Lean startup

by | Jun 3, 2021 | entrepreneurship, patreon

Hi Makers,

In this article we will explore the notion of lean startup and how to use it to build innovations. The article will treat of the vision, the steering and the acceleration of a startup.

The lean startup concept has been developed by Eric Ries in 2011 in his book “The lean startup : How today’s entrepreneurs use continuous innovation to create radically successful businesses”. It constitutes a reference in the startup world.

PART 1: VISION

What is lean startup:

  • startup: “a human institution designed to create new products and services under conditions of extreme uncertainty”.
  • lean startup: method designed to drive a startup by developing innovative new products that emphasizes fast iteration and customer insights, with a vision. 

How it works:

Instead of making complex plans that are based on a lot of assumptions, with the lean startup method you can make constant adjustments with a steering wheel called the “build-measure-learn feedback loop“. Through this process of steering you can learn when and if it’s time to make a pivot or whether we should persevere along our current path.

Startup components:

  • 1. vision: a destination in mind. It rarely changes.
  • 2. strategy: a set composed of a business model, a product road map, a point of view about partners and competitors, and ideas about who the customer will be. It achieves the vision. Sometimes, it changes and this event is called a pivot.
  • 3. product: end result of this strategy. Products/services change constantly through the process of optimization, called “tuning the engine”.

(If you don’t have the reference, check the video below!)

Startup experimentation:

The goal of every startup experimentation is to discover how to build a sustainable business around the vision. As lean startup employs the scientific method, the vision is broken down into two leap-of-faith hypotheses, the value hypothesis and the growth hypothesis. Remember to find early adopters, not the average customers at this stage.

  • 1. value hypothesis: It tests whether a product or service delivers value to customers once they are using it. For example, test it by monitoring the time users spent on the website (e.g. More than half of the user of Facebook came back to the site every single day when created). 
  • 2. growth hypothesis: It tests how new customers will discover a product or service. For example, test it by monitoring the early traction rate (e.g. Facebook launched on February 4th, 2004, and by the end of the month, almost three-quarters of Harvard’s undergraduates were using it). 

PART 2: STEER

Build-measure-learn feedback loop:

To drive the startup experimentation, follow these steps: 

  • 1. Define: the leap-of-faith assumptions 
  • 2. Build: as quickly as possible an MVP 
  • 3. Measure: the results using innovation accounting 
  • 4. Learn: to start the next feedback loop (persevere) or to review the strategy (pivot)

Wizard of Oz experiment:

It is a research experiment in which subjects interact with a  computer system that subjects believe to be autonomous, but which is  actually being operated or partially operated by an unseen human being.

Concierge minimum viable product:

You offer a personal service to your first(s) customer(s), before  the service is built. The concierge minimum viable product is  inefficient at solving a problem, but it’s a short term solution to help you learn how to solve  customer’s problems. 

Minimum Viable Product (MVP):

An MVP is the version of a product that enables a full turn of  the build-measure-learn feedback loop with a minimum amount of effort  and the least amount of development time. The MVP lacks many features  that may prove essential later on. We must be able to measure its impact  when put in front of potential customers. We may need to try to sell  the MVP as well.

How to build an MVP:

Remove any feature, process, or effort that does not directly contribute to the learning you seek.

Innovation accounting:

Quantitative approach that allows to see whether our product optimization efforts are bearing fruit.

  • Use actionable metrics: metrics that demonstrate a clear cause and effect.
  • Do not use vanity metrics: metrics that does not lead to  learning but rather to promote the startup, such as gross number of  customers.

Learning milestone:

An alternative to traditional business and product milestones.  The first startup learning milestone could be the conversion rate,  sign-up and trial rates, customer lifetime value (average revenue  you get from each new user), etc.

Pivot:

A structured course correction designed to test a new fundamental  hypothesis about the product, strategy, and engine of growth. It  happens after a learning phase. There are two types of pivot: 

  • 1. voluntary pivot: based on a firm’s learning experience 
  • 2. involuntary pivot: based on an environmental change

To pivot, you need enough money, time, and investor support. There are many companies that failed because they ran out of cash.

https://www.youtube.com/watch?v=8w3wmQAMoxQ

PART 3: ACCELERATE

Waste:

  • Value in a startup is not the creation of stuff, but rather validated learning about how to build a sustainable business. i.e. Avoid spending too much time developing a product nobody wants.
  • Small batches: minimize the expenditure of time, money, and effort that ultimately turns out to have been wasted.
  • The key to operate quickly is to check for defects immediately, thus preventing bigger problems later. (similar to the Toyota Production Systems)
  • Having a low-quality product can inhibit learning when the defects prevents customers from experiencing and giving feedback on the product’s benefits.

Sustainable growth:

It is characterized by one rule: new customers come from the actions of past customers. There are four primary ways past customers drive sustainable growth:

  • 1. word of mouth
  • 2. as a side effect of product usage
  • 3. through funded advertising: as long as the cost of acquiring a new customer (marginal cost) is less than the revenue that customer generates (marginal revenue), the excess (marginal profit) can be used to acquire more customers.
  • 4. through repeat purchase or use

The three engines of growth:

It is recommended to focus on one unique engine at a time, in order to specialize in everything that is required to make it grow.

  • 1. Sticky engine of growth: Track the churn rate, i.e. the fraction of customers lost on a given period. Once a customer starts using the product, they are locked in due to a proprietary technology from which it is difficult to switch or due to benefits customers are not willing to let go (network effects, credits, etc.) The focus should only be customer retention, not growth.
  • 2. Viral engine of growth: Person-to-person transmission as a necessary consequence of normal product use. Quantify how many friends each customer will recruit.
  • 3. Paid engine of growth: Two ways to increase revenue, 1. increase the revenue from each customer; 2. drive down the cost to acquire a new customer

Innovation sandbox:

It contains the impact of new innovations without constraining the methods of the startup.

  • 1. Any team can create a true split-test experiment that affects only the sandbox.
  • 2. One team must see the whole experiment from beginning to end.
  • 3. No experiment can run longer than a specified amount of time.
  • 4. No experiment can affect more than a specified number of customers (expressed as a percentage of the total number of customers).
  • 5. Every experiment has to be evaluated on the basis of a single standard report of 5 to 10 metrics.
  • 6. Every team that works inside the sandbox and every product that is built must use the same metrics to evaluate success.
  • 7. Any team that creates an experiment must monitor the metrics and customer reactions while the experiment is in progress and abort it if something catastrophic happens.

Management portfolio:

There are four kinds of work that companies must manage:

  • 1. Early startup: the entrepreneurs must tackle the challenge of scale.
  • 2. Late startup: New mainstream customers are acquired and new markets are conquered. The product becomes part of the public face. It has implications for PR, marketing sales, business development.
  • 3. Incumbent: Market is well established. To combat commoditization of the product in the market, line extensions, incremental upgrades, and new forms of marketing are essentials. Operational excellence and optimization are necessary to drive the costs down.
  • 4. Legacy company: costs are driven down with automation & outsourcing. Keep the loyal customers for as long as possible.

References:

Take care,

Nico