The Lean Startup - critical summary review

Eric Ries is one of the greatest thinkers of the tech startups movement in the world. He defines a startup as an organization created in situations of extreme uncertainty, seeking a scalable and repeatable business model. In The Lean Startup, he proposes a different model of thinking about entrepreneurship that has been widely adopted by the community. The Lean Startup Methodology, also known as the Lean Methodology, helps companies to become more efficient, spend less and make the most out of their biggest asset, their people.

In this microbook, we bring you a model to help your company learn in a market-validated way through rapid and constant experimentation. The lean way to start businesses needs speed and agility to be able to change directions whenever necessary. Leave your business plan aside and dive with us into this reading!

The Importance of Vision

Every startup has a true north, a direction where it would like to go, which is directly associated with its vision.

You need to have a clear strategy that involves a business model, product plan, and a clear market understanding, including partners, competitors, and customers. The product sold by a startup is the end-result of this strategy and can - and should - always change to achieve the predetermined vision. Eric refers to the great strategic turns of a startup as pivots. The vision almost never changes, but most companies fail because they are unable to execute and put this vision into practice. A startup is a human organization designed to create a new product or service in an environment of extreme uncertainty. Therefore it is necessary to experiment and learn quickly.

The Importance of Validated Learning

It is natural for people to say they learned a lot during a project, or while starting something new, but for Eric, it takes more than just learning. It is necessary to constantly validate the learnings and check if it still remains true. Your true goal is not the learning itself, but the validation of it. Validation comes through simplifying and proving that you are solving a problem that people have. You need to focus on what customers really need and eliminate everything else. In IMVU, his startup, Eric worked developing a 3D virtual world and plugins for chat tools in 2004. During the company's initial testing phase, in conversations with users and observing their behaviors, he found that consumers did not want - nor did they know - how to install the plugins in their chat software. On the other hand, he also learned that people did not mind having to install new chat software, or even use more than one software. This learning was validated by consumers, and he realized that he had wasted a lot of time and resources creating something that people did not want or knew how to use. After this realization, Eric and his team realized that the important thing was to launch experiments quickly, learn from them and understand what works and what doesn’t.

Validation came from the numbers and analysis of users’ behaviors. If a change occurred and brought good results, it was validated and maintained. Otherwise, it was removed.

The Importance of Early Monetization

In the life of a startup, one of its goals is to find a business model, and this comes through revenue generation. If people pay for something, that is minimally validated.

Eric's startup started charging its customers early, unlike many startups, and that also helped his team. It is better to have some income as soon as possible, even if it is low, than to spend a lot of time trying to figure out something that people will pay for one day. Many entrepreneurs get caught up in product development for a long time without charging their potential customers and dreaming of the day when people will simply want to pay for their products and services. The great truth is that most of the time postponing invoicing leads to the development of products for which people do not want to pay. Starting to charge early is important and will help you to really understand how much value you are generating for users with your product or service.

To discover a business model, you need to interact with potential customers and capture value. Therefore, you need to start with a prototype, albeit incomplete and constantly validate it with your potential customers. Create revenue targets, although low, but grow steadily from the start.

The Importance of Experimentation

The founders of Zappos had a vision in which he believed that people would want to buy shoes online.

But how do you test if this really works, without having to buy thousands of pairs of shoes, building a website and build a stock? Rather than starting with a large structure, they did an experiment to validate if there was enough demand to achieve the vision of selling shoes online. They started by taking pictures of shoes in various physical stores and advertising them on the internet. If a customer placed an order, they would go to the store, buy the shoe, and send it to the customer. This minimal product allowed them to test many critical factors for business success. With this experiment, they validated that there was demand, they learned the optimal pricing for their products, became aware of complaints and the logistical challenges of the business with a minimum of expenses. This validation allowed them to really start the company and it was such a success that it was eventually acquired by the giant Amazon for more than one billion dollars.

Build, Mesure, Learn

To experiment in the right way and to generate validated learning, you must follow the scientific method. Just as in science, in the business world, every experiment must begin with a hypothesis. A price hypothesis, for example, tests whether the product generates value to users. A marketing hypothesis, on the other hand, tests whether the company can reach out to consumers at a cost to generate profit. To test the value of your product to the customer, find potential customers to run the experiment. To conduct an effective test, you need to follow 3 main steps:

• Build;
• Measure;
• Learn;

In a startup, this cycle must be running all the time. Find people who would be the ideal customers for that imaginable product and build a minimum viable product (MVP), having you as a concierge. Yes, the product will not be mature enough, but for the initial users, if the problem you solve is large enough to generate value for them, they will forgive you for its shortcomings and bugs.

Participate actively in product validation with customers and monitor all experiment results. Track new revenue, adoption of features, the frequency of use, etc. Always analyze whether the measurement corroborates your initial hypothesis.

For example, if a customer asks for a feature that does not yet exist but you plan to do one day, that means you're on the right track. On the other hand, if there are features in the product plan that are not ordered by customers, remove them from the plan to avoid waste. These close interactions with customers will help you to constantly validate your hypotheses.

The build-measure-learn model is the main pillar of the lean startup, and once an MVP is built, its purpose is to quickly learn and iterate through it, always starting from new assumptions and user feedbacks.

The Leap of Faith

Every startup also needs to have their own beliefs about its product and its ability to truly cater to the cravings of customers. Steve Jobs, for example, when launching the iPod, had 2 primordial beliefs, which were considered true. The first of these is that users wanted to listen to music anywhere, on their headphones. The second is that they were willing to pay for music on the internet, unlike how they formerly consumed music, through digital piracy. The first had already been validated by Sony, with the Walkman, but the second was much more uncertain and risky. You need to be able to choose the risks you are going to take and reduce them to the maximum through validation.

Intuit is a company that was founded on the belief that someday companies would use computers to pay bills and to track their expenses and their financial and accounting status. To test the concept, the founders phoned random people to understand how this vision applied in practice.

Toyota, which is one of the forerunners of the lean movement, had a validation method called "See for yourself," whose premise encouraged employees to experience situations in which it was necessary to learn before creating new products. Its director of the SUV segment, to learn more about the potential customer, traveled through the United States in an SUV understanding how the minivan worked in practice. He quickly discovered that on long trips, families with children (the target audience of the SUV) comfort matters a lot and is a differential for the whole family. When the vehicle was launched, it had full focus on comfort and a cozy internal space for long family trips. This made the vehicle a great success.

One of the biggest challenges to avoid is getting paralyzed to analyze market information. A startup is only able to learn by talking comprehensively and putting themselves in the shoes of the consumers. Many strategy mistakes can be avoided by just talking to the customer all the time.

How to Test Your Product

When it began, Andrew Mason's vision, founder of Groupon, was to create a platform for digital activism, where people related to their causes. That was the leap of faith, and it failed for Groupon.

To overcome this defeat, the Groupon team began experimenting with different ideas, through a blog and a mailing list, to which it sent discount coupons. At first, it was all manual, and there was no proprietary software to validate that idea. Only the company team interacting with customers.

Very quickly, they felt that the idea was well accepted by the users and they began an effort to automate it and build the software that would run Groupon months later. It is important to show the product, albeit immature to customers, as soon as possible to use certainty and not just faith to validate a market. This may sound counterintuitive for entrepreneurs who always want to get the best possible product, but the best possible product is an uncertain future, and you are only able to reach it if you are effectively testing ideas and validating them.

Another story of a product that benefited from the early launch and learn approach was Dropbox. The cloud storage solution was looking for investments, and all investors said that it was a saturated market. No one wanted to invest. Drew Houston, CEO of Dropbox had a different vision. He thought the market was bad because cloud storage products were bad and difficult to use, so he moved quickly to validate his idea. He created a video demonstrating the vision of what the software would look like and drew people's attention to a new approach to file storage. This allowed him to validate that there was demand for the product he wanted to build and then actually build the software.

Many entrepreneurs are afraid to launch an MVP, out of fear of competition from larger companies. However, this perception is flawed, since product managers at large companies are often bogged down with projects at all times, having great ideas but no speed. They know that if they want to copy something, they can copy something later, so you shouldn't worry about it to delay your MVP tests.

In experimentation, it is very important to understand that what users perceive as product quality is quite different from what the company perceives. Users care if the product works for them and not if it has been invested a lot of time to create it. In some cases, you can accidentally create things that users love and have not been designed for, so you need to test new things and monitor them all the time.

How to Measure Your MVP

Once you build your MVP and have the first users, test the riskiest assumptions first, so you maximize your chances of getting hit and also reduce the risks of testing something too bold that will alienate your customers later on. Define the fundamental metric you want to affect (revenue, adoption, acquisition) and create a set of experiments to attack it. If the results are positive, continue in that direction and if they are negative, consider changing the direction. It is important to be careful not to follow vanity metrics, metrics that are expressive in volume, but do not capture the real value of your product to the customer. Forget metrics as registered users and focus on using your product, ability to acquire new customers and grow your revenue. For Eric Ries, the good metrics are:

• Actionable: You know what to do to change it;
• Accessible: It is easy to follow;
• Auditable: It is trustworthy;

Create a template to prioritize your assumptions with 3 parts: saved tests, in-progress tests, and validated tests. Prioritize your experiments in these columns and after evaluating the metrics, keep the successful experiments and discard those that failed.

Continue or Pivot?

How much money your company has in the bank and how much you spend each month tells you how much you can try. Track this closely, to always know if it's time to continue in the current direction or take a turn in your business. If things are going well and your product keeps growing, with great prospects, you've probably found your fit or the Product Market Fit, a term created by Eric.

When your company can't make progress with the assumptions and the existing MVP, and the numbers do not keep improving, it may be time to pivot. A pivot is a new product direction, with new validations and potentially new customer profiles. Many entrepreneurs regret not having "pivoted" earlier, or made it too late and the company did not survive. Several companies go through pivots and it is extremely common to have these turns. Wealthfront, for example, pivoted from an equity management service for investors to an investment management company for consumers on the internet.

Know the Different Types of Pivots

If it's time to change direction, you need to understand that there are many different types of paths that your company can follow.

• Internal Pivot: Occurs when an MVP functionality becomes the new product and it focuses on improving only the part of the system that already works;
• External pivot: When the current MVP becomes a feature of a new product;
• Customer Segment Pivot: Occurs when the product is the same, but marketed to other customers;
• Customer need pivot: When the customer is the same, but the value proposition for it changes;
• Platform Pivot: When the product ceases to be a single product and becomes a platform for other products;
• Business Architecture Pivot: When the company dramatically changes its business model in pursuit of capturing more value;
• Value pivot: When the way the company charges for its services changes;
• Growth Pivot: Occurs when the way the company acquires new customers changes.
• Channel Pivot: When the distribution channels change;
• Technology Pivot: When the technology used to build the product changes;

You need to consider all kinds of pivots before making a change. Ask yourself what would have the most impact:

• Change my target client?
• Change the billing model?
• Change your distribution channels?
• Change the way you acquire customers?

Document these possible directions and create experiments before you make the pivot itself.

The Market Fit

If your company has market fit, it's important to know that new customers come to it based on the success of previous customers, as they are constantly talking about your product to other companies, using it and recommending it. If you are in doubt whether your company has hit the market fit, it probably has not yet. But if you already know that the demand for your product only grows, there is no more doubt, and it is time to step on the accelerator. The important thing is that as the company grows, it is able to adapt to its customer profile, which has also evolved over time. You need to be able to adapt, find new channels of acquisition and constantly improve the product.

Do Not Get Stagnated

Large companies may be able to innovate but to achieve this goal they need to be able to form small, independent teams with the resources they need. At Toyota, every time a new product comes on the market, a small team is created, and the team is free to experiment.

These teams need to be politically shielded from the other groups of the organization. According to Eric, creating secret teams ends up generating more internal policies, which is detrimental to the project. The team must be the owner of the project and have the autonomy to put it into practice.

Final Notes:

Startups should take a scientific approach to test their main assumptions and then build a sustainable business model from a validated hypothesis. They should develop product prototypes quickly and then continually refine them by collecting consumer feedback and BML(Build, Measure, Learn) cycles.

Every startup must define its core metrics and analyze them appropriately.

12min tip: Did you like Lean Startup? Read the work that most influenced Eric Ries, “The Four Steps to Epiphany”, by Professor Steve Blank.