The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses

by Eric Ries

“The road map for innovation for the twenty-first century. The ideas in The Lean Startup will help create the next industrial revolution.” —Steve Blank, lecturer, Stanford University, UC Berkeley Hass Business School

Steve blank on the lean startup

“If you are an entrepreneur, read this book. If you are thinking about becoming an entrepreneur, read this book. If you are just curious about entrepreneurship, read this book. Starting Lean is today’s best practice for innovators. Do yourself a favor and read this book.” —Randy Komisar, founding director of TiVo and author of the bestselling The Monk and the Riddle

Founding director of TiVo on the lean startup

We must learn what customers really want, not what they say they want or what we think they should want.

What customers really want, not what they say they want

The next few months are where the true story of IMVU begins, not with our brilliant assumptions and strategies and whiteboard gamesmanship but with the hard work of discovering what customers really wanted and adjusting our product and strategy to meet those desires. We adopted the view that our job was to find a synthesis between our vision and what customers would accept; it wasn’t to capitulate to what customers thought they wanted or to tell customers what they ought to want.

Our job was to find a synthesis between our vision and what customer would accept

What we needed to demonstrate was that our product development efforts were leading us toward massive success without giving in to the temptation to fall back on vanity metrics and “success theater”—the work we do to make ourselves look successful. We could have tried marketing gimmicks, bought a Super Bowl ad, or tried flamboyant public relations (PR) as a way of juicing our gross numbers. That would have given investors the illusion of traction, but only for a short time. Eventually, the fundamentals of the business would win out and the PR bump would pass. Because we would have squandered precious resources on theatrics instead of progress, we would have been in real trouble.

Sucess theather

The Lean Startup model offers a way to test these hypotheses rigorously, immediately, and thoroughly. Strategic planning takes months to complete; these experiments could begin immediately. By starting small, Caroline could prevent a tremendous amount of waste down the road without compromising her overall vision.

Strategic planning takes months to complete, the lean startup model could start right now

growth hypothesis, which tests how new customers will discover a product or service,

Growth hypothesis: how new customers will discover a product or service

The point is not to find the average customer but to find early adopters: the customers who feel the need for the product most acutely. Those customers tend to be more forgiving of mistakes and are especially eager to give feedback.

Find the early adopters, the people that most need your product

As we’ve seen, even the seasoned managers and executives at the world’s best-run companies struggle to consistently develop and launch innovative new products. Their challenge is to overcome the prevailing management thinking that puts its faith in well-researched plans. Remember, planning is a tool that only works in the presence of a long and stable operating history. And yet, do any of us feel that the world around us is getting more and more stable every day? Changing such a mind-set is hard but critical to startup success. My hope is that this book will help managers and entrepreneurs make this change.

Remember, planning is a tool that only works in the presence of a long and stable operating history

Is the lesson of Facebook that startups should not charge customers money in the early days? Or is it that startups should never spend money on marketing? These questions cannot be answered in the abstract; there are an almost infinite number of counterexamples for any technique. Instead, as we saw in Part One, startups need to conduct experiments that help determine what techniques will work in their unique circumstances. For startups, the role of strategy is to help figure out the right questions to ask.

Startups need to conduct experiments to determine what techniques work in their unique circumstances

In my Toyota interviews, when I asked what distinguishes the Toyota Way from other management approaches, the most common first response was genchi gembutsu—whether I was in manufacturing, product development, sales, distribution, or public affairs. You cannot be sure you really understand any part of any business problem unless you go and see for yourself firsthand. It is unacceptable to take anything for granted or to rely on the reports of others.6

Genchi gembutsu, go and see for yourself

A minimum viable product (MVP) helps entrepreneurs start the process of learning as quickly as possible.3 It is not necessarily the smallest product imaginable, though; it is simply the fastest way to get through the Build-Measure-Learn feedback loop with the minimum amount of effort.

Minimum Viable Product: the simplest product you could build to test your business plan hypothesis

Most modern business and engineering philosophies focus on producing high-quality experiences for customers as a primary principle; it is the foundation of Six Sigma, lean manufacturing, design thinking, extreme programming, and the software craftsmanship movement. These discussions of quality presuppose that the company already knows what attributes of the product the customer will perceive as worthwhile. In a startup, this is a risky assumption to make. Often we are not even sure who the customer is. Thus, for startups, I believe in the following quality principle: If we do not know who the customer is, we do not know what quality is.

Quality also depends on knowing who is the customer and what he wants

This inexpensive compromise outperformed many features of the product we were most proud of, features that had taken much more time and money to produce. Customers don’t care how much time something takes to build. They care only if it serves their needs.

Customers don't care about how much time and money something takes to build

MVPs require the courage to put one’s assumptions to the test. If customers react the way we expect, we can take that as confirmation that our assumptions are correct. If we release a poorly designed product and customers (even early adopters) cannot figure out how to use it, that will confirm our need to invest in superior design. But we must always ask: what if they don’t care about design in the same way we do?

MVPs should meassure if the users want those new features or not

startups have the advantage of being obscure, having a pathetically small number of customers, and not having much exposure. Rather than lamenting them, use these advantages to experiment under the radar and then do a public marketing launch once the product has proved itself with real customers.11

Make your MVPs and learn being under the radar and when the product is proved by customers launch it

Before building the prototype, the company might perform a smoke test with its marketing materials. This is an old direct marketing technique in which customers are given the opportunity to preorder a product that has not yet been built. A smoke test measures only one thing: whether customers are interested in trying a product. By itself, this is insufficient to validate an entire growth model. Nonetheless, it can be very useful to get feedback on this assumption before committing more money and other resources to the product.

Smoke test

A few years ago, a team that sells products to large media companies invited me to help them as a consultant because they were concerned that their engineers were not working hard enough. However, the fault was not in the engineers; it was in the process the whole company was using to make decisions. They had customers but did not know them very well. They were deluged with feature requests from customers, the internal sales team, and the business leadership. Every new insight became an emergency that had to be addressed immediately. As a result, long-term projects were hampered by constant interruptions. Even worse, the team had no clear sense of whether any of the changes they were making mattered to customers. Despite the constant tuning and tweaking, the business results were consistently mediocre.

Discipline is useless if your following a bad plan

the grand bargain of agile development: engineers agree to adapt the product to the business’s constantly changing requirements but are not responsible for the quality of those business decisions.

Software development: engineers build what the business manager says even if its the wrong product

There is an antidote to this misuse of data. First, make the reports as simple as possible so that everyone understands them. Remember the saying “Metrics are people, too.” The easiest way to make reports comprehensible is to use tangible, concrete units. What is a website hit? Nobody is really sure, but everyone knows what a person visiting the website is: one can practically picture those people sitting at their computers.

Do your metrics with people as units

Startup productivity is not about cranking out more widgets or features. It is about aligning our efforts with a business and product that are working to create value and drive growth.

Startup productivity is about aligning with a business and product, not making more features

The reality of our team and our backgrounds built up a massive wall of expectations. I don’t think it would have mattered what we would have released; we would have been met with expectations that are hard to live up to. But to us it just meant we needed to get our product and our vision out into the market broadly in order to get feedback and to begin iteration. We humbly test our theories and our approach to see what the market thinks. Listen to feedback honestly. And continue to innovate in the directions we think will create meaning in the world.

Dave morin on Path: we humbly test our theories and our approach to see what the market thinks

I recommend that every startup have a regular “pivot or persevere” meeting. In my experience, less than a few weeks between meetings is too often and more than a few months is too infrequent. However, each startup needs to find its own pace.

Schedule a regular "pivot or pesevere" meeting

Once you have found success with early adopters, you want to sell to mainstream customers. Mainstream customers have different requirements and are much more demanding. The kind of pivot we needed is called a customer segment pivot. In this pivot, the company realizes that the product it’s building solves a real problem for real customers but that they are not the customers it originally planned to serve.

Early adopters and mainstream customers have different requirements

Product managers figure out what features are likely to please customers; product designers then figure out how those features should look and feel. These designs are passed to engineering, which builds something new or modifies an existing product and, once this is done, hands it off to somebody responsible for verifying that the new product works the way the product managers and designers intended.

For tiny changes, the whole process might be repeated several times per day. In fact, in the aggregate, IMVU makes about fifty changes to its product (on average) every single day. Just as with the Toyota Production System, the key to being able to operate this quickly is to check for defects immediately, thus preventing bigger problems later. For example, we had an extensive set of automated tests that assured that after every change our product still worked as designed.

Develop and try one feature at the time. But be careful to have a safety net

The essential lesson is not that everyone should be shipping fifty times per day but that by reducing batch size, we can get through the Build-Measure-Learn feedback loop more quickly than our competitors can. The ability to learn faster from customers is the essential competitive advantage that startups must possess.

The ability to learn faster from customers is what will let you win to the other companies

What happens when engineering has questions about how the drawings are supposed to work? What if some of the drawings are unclear? What if something goes wrong when engineering attempts to use the drawings? These problems inevitably turn into interruptions for the designer, and now those interruptions are interfering with the next large batch the designer is supposed to be working on. If the drawings need to be redone, the engineers may become idle while they wait for the rework to be completed. If the designer is not available, the engineers may have to redo the designs themselves. This is why so few products are actually built the way they are designed.

Large batches working alone vs small batches working like a team

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

Sustainable growth: new customers come from the actions of past customers

how many friends will each customer bring with him or her? Since each friend is also a new customer, he or she has an opportunity to recruit yet more friends. For a product with a viral coefficient of 0.1, one in every ten customers will recruit one of his or her friends. This is not a sustainable loop. Imagine that one hundred customers sign up. They will cause ten friends to sign up. Those ten friends will cause one additional person to sign up, but there the loop will fizzle out. By contrast, a viral loop with a coefficient that is greater than 1.0 will grow exponentially, because each person who signs up will bring, on average, more than one other person with him or her.

Viral engine of growth

This is one of the most important discoveries of the lean manufacturing movement: you cannot trade quality for time. If you are causing (or missing) quality problems now, the resulting defects will slow you down later. Defects cause a lot of rework, low morale, and customer complaints, all of which slow progress and eat away at valuable resources.

If you are causing(or missing) quality problems now, the resulting defects will slow you down later

The Five Whys ties the rate of progress to learning, not just execution. Startup teams should go through the Five Whys whenever they encounter any kind of failure, including technical faults, failures to achieve business results, or unexpected changes in customer behavior. Five Whys is a powerful organizational technique. Some of the engineers I have trained to use it believe that you can derive all the other Lean Startup techniques from the Five Whys. Coupled with working in small batches, it provides the foundation a company needs to respond quickly to problems as they appear, without overinvesting or overengineering.

Five Whys and small batches, no overinvesting or overengineering

When blame inevitably arises, the most senior people in the room should repeat this mantra: if a mistake happens, shame on us for making it so easy to make that mistake. In a Five Whys analysis, we want to have a systems-level view as much as possible.

If a mistake happens, shame on us for making it so easy to make that mistake

This is the standard “waterfall” development methodology that product development teams have used for years. It is a linear, large-batch system that relies for success on proper forecasting and planning. In other words, it is completely maladapted for today’s rapidly changing business environment.

Waterfall methodology is completely maladapted for today's rapidly changing business enviroment

Internal startup teams require support from senior management to create these structures. Internal or external, in my experience startup teams require three structural attributes: scarce but secure resources, independent authority to develop their business, and a personal stake in the outcome. Each of these requirements is different from those of established company divisions. Keep in mind that structure is merely a prerequisite—it does not guarantee success. But getting the structure wrong can lead to almost certain failure.

Internal startups: startups inside a big corporation

Listening in, I assumed this would be the end of the meeting. With no agreed-on facts to help make the decision, I thought nobody would have any basis for making the case for a particular action. I was wrong. Each department simply took whatever interpretation of the data supported its position best and started advocating on its own behalf. Other departments would chime in with alternative interpretations that supported their positions, and so on. In the end, decisions were not made based on data. Instead, the executive running the meeting was forced to base decisions on the most plausible-sounding arguments.

Save your ass decision making of big companies

When people have a chance to see a project through from end to end and the work is done in small batches and delivers a clear verdict quickly, they benefit from the power of feedback. Each time they fail to move the numbers, they have a real opportunity to act on their findings immediately. Thus, these teams tend to converge on optimal solutions rapidly even if they start out with really bad ideas.

THE POWER OF FAST FEEDBACK

It is these questions that require the use of theory to answer. Those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed. I had to learn this the hard way. In a startup situation, things constantly go wrong. When that happens, we face the age-old dilemma summarized by Deming: How do we know that the problem is due to a special cause versus a systemic cause? If we’re in the middle of adopting a new way of working, the temptation will always be to blame the new system for the problems that arise. Sometimes that tendency is correct, sometimes not. Learning to tell the difference requires theory. You have to be able to predict the outcome of the changes you make to tell if the problems that result are really problems.

Those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed

We can see and feel the waste of material things. Awkward, inefficient, or ill-directed movements of men, however, leave nothing visible or tangible behind them. Their appreciation calls for an act of memory, an effort of the imagination. And for this reason, even though our daily loss from this source is greater than from our waste of material things, the one has stirred us deeply, while the other has moved us but little.1

Taylor on our waste of human effort

How much of our current innovation work is guided by catchphrases that lack a scientific foundation?

How much of our management is guided by catchphrases that lack a scientific foundation?

We would not waste time on endless arguments between the defenders of quality and the cowboys of reckless advance; instead, we would recognize that speed and quality are allies in the pursuit of the customer’s long-term benefit. We would race to test our vision but not to abandon it. We would look to eliminate waste not to build quality castles in the sky but in the service of agility and breakthrough business results. We would respond to failures and setbacks with honesty and learning, not with recriminations and blame.

Cowboys of reckless advance

Sean Ellis writes the Startup Marketing Blog, which has been influential in my thinking about how to integrate marketing into startups: http://startup-marketing.com/ Andrew Chen’s blog Futuristic Play is one of the best sources for thoughts on viral marketing, startup metrics, and design: http://andrewchenblog.com/

Startup marketing

Real startups involve failure, embarrassing mistakes, and constant chaos. In my research for this book, I discovered that most entrepreneurs and managers would prefer not to have the real story of their daily work told in public. Therefore, I am indebted to the courageous entrepreneurs who consented to have their stories told, many of whom spent hours in tedious interviews and fact-checking conversations. Thank you.

Real startups involve failure, embarrassing mistakes, and constant chaos

We all owe Steve Blank a debt for the work he did developing the theory of customer development at a time when it was considered heretical in startup and VC circles. As I mentioned in the Introduction, Steve was an early investor in and adviser to IMVU. For the past seven years, he has been an adviser, mentor, and collaborator to me personally. I want to thank him for his encouragement, support, and friendship.

We all owe Steve Blank a debt for the work he did developing the theory of customer development