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

by Eric Ries

A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.

the most important part of this definition is what it omits. It says nothing about size of the company, the industry, or the sector of the economy.

The word institution connotes bureaucracy, process, even lethargy. How can that be part of a startup? Yet successful startups are full of activities associated with building an institution: hiring creative employees, coordinating their activities, and creating a company culture that delivers results.

a startup is not just about a product, a technological breakthrough, or even a brilliant idea. A startup is greater than the sum of its parts; it is an acutely human enterprise.

The fact that a startup’s product or service is a new innovation is also an essential part of the def...

Anything those customers experience from their interaction with a company should be considered part of that company’s product.

It’s also important that the word innovation be understood broadly. Startups use many kinds of innovation: novel scientific discoveries, repurposing an existing technology for a new use, devising a new business model that unlocks value that was hidden, or simply bringing a product or service to a new location or a previously underserved set of customers. In all these cases, innovation is at the heart of the company’s success.

THE SNAPTAX STORY

In 2009, a startup decided to try something really audacious. They wanted to liberate taxpayers from expensive tax stores by automating the process of collecting information typically found on W-2 forms

After numerous conversations with potential customers, the team lit upon the idea of having customers take photographs of the forms directly from their cell phone. In the process of testing this concept, customers asked something unexpected: would it be possible to finish the whole tax return right on the phone itself?

Instead of having consumers fill out a complex form, they allowed the customers to use the phone’s camera to take a picture of their W-2 forms. From that single picture, the company developed the technology to compile and file most of the 1040 EZ tax return.

This is the kind of amazing innovation you’d expect from a new startup. However, the name of this company may surprise you. SnapTax was developed by Intuit,

Usually, companies like Intuit fall into the trap described in Clayton Christensten’s The Innovator’s Dilemma: they are very good at creating incremental improvements to existing products and serving existing customers, which Christensen called sustaining innovation, but struggle to create breakthrough new products—disruptive innovation—that can create new sustainable sources of growth.

What allowed the SnapTax team to innovate was not their genes, destiny, or astrological signs but a process deliberately facilitated by Intuit’s senior management.

A SEVEN-THOUSAND-PERSON LEAN STARTUP

Now they test over five hundred different changes in a two-and-a-half-month tax season. They’re running up to seventy different tests per week. The team can make a change live on its website on Thursday, run it over the weekend, read the results on Monday, and come to conclusions starting Tuesday; then they rebuild new tests on Thursday and launch the next set on Thursday night.

You don’t have to be high tech to use fast-cycle testing.”

believe a company’s only sustainable path to long-term economic growth is to build an “innovation factory” that uses Lean Startup techniques to create disruptive innovations on a continuous basis.

they hold themselves accountable for their new innovation efforts by measuring two things: the number of customers using products that didn’t exist three years ago and the percentage of revenue coming from offerings that did not exist three years ago.

“Developing these experimentation systems is the responsibility of senior management; they have to be put in by the leadership. It’s moving leaders from playing Caesar with their thumbs up and down on every idea to—instead—putting in the culture and the systems so that teams can move and innovate at the speed of the experimentation system.”

3 LEARN

What if we found ourselves building something that nobody wanted? In that case what did it matter if we did it on time and on budget?

“learning” is the oldest excuse in the book for a failure of execution. It’s what managers fall back on when they fail to achieve the results we promised.

However, learning is cold comfort to employees who are following an entrepreneur into the unknown. It is cold comfort to the investors who allocate precious money, time, and energy to entrepreneurial teams.

You can’t take learning to the bank; you can’t spend it or invest it.

In the Lean Startup model, we are rehabilitating learning with a concept I call validated learning. Validated learning is not after-the-fact rationalization or a good story designed to hide failure. It is a rigorous method for demonstrating progress

Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects.

VALIDATED LEARNING AT IMVU

Brilliant Strategy

IM is an example of a market that involves strong network effects. Like most communication networks, IM is thought to follow Metcalfe’s law: the value of a network as a whole is proportional to the square of the number of participants. In other words, the more people in the network, the more valuable the network. This makes intuitive sense: the value to each participant is driven primarily by how many other people he or she can communicate with. Imagine a world in which you own the only telephone; it would have no value. Only when other people also have a telephone does it become valuable.

Because of the near impossibility of bringing a new IM network to market, we decided to build an IM add-on product that would interoperate with the existing networks. Thus, customers would be able to adopt the IMVU virtual goods and avatar communication technology without having to switch IM providers, learn a new user interface, and—most important—bring their friends with them.

Six Months to Launch

The add-on product was so large and complex and had so many moving parts that we had to cut a lot of corners to get it done on time. I won’t mince words: the first version was terrible. We spent endless hours arguing about which bugs to fix and which we could live with, which features to cut and which to try to cram in.

Personally, I was worried that the low quality of the product would tarnish my reputation as an engineer.

All of us feared tarnishing the IMVU brand; after all, we were charging people money for a product that didn’t work very well.

Launch

After all the hours we had spent arguing about which features to include and which bugs to fix, our value proposition was so far off that customers weren’t getting far enough into the experience to find out how bad our design choices were. Customers wouldn’t even download our product.

Over the ensuing weeks and months, we labored to make the product better.

We soon ran out of friends and family; our frustration escalated. We were making the product better every day, yet our customers’ behavior remained unchanged: they still wouldn’t use it.

efforts to bring customers into our office for in-person interviews and usability tests.

In short, our entire strategic analysis of the market was utterly wrong.

Customers could not tell us what they wanted; most, after all, had never heard of 3D avatars.

Talking to Customers

She looks at us, her face filled with doubt; you can see that this is a deal breaker. Of course, the first time I had that experience, I said, “It’s all right, it’s just this one person, send her away and get me a new one.” Then the second customer comes in and says the same thing. Then the third customer comes in, and it’s the same thing. You start to see patterns, and no matter how stubborn you are, there’s obviously something wrong.

You could see their eyes go wide, and they’d say, “Are you kidding me? A stranger on my AIM buddy list?” To which we’d respond, “Yes; otherwise you’d have to download a whole new IM client with a new buddy list.” And they’d say, “Do you have any idea how many IM clients I already run?” “No. One or two, maybe?” That’s how many clients each of us in the office used. To which the teenager would say, “Duh! I run eight.” We had no idea how many instant messaging clients there were in the world.

We had the incorrect preconception that it’s a challenge to learn new software and it’s tricky to move your friends over to a new buddy list. Our customers revealed that this was nonsense.

We had a mental model for how people used software that was years out of date, and so eventually, painfully, after dozens of meetings like that, it started to dawn on us that the IM add-on concept was fundamentally flawed.

Bit by bit, customers tore apart our seemingly brilliant initial strategy.

Throwing My Work Away

Perhaps you can sympathize with o...