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by
Eric Ries
If a competitor can outexecute a startup once the idea is known, the startup is doomed anyway.
The reason to build a new team to pursue an idea is that you believe you can accelerate through the Build-Measure-Learn feedback loop faster than anyone else can. If that’s true, it makes no difference what the competition knows.
time spent in stealth mode—away from customers—is unlikely to provide a head start. The only way to win is to learn faster than anyone else.
Finally, it helps to prepare for the fact that MVPs often result in bad news.
they often provide a needed dose of reality.
FROM THE MVP TO INNOVATION ACCOUNTING
You have to commit to a locked-in agreement—ahead of time—that no matter what comes of testing the MVP, you will not give up hope.
The MVP is just the first step on a journey of learning.
you may learn that some element of your product or strategy is flawed and decide it is time to make a change, which I call a pivot, to a different method for achieving your vision.
In traditional management, a manager who promises to deliver something and fails to do so is in trouble.
Entrepreneurial managers face a difficult problem: because the plans and projections we make are full of uncertainty, how can we claim success when we inevitably fail to deliver what we promised?
7 MEASURE
startup’s job is to (1) rigorously measure where it is right now, confronting the hard truths that assessment reveals, and then (2) devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan.
One of the most dangerous outcomes for a startup is to bumble along in the land of the living dead.
We want to keep believing in our ideas even when the writing is on the wall. This is why the myth of perseverance is so dangerous.
WHY SOMETHING AS SEEMINGLY DULL AS ACCOUNTING WILL CHANGE YOUR LIFE
How do we know that the changes we’ve made are related to the results we’re seeing? More important, how do we know that we are drawing the right lessons from those changes?
An Accountability Framework That Works Across Industries
Innovation accounting begins by turning the leap-of-faith assumptions discussed in Chapter 5 into a quantitative financial model.
For example, the business plan for an established manufacturing company would show it growing in proportion to its sales volume.
The rate of growth depends primarily on three things: the profitability of each customer, the cost of acquiring new customers, and the repeat purchase rate of existing customers. The higher these values are, the faster the company will grow and the more profitable it will be.
By contrast, a marketplace company that matches buyers and sellers such as eBay will have a different growth model. Its success depends primarily on the network effects
For this kind of startup, the important thing to measure is that the network effects are working, as evidenced by the high retention rate of new buyers and sellers.
HOW INNOVATION ACCOUNTING WORKS—THREE LEARNING MILESTONES
Innovation accounting works in three steps: first, use a minimum viable product to establish real data on where the company is right now.
Second, startups must attempt to tune the engine from the baseline toward the ideal. This may take many attempts.
After the startup has made all the micro changes and product optimizations it can to move its baseline toward the ideal, the company reaches a decision point. That is the third step: pivot or persevere.
When a company pivots, it starts the process all over again, reestablishing a new baseline and then tuning the engine from there. The sign of a successful pivot is that these engine-tuning activities are more productive after the pivot than before.
Establish the Baseline
a startup might prefer to build separate MVPs that are aimed at getting feedback on one assumption at a time. 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.
These MVPs provide the first example of a learning milestone
An MVP allows a startup to fill in real baseline data in its growth model—conversion rates, sign-up and trial rates, customer lifetime value, and so on—and
When one is choosing among the many assumptions in a business plan, it makes sense to test the riskiest assumptions first.
For example, a media business that is selling advertising has two basic assumptions that take the form of questions: Can it capture the attention of a defined customer segment on an ongoing basis? and can it sell that attention to advertisers?
In a business in which the advertising rates for a particular customer segment are well known, the far riskier assumption is the ability to capture attention. Therefore, the first experiments should involve content production rather than advertising sales.
Tuning the Engine
For example, a company might spend time improving the design of its product to make it easier for new customers to use. This presupposes that the activation rate of new customers is a driver of growth and that its baseline is lower than the company would like. To demonstrate validated learning, the design changes must improve the activation rate of new customers. If they do not, the new design should be judged a failure.
Pivot or Persevere
if we’re not moving the drivers of our business model, we’re not making progress. That becomes a sure sign that it’s time to pivot.
INNOVATION ACCOUNTING AT IMVU
the quality improvements were not yielding any change in customer behavior. This led to some frustrating board meetings at which we could show great product “progress” but not much in the way of business results.
Improving a Product on Five Dollars a Day
To have enough data to learn, we needed just enough customers using our product to get real numbers for each behavior. We allocated a budget of five dollars per day: enough to buy clicks on the then-new Google AdWords system.
Five dollars bought us a hundred clicks—every day.
Every single day we were able to measure our product’s performance with a brand new set of customers. Also, each time we revised the product, we got a brand new report card on how we were doing the very next day.
Day in and day out we were performing random trials. Each day was a new experiment.
Here is a graph from one of IMVU’s early board meetings:
Cohort Analysis
To read the graph, you need to understand something called cohort analysis. This is one of the most important tools of startup analytics.
