I recently finished reading The Lean Startup by Eric Ries, and thought I might as well post a summary here. Even if you don't plan on doing business the 'lean startup' way, I think there's still some good concepts here, and it gives you dictionary for some common business practices.
I'd like to hear your thoughts and criticism, I think the author got a lot right in this book.
From the last part of the book, "It should be noted that those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed. Ultimately, the Lean Startup is a framework, not a blueprint of steps to follow."
For some background, The Lean Startup gets its name from Lean manufacturing, and uses techniques pioneered by post-war Toyota. Toyota could not afford to compete with American manufacturers that were using mass scale manufacturing, so instead they focused on cutting waste.
The book is quite long and it's many ideas are intertwined, so if you do not understand something, want to know more or want to see examples of these being used, just get the book.
I'm going to start with a concept from the later part of this book, because I think it's great for personal development as well.
Five Whys is a system introduced to make the startup switch from cutting corners to go as fast as possible to slowing down and focusing on quality, but I think it can be used for much more.
The system is simple - just ask the investigative question "Why?" five times to understand what happened, and then make a proportional investment at each of the five levels.
For example, suppose your website was down for two days.
Why is the website down? A server overloaded and shut down.
Why did the server overload? An obscure subsystem was used in the wrong way.
Why was it used the wrong way? The engineer didn't know how to use it properly.
Why didn't he know? Because he was never trained on how it works.
Why wasn't he trained? Because management doesn't believe in training new engineers because he and his team are "too busy".
What started as a purely technical fault revealed itself to be a systemic, very human issue.
Once you know the causes, you can focus on improving each step of the issue from the bottom up.
Make senior engineers train new engineers, add documentation, improve the subsystem so that it cannot be used in the wrong way and add system monitoring and alerts. A good Five Whys session has two outputs, learning and doing.
If you start using this in a company, there are a few more things worth mentioning.
Five Whys is designed to see the true chronic issues that are caused by bad processes, not bad people. You need to pay attention so that it doesn't degenerate into Five Blames, where everyone starts blaming the other department.
It's also important that everyone involved is in the discussion, anyone left out becomes an easy scapegoat.
The most senior people should also repeat this mantra: "Shame on us for making it so easy to make that mistake".
If your new developer makes a change that stops your system from compiling but it still gets pushed to production and takes it down, shame on you for not automated builds and tests.
Five Whys on an institutional level requires mutual trust and empowerment. You should be tolerant of all mistakes the first time, but never allow the same mistake to be made twice.
You will also need to be prepared to face unpleasant truths about your organization, especially in the beginning. It is going to call for investments in prevention that come at the expense of time and money that could be invested somewhere else.
The book tries to answer a simple question: how can we maximize a startup's chance of success?
The answer presented is using the semi-scientific method. Semi-scientific because you do not understand and cannot know your customer base before hand, you have to launch and measure their reaction.
A startup is composed of three parts - a product, strategy and vision.
The vision is the purpose of the company. Strategy is the plan to achieve it and changing it is called pivoting, the product is the end result and changing it is called optimization.
This is the fundamental feedback loop of a startup. Your goal as an entrepreneur is to minimize the time spent through the loop, and come out with a product people want. In the followingbrain dump text, I will explain this loop in the order it will usually be executed in.
Being "Lean" means finding out what parts create value and which are wasteful, leaning into value, and aggressively cutting waste.
Value is defined as providing benefit to the consumer, everything else is waste. In manufacturing, nobody cares how the car is produced, just that it works.
In a startup, what the customer values is uncertain. That is why you need validated learning - validated because it was tested on real consumers.
Learning is the essential unit of progress for startups. Effort that is not absolutely necessary for learning what customers want should be eliminated.
Every assumption of a startup's strategy should be tested. Will users care? How do they interact? What do they want but cannot find?
For example, Amazon's assumption was that people would buy books on the internet. Zappos' assumption was that people would buy shoes online.
To test these, you should just build and launch an MVP. A Minimum Viable Product exists purely to start the process of learning as quickly as possible. It is not the smallest product imaginable, it is simply the fastest way to get through the Build-Measure-Learn feedback loop.
For example, Zappos' MVP was a site where you would pay, and the founder would buy your shoes in a physical shop and mail them to you.
Its goal is not to answer product design but to test fundamental business hypotheses. Any additional work beyond what was required to start learning is waste. There is surely nothing quite so useless as doing with great efficiency what should not be done at all.
If you do not know who your customer is, you do not know what quality is. What if they don't care about design in the same way you do?
MVPs establish baseline data on which experiments and learning can be built upon. Optimizing and pivoting until a vision is completed is the essence of startups.
To know whether to optimize your current product or pivot, you need metrics.
You should beware of so-called vanity metrics that allow you to form false conclusions and live in your own private reality.
Do not use cumulative data such as total revenue. While these graphs are pretty, they do not explain much. Instead, use cohort analysis. For example, last week's revenue per customer vs customer acquisition cost compared to the previous week. Now you can see if you're making real progress.
Good metrics need to have three values: actionable, accessible, and auditable.
Actionable metrics demonstrate clear cause and effect and make it clear what actions need to be taken to optimize them.
Accessible metrics are simple and understood easily. They deal with people and their actions, not piles of data points. (Reports should also be accessible by all employees, not just C suites)
Auditable metrics ensure the data is credible. Employees are quick to blame the data and the system that collects them instead of their own work. Metrics should be drawn from master data (not intermediate) and should be tested to be consistent with reality.
Sustainable growth is characterized by one simple rule: new customers come from the actions of past customers.
There are four ways past customers drive sustainable growth: word of mouth, as a side effect of usage, advertising, and repeat usage or use.
These four sources power three feedback loops termed engines of growth. There are always a zillion new ideas on how to optimize the product, but only a few make an actual difference.
Knowing which engine you use means you know which metrics to focus on and what optimizations are useful and which waste.
The first is the sticky engine of growth, where you attract and retain customers for the long term. For example, consider telephone service providers: when someone cancels, they must have a large enough reason to switch.
This is in contract to, for example, a store aisle where it's no big deal if a customer chooses a Pepsi instead of Coke.
With the sticky engine, you need to track the attrition rate or churn rate (% of people who fail to engage with the product).
The rules of this engine are simple: If the rate of new customers exceeds the churn rate, the product will grow. So you need to focus on improving customer acquisition and retention.
The viral engine of growth relies on the awareness of the product spreading like a virus. This engine depends on person-to-person transmissions as a necessary consequence of normal product use.
Customers aren't intentionally evangelists, growth happens as an automatic side effect of usage.
For example, take Hotmail. Hotmail was different because at the time all mail was paid. Hotmail wanted to revolutionize that, but was struggling.
Everything changed when they added a simple 'P.S. Get your free email at Hotmail' at the bottom of every email sent. Within six months, more than 1 million customers signed up.
This engine is powered by the so-called viral coefficient, which measures how many new customers will use a product as a consequence of each new customer.
A coefficient of 0.1 means every ten customers who sign up organically recruit one customer, and the business needs to invest heavily in new customer acquisition.
Meanwhile, a coefficient greater than 1.0 will grow exponentially on its own, without need for artificial growth. Companies that rely on this must focus on this single metric, because even small changes will cause dramatic changes in the future.
To see this graphically, take a look at this chart:
Viral products cannot afford to have any friction to impede the process of signing up new customers. As a consequence of this, (many) viral products do not charge customers directly but rely on indirect means of revenue (e.g., advertising).
The paid engine of growth is simple - you pay for customers (e.g., ads), and each customer makes you some revenue. The speed at which you grow is determined by the difference between customer acquisition cost and revenue from that customer.
If you spend 80 cents on a customer that will make you $1, you have 20 cents of profit to reinvest into new customer acquisition.
Therefore, you should increase the revenue from each customer or drive down the cost of acquiring a new customer. As long as the customer is worth (in their lifetime as a customer) more than they cost to acquire, you are golden.
Now that you know which engine of growth you use and which metrics you need to track, you can choose whether to persevere or pivot.
You can persevere with your current strategy and optimize your product or pivot based on your knowledge of the customer.
A pivot is a special change that tests a new fundamental hypothesis about the product. If you take the wrong turn, you can have the agility to find another path. A pivot is also not a failure event: you are simply adapting the product to the market.
There are a few types of pivots:
Now that you have pivoted, it's time to learn from the customers and metrics and repeat the cycle — do you persevere or pivot?
A great example presented in the book is @2gov founded by David Binetti.
The first version was a social network for registered voters and used a sticky engine of growth. It has a 5% registration rate and 17% activation rate. After two months of split testing, he achieved 17% registration and 90% activation rate.
Despite split testing and optimizing for another three months, these numbers didn't move much and retention was below 8%. This isn't bad, but it isn't good enough.
As such, David decided to execute a zoom-in pivot. Users loved to get more involved, but there was nobody there.
So he decided to change the platform to a "Social lobbying platform", and allowed users to contact their elected official digitally and @2gov translates that into physical form.
The new metrics were better — 42% registration rate, 83% activation, 21% retention, 54% referral but minimal customer value.
The number of activists willing to pay was less than 1 percent. The value of each transaction was far too low to sustain a profitable business even after David had done his best to optimize it.
So, he pivoted again, this time making so that anyone could pay with just a credit card, this switching into the viral engine of growth.
Now, he had a 51% registration rate, 92% activation, 28% retention, 64% referral rate and got 20 cents per message, finally raising some money.
Although the vision stayed the same, he was able to pivot until he found a working business strategy.
I'd like to hear your thoughts and criticism, I think the author got a lot right in this book.
From the last part of the book, "It should be noted that those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed. Ultimately, the Lean Startup is a framework, not a blueprint of steps to follow."
For some background, The Lean Startup gets its name from Lean manufacturing, and uses techniques pioneered by post-war Toyota. Toyota could not afford to compete with American manufacturers that were using mass scale manufacturing, so instead they focused on cutting waste.
The book is quite long and it's many ideas are intertwined, so if you do not understand something, want to know more or want to see examples of these being used, just get the book.
I'm going to start with a concept from the later part of this book, because I think it's great for personal development as well.
Five Whys is a system introduced to make the startup switch from cutting corners to go as fast as possible to slowing down and focusing on quality, but I think it can be used for much more.
The system is simple - just ask the investigative question "Why?" five times to understand what happened, and then make a proportional investment at each of the five levels.
For example, suppose your website was down for two days.
Why is the website down? A server overloaded and shut down.
Why did the server overload? An obscure subsystem was used in the wrong way.
Why was it used the wrong way? The engineer didn't know how to use it properly.
Why didn't he know? Because he was never trained on how it works.
Why wasn't he trained? Because management doesn't believe in training new engineers because he and his team are "too busy".
What started as a purely technical fault revealed itself to be a systemic, very human issue.
Once you know the causes, you can focus on improving each step of the issue from the bottom up.
Make senior engineers train new engineers, add documentation, improve the subsystem so that it cannot be used in the wrong way and add system monitoring and alerts. A good Five Whys session has two outputs, learning and doing.
If you start using this in a company, there are a few more things worth mentioning.
Five Whys is designed to see the true chronic issues that are caused by bad processes, not bad people. You need to pay attention so that it doesn't degenerate into Five Blames, where everyone starts blaming the other department.
It's also important that everyone involved is in the discussion, anyone left out becomes an easy scapegoat.
The most senior people should also repeat this mantra: "Shame on us for making it so easy to make that mistake".
If your new developer makes a change that stops your system from compiling but it still gets pushed to production and takes it down, shame on you for not automated builds and tests.
Five Whys on an institutional level requires mutual trust and empowerment. You should be tolerant of all mistakes the first time, but never allow the same mistake to be made twice.
You will also need to be prepared to face unpleasant truths about your organization, especially in the beginning. It is going to call for investments in prevention that come at the expense of time and money that could be invested somewhere else.
The book tries to answer a simple question: how can we maximize a startup's chance of success?
The answer presented is using the semi-scientific method. Semi-scientific because you do not understand and cannot know your customer base before hand, you have to launch and measure their reaction.
A startup is composed of three parts - a product, strategy and vision.
The vision is the purpose of the company. Strategy is the plan to achieve it and changing it is called pivoting, the product is the end result and changing it is called optimization.
This is the fundamental feedback loop of a startup. Your goal as an entrepreneur is to minimize the time spent through the loop, and come out with a product people want. In the following
Being "Lean" means finding out what parts create value and which are wasteful, leaning into value, and aggressively cutting waste.
Value is defined as providing benefit to the consumer, everything else is waste. In manufacturing, nobody cares how the car is produced, just that it works.
In a startup, what the customer values is uncertain. That is why you need validated learning - validated because it was tested on real consumers.
Learning is the essential unit of progress for startups. Effort that is not absolutely necessary for learning what customers want should be eliminated.
Every assumption of a startup's strategy should be tested. Will users care? How do they interact? What do they want but cannot find?
For example, Amazon's assumption was that people would buy books on the internet. Zappos' assumption was that people would buy shoes online.
To test these, you should just build and launch an MVP. A Minimum Viable Product exists purely to start the process of learning as quickly as possible. It is not the smallest product imaginable, it is simply the fastest way to get through the Build-Measure-Learn feedback loop.
For example, Zappos' MVP was a site where you would pay, and the founder would buy your shoes in a physical shop and mail them to you.
Its goal is not to answer product design but to test fundamental business hypotheses. Any additional work beyond what was required to start learning is waste. There is surely nothing quite so useless as doing with great efficiency what should not be done at all.
If you do not know who your customer is, you do not know what quality is. What if they don't care about design in the same way you do?
MVPs establish baseline data on which experiments and learning can be built upon. Optimizing and pivoting until a vision is completed is the essence of startups.
To know whether to optimize your current product or pivot, you need metrics.
You should beware of so-called vanity metrics that allow you to form false conclusions and live in your own private reality.
Do not use cumulative data such as total revenue. While these graphs are pretty, they do not explain much. Instead, use cohort analysis. For example, last week's revenue per customer vs customer acquisition cost compared to the previous week. Now you can see if you're making real progress.
Good metrics need to have three values: actionable, accessible, and auditable.
Actionable metrics demonstrate clear cause and effect and make it clear what actions need to be taken to optimize them.
Accessible metrics are simple and understood easily. They deal with people and their actions, not piles of data points. (Reports should also be accessible by all employees, not just C suites)
Auditable metrics ensure the data is credible. Employees are quick to blame the data and the system that collects them instead of their own work. Metrics should be drawn from master data (not intermediate) and should be tested to be consistent with reality.
Sustainable growth is characterized by one simple rule: new customers come from the actions of past customers.
There are four ways past customers drive sustainable growth: word of mouth, as a side effect of usage, advertising, and repeat usage or use.
These four sources power three feedback loops termed engines of growth. There are always a zillion new ideas on how to optimize the product, but only a few make an actual difference.
Knowing which engine you use means you know which metrics to focus on and what optimizations are useful and which waste.
The first is the sticky engine of growth, where you attract and retain customers for the long term. For example, consider telephone service providers: when someone cancels, they must have a large enough reason to switch.
This is in contract to, for example, a store aisle where it's no big deal if a customer chooses a Pepsi instead of Coke.
With the sticky engine, you need to track the attrition rate or churn rate (% of people who fail to engage with the product).
The rules of this engine are simple: If the rate of new customers exceeds the churn rate, the product will grow. So you need to focus on improving customer acquisition and retention.
The viral engine of growth relies on the awareness of the product spreading like a virus. This engine depends on person-to-person transmissions as a necessary consequence of normal product use.
Customers aren't intentionally evangelists, growth happens as an automatic side effect of usage.
For example, take Hotmail. Hotmail was different because at the time all mail was paid. Hotmail wanted to revolutionize that, but was struggling.
Everything changed when they added a simple 'P.S. Get your free email at Hotmail' at the bottom of every email sent. Within six months, more than 1 million customers signed up.
This engine is powered by the so-called viral coefficient, which measures how many new customers will use a product as a consequence of each new customer.
A coefficient of 0.1 means every ten customers who sign up organically recruit one customer, and the business needs to invest heavily in new customer acquisition.
Meanwhile, a coefficient greater than 1.0 will grow exponentially on its own, without need for artificial growth. Companies that rely on this must focus on this single metric, because even small changes will cause dramatic changes in the future.
To see this graphically, take a look at this chart:
Viral products cannot afford to have any friction to impede the process of signing up new customers. As a consequence of this, (many) viral products do not charge customers directly but rely on indirect means of revenue (e.g., advertising).
The paid engine of growth is simple - you pay for customers (e.g., ads), and each customer makes you some revenue. The speed at which you grow is determined by the difference between customer acquisition cost and revenue from that customer.
If you spend 80 cents on a customer that will make you $1, you have 20 cents of profit to reinvest into new customer acquisition.
Therefore, you should increase the revenue from each customer or drive down the cost of acquiring a new customer. As long as the customer is worth (in their lifetime as a customer) more than they cost to acquire, you are golden.
Now that you know which engine of growth you use and which metrics you need to track, you can choose whether to persevere or pivot.
You can persevere with your current strategy and optimize your product or pivot based on your knowledge of the customer.
A pivot is a special change that tests a new fundamental hypothesis about the product. If you take the wrong turn, you can have the agility to find another path. A pivot is also not a failure event: you are simply adapting the product to the market.
There are a few types of pivots:
- Zoom-in pivot: What was a single feature becomes the whole product
- Zoom-out pivot: What was the product now becomes a single feature in a larger product
- Customer segment pivot: The product solves a real problem, but not for the customers it planned
- Customer need pivot: As a result of getting to know your customers, it becomes evident there is a bigger problem you can solve
- Platform pivot: A change from an application to a platform or vice versa
- Business architecture pivot: A change from high margin low volume to low margin high volume or vice versa
- Value Capture pivot: Changing monetization or revenue models
- Engine of Growth pivot: Changing the engine between viral, sticky, and paid
- Channel pivot: Changing the sales channel or distribution channel
- Technology pivot: Achieving the same solution using a different technology
Now that you have pivoted, it's time to learn from the customers and metrics and repeat the cycle — do you persevere or pivot?
A great example presented in the book is @2gov founded by David Binetti.
The first version was a social network for registered voters and used a sticky engine of growth. It has a 5% registration rate and 17% activation rate. After two months of split testing, he achieved 17% registration and 90% activation rate.
Despite split testing and optimizing for another three months, these numbers didn't move much and retention was below 8%. This isn't bad, but it isn't good enough.
As such, David decided to execute a zoom-in pivot. Users loved to get more involved, but there was nobody there.
So he decided to change the platform to a "Social lobbying platform", and allowed users to contact their elected official digitally and @2gov translates that into physical form.
The new metrics were better — 42% registration rate, 83% activation, 21% retention, 54% referral but minimal customer value.
The number of activists willing to pay was less than 1 percent. The value of each transaction was far too low to sustain a profitable business even after David had done his best to optimize it.
So, he pivoted again, this time making so that anyone could pay with just a credit card, this switching into the viral engine of growth.
Now, he had a 51% registration rate, 92% activation, 28% retention, 64% referral rate and got 20 cents per message, finally raising some money.
Although the vision stayed the same, he was able to pivot until he found a working business strategy.
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