risk a surprise battle in the future.
The Build-Measure-Learn Feedback Loop
Startup success doesn’t come from having one brilliant idea that works, but rather from running a series of experiments that sharpen and refine your ideas until you find one that works.
You’re looking for a model that fits with the Three Lenses of Innovation:
· Desirable – customers love what you sell
· Feasible – the business runs smoothly
· Viable – you consistently make money
It takes time to reach all three of these criteria, so the best approach is a series of small experiments that guide you towards the model that ticks all the boxes.
This is known as the Build-Measure-Learn feedback loop; you build a MVP of your concept, measure the relevant numbers and customer interest, learn about what is/isn’t working, build a better prototype, measure the performance of the newer version, etc.
If you want an example from popular culture, think about Tony Stark and his suit – in every MCU movie he faces a new challenge, studies the weakness in his setup, and by the next movie he’s altered the design to eliminate the old problems.
In the 2008 movie Iron Man he makes the first suit in a cave.
In the 2012 movie The Avengers he’s using the seventh iteration.
In the 2018 movie Infinity War he’s using the 50th iteration.
In the 2019 movie Endgame he’s up to the 85th iteration.
The reason I bring this up is because Tony Stark has no supernatural blessings or powers, and is still arguably the strongest/most powerful Avenger.
His “superpower” is the ability to learn from failure, make improvements, and try again.
He’s constantly being defeated by people that are overwhelmingly stronger than him, so he redesigns his setup to ensure that he’s prepared for what knocked him over the last time.
Eventually, spoilers, he does the seemingly impossible with that 85th version of the suit, but he started with something much more rudimentary.
An entrepreneur’s job is to do the same thing: build, measure, learn until they find their product-market fit, at which point they can focus more on growing in an effective way.
The Right Type Of Growth
People always talk about “Scale” like it’s the only thing that matters, which isn’t really true.
Yes, most businesses are more effective and profitable when they run at a larger scale, but scale doesn’t guarantee profitability.
It depends on how you grow.
A simple way of looking at this is through two metrics:
The cost to acquire each new customer, versus the amount a new customer spends in their relationship with your company.
This is also known as CAC (Cost of Acquiring a Customer) vs LTV (Life Time Value).
e.g. if it costs you $10 to acquire a customer, and they then spend $200 over the course of a year, then growth is good.
If it costs $50 to acquire a customer and they spend $40 over the course of a year, then growth will send you broke.
Therefore, an entrepreneur will be on the lookout for ways of attracting new customers that makes financial sense.
They’ll try anything and measure the results, then when something looks like it’s working they’ll double down on it.
If Instagram ads are working, they’ll run 10x more Instagram ads.
If door-to-door sales are working, they’ll hire 10x more salespeople.
No channel is always good or bad, it just depends on if it works or not.
There will be times that investment is required to get to the next level of production and features, but for the most part it’s better to grow through customer funding.
It makes financial sense, since you’re not selling so much equity or taking on debt, but it’s also a reassuring sign that people love what you sell.
If you’d like to know more about the book The Lean Startup, there’s a detailed summary here, or you can get your own copy.
You can also read more about the Business Model Canvas, the Value Proposition Canvas, different ways of Pivoting, Test Cards and Customer Interviews.
