[notes] The Lean Startup

The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (2011) by Eric Ries #

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These are my notes from reading The Lean Startup. I’ve re-arranged and summarized them where I thought doing so would aid clarity. In particular, I combined Ries’ introduction and epilogue into a single background section which I’ve placed first because I think it provides useful context for understanding the rest of the content. I’ve also included a commentary section at the end, which aggregates the questions and comments I had while reading. Quotes are taken directly from The Lean Startup unless otherwise attributed. Enjoy : )

Background #

• The Lean Startup describes a management philosophy
• What are management philosophies?

Frederick Taylor’s The Principles of Scientific Management (1911) #

• Frederick Taylor is known as “The Father of Scientific Management”
• e.g. “work can be studied and improved through conscious effort”
• Standardized work into tasks
• Created the task-plus-bonus system of compensation
• Time and motion studies
• Differential piece-rate system
• Functional foremanship (precursor to functional departments, like sales, marketing, etc)

“In the past, the man has been first; in the future, the system must be first.” (Taylor)

“By putting the system first, man has been able to acquire massive material surplus.”

“To achieve this success, man relied on planning, prevention, and procedure, which enabled organizations to achieve consistent results in a mostly static world.”

For the last hundred years or so, however, the trend of the world has been towards not-static. Ries doesn’t go into detail on this point but I’ll elaborate briefly with some of my own thoughts.

The increased industrial capacity produced by management has created the space for consumers to demand more personalized products. Malcolm Gladwell has a great Ted Talk about this transition where he tells the story of the perfect spaghetti sauces. Spoilers alert, the final s is important. Basically the spaghetti sauce company discovered that not all customers liked the same type of spaghetti sauce, and so the company created multiple types of spaghetti to appeal to all the different customer types. This was the beginning of market segmentation, and ever since we’ve seen a trend towards more specialized products.

[!!! furthermore, marketing and advertising tactics that push consumer trends to change faster]

Taiichi Ohno and Shigeo Shingo’s Toyota Production System (1948-1975) #

• Draws on the knowledge and creativity of individual workers
• Emphasizes smaller batch sizes with accelerated cycle times
• Single-piece flow (=> batch size of one)
• Just-in-time production (inventory control)
• Andon cord
• Shusa
• Precursor to the lean manufacturing revolution

Single piece flow #

• batch size of one
• finds errors more quickly
• e.g. continuous deployment at software companies

Just-in-time production #

• from Toyota
• pull, don’t push
• single piece flow along the entire supply chain
• aim to reduce WIP (work in progress) inventory

Andon cord #

• from Toyota
• any worker can freeze the entire process if they find something wrong
• prevents errors from propagating
• “stop production so that it never has to stop” (Toyota proverb)

Shusa #

• chief engineer
• has final say in anything regarding the product

Lean Manufacturing #

• built on the ideas that Taiichi Ohno and Shigeo Shingo developed at Toyota
• agile programming
• lean UX

“The management style of the past century has created unprecedented material abundance but is ill suited to handle the chaos and uncertainty of a startup.”

“Our productive capacity greatly exceeds our ability to know what to build.”

“The big question of our time is not ‘Can it be built?’ but ‘Should it be built?’”

Eric Ries’ Lean Startup (2011) #

The five guiding principles of the Lean Startup:

1. Startup => “a human institution designed to create new products and services under conditions of extreme uncertainty”
2. Startups “require a new kind of management specifically geared to its context of extreme uncertainty”
3. Validated learning
4. Build-Measure-Learn - “startup processes should be geared to accelerate the Build-Measure-Learn feedback loop”
5. Innovation accounting

Part 1: Vision #

“Much of the time in a startup’s life is spent tuning the engine by making improvements in product, marketing, or operations.”

• Vision -> Strategy -> Product
• Pivot or persevere applies to vision and strategy
• Build-Measure-Learn (optimizations) apply to strategy and product

“Thing big, start small. Be creative in the small-ness.”

Validated Learning #

• break down the grand vision into component parts
• value hypothesis => tests whether a product or service really delivers value to customers once they are using it
• growth hypothesis => tests how new customers will discover a product or service
• e.g. early adopters -> mass adoption

Genchi Gembutsu #

• core principle in the Toyota Production System
• translates to “go and see for yourself”

Part 2: Steer #

“A startup is a catalyst that transforms ideas into products. As customers interact with those products, they generate feedback and data.”

Build-Measure-Learn Feedback Loop #

• Ideas -> Build -> Product -> Measure -> Data -> Learn -> Ideas -> …
• don’t get preoccupied with optimizing certain steps in this loop
• goal: minimize the total time through the Build-Measure-Learn feedback loop

Kanban (from lean manufacturing) #

• basically bucket tasks into stages, and limit the number of tasks that can be in each stage at any given time
• forces you to not over optimize in any one area, and instead focus on the big picture of getting through cycles

“To apply the scientific method to a startup, we need to identify which hypothesis to test. I call the riskiest elements of a startup’s plan, the parts on which everything depends, leap-of-faith assumptions.”

• this includes the value hypothesis and the growth hypothesis

Build #

• MVP (minimum viable product) => “version of the product that enables a full turn of the Build-Measure-Learn loop with a minimum amount of effort and the least amount of development time”
• MVP has to include measuring
• MVP has to include a way to release to actual users
• even better, try to sell the MVP
• when in doubt, simplify
• goal: find early adopters (customers who feel the need for the product most acutely)

Analogs and Antilogs #

• analog => prior product that validated assumptions critical to your product
• antilog => prior product that validated that something won’t work in the market

Types of MVPs: #

1. video MVP => make a video
2. concierge MVP => substitute complicated engineering infrastructure with humans (build infrastructure as necessitated by scale)

“If we do not know who the customer is, we do not know what quality is.”

Concerns: #

• protecting IP (intellectual property) (e.g. patents)
• ruining a potential brand
• losing hope
• all of these are easily refuted

“If we’re building something that nobody wants, it doesn’t much matter if we’re doing it on time and on budget.”

“A new breed of designers is developing brand-new techniques under the banner of Lean User Experience.”

Measure #

• don’t use vanity metrics
• e.g. traditional gross metrics that always go up and to the right
• instead use cohort analysis => bucket metrics by users that signed up in the same time period

Metrics should be… #

• actionable
• accessible
• auditable

Innovation Accounting #

• establish a baseline (MVP)
• tune the engine (find the metric that matters and run experiments to optimize it)
• pivot or persevere (based on results of the experiments)

Split testing #

Learn #

• test assumptions without losing sight of the company’s overall vision
• pivot or persevere

“A startup’s runway is the number of pivots they have left.”

Pivoting requires courage #

• afraid of failure
• even worse, afraid of failing without ever being given a proper chance

Types of Pivots: #

1. zoom-in pivot => new product becomes a single feature of the old product
2. zoom-out pivot => new product incorporates previous product as a single feature
3. customer segment pivot => solves the problem but for a different customer segment
4. customer need pivot => discover a different problem to solve for the same customer segment
5. platform pivot
6. business architecture pivot
7. value capture pivot
8. engine of growth pivot (viral, sticky, paid growth)
9. channel pivot
10. technology pivot

Part 3: Accelerate #

• startups are built on: accountability -> process -> culture -> people
• adaptive organization => automatically adjusts its process and performance to current conditions
• manage a portfolio of sustainable and disruptive innovation
• entrepreneur as a job title
• just-in-time scalability

“Sustainable growth is characterized by one simple rule: New customers come from the actions of past customers.”

• word of mouth
• as a side effect of product usage (e.g. messaging)
• through funded advertising (marginal cost must be lower than marginal revenue so marginal profit is positive)
• through repeat purchase (subscription based)

“Startups don’t starve; they drown.”

“There are always a zillion new ideas about how to make the product better floating around but the hard truth is that most of those ideas make a difference only at the margins. They are mere optimizations. Startups need to focus on the big experiments that lead to validated learning. The engines of growth framework helps them stay focused on the metrics that matter.”

Engines of Growth #

1. Sticky
2. Viral
3. Paid

Sticky #

• relies on having high customer retention
• track attrition rate or churn rate

Viral #

• depends on person to person transmission as a necessary consequence of normal product use
• powered by the viral loop, which is determined by the viral coefficient (the percentage of customers that recruit a new customer)
• the viral coefficient needs to be greater than 1

Paid #

• pay for LTV (lifetime value) of user
• advertising and CPA (cost per acquisition)

Product/Market Fit #

• product/market fit describes the moment when a startup finally finds a widespread set of customers that resonate with its product
• engines of growth determine product/market fit

Five Whys #

• systematic problem solving tool from Taiichi Ohno
• basically just keep asking why until you determine the root cause of a problem
• then create actionable items to fix that problem
• be specific
• keep the solution in scope to the problem
• don’t have five whys for problems that haven’t happened yet, or old problems from the past (because you don’t know they are actually problems until they happen)
• five whys acts as a natural speed regulator
• be tolerant of all mistakes the first time
• never allow the same mistake to be made twice

Structure of Startups #

• scarce but secure resources
• independent development authority
• a personal stake in the outcome

Innovation Sandbox #

• for split testing

Commentary #

Questions:

• What are the possible downsides of “lean” thinking?
• How does lean thinking play with art?
• How do you iterate (run through the Build-Measure-Learn loop) without incurring tech debt, product debt, design debt, etc?
• How do you measure long term metrics (e.g. the long tail)?
• How do you create a good sandbox? — sandbox has to be big enough to be of statistical significance — don’t want to ostracize sandboxed users

Notes:

• I feel like lean can be abstracted to include the design process: lean design, continuous deployment in design, rapid iterating