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

by Eric Ries

Let me tell you a second startup story. It’s 2004, and a group of founders have just started a new company. Their previous company had failed very publicly. Their credibility is at an all-time low. They have a huge vision: to change the way people communicate by using a new technology called avatars

one of those people who grew up programming computers, and so my journey to thinking about entrepreneurship and management has taken a circuitous path. I have always worked on the

methods I mentioned earlier. Measured against the traditional theories of product development I had been trained on in my career,

especially manufacturing, from which most modern theories of management derive.

the Toyota Production System, a completely new way of thinking about the manufacturing of physical goods.

loss of manufacturing capability. That’s because total manufacturing output in the United States is increasing (by 15 percent in the last decade) even as jobs continue to be lost (see the charts below).

Startup takes its name from the lean manufacturing revolution that Taiichi Ohno and Shigeo Shingo are credited

venture: vision and concept, product development, marketing and sales, scaling up, partnerships and distribution, and structure and organizational design.

When I worked as a programmer, that meant eight straight hours of programming without interruption. That was a good day. In contrast, if I was interrupted with questions, process, or—heaven forbid—meetings, I felt bad. What did I really accomplish that day?

Entrepreneurship is management. And yet, imagine a modern manager who is tasked with building a new product in the context of an established company. Imagine that she goes back to her company’s chief financial officer (CFO) a year later and says, “We have failed to meet the growth targets we predicted. In fact, we have almost no new customers and no new revenue. However, we have learned an incredible amount and are on the cusp of a breakthrough new line of business. All we need is another year.” Most of the time, this would be the last report this intrapreneur would give her

employer. The reason is that in general management, a failure to deliver results is due to either a failure to plan adequately or a failure to execute properly. Both are significant lapses, yet new product development in our modern economy routinely requires exactly this kind of failure on the way to greatness. In the Lean Startup movement, we have come to realize that these internal innovators are actually entrepreneurs, too, and that entrepreneurial management can help them succeed; this is the subject of the next chapter.

The Innovator’s Dilemma.

“Developing these experimentation systems is the responsibility of senior management; they have to be put in by the leadership.

As an entrepreneur, nothing plagued me more than the question of whether my company was making progress toward creating a successful business.

Validated learning is not after-the-fact rationalization or a good story designed to hide failure. It is a rigorous method for demonstrating progress when one is embedded in the soil of extreme uncertainty in which startups grow.

Over the ensuing weeks and months, we labored to make the product better. We brought in a steady flow of customers through our online registration and download process. We treated each day’s customers as a brand-new report card to let us know how we were doing.

I was a devotee of the latest in software development methods (known collectively as agile development), which promised to help drive waste out of product development.

That was really depressing. I wondered: in light of the fact that my work turned out to be a waste of time and energy, would the company have been just as well off if I had spent the last six months on a beach sipping umbrella drinks? Had I really been needed? Would it have been better if I had not done any work at all?

This was critically important because we could show our stakeholders—employees, investors, and ourselves—that we were making genuine progress, not deluding ourselves. It is also the right way to think about productivity in a startup: not in terms of how much stuff we are building but in terms of how much validated learning we’re getting for our efforts.4

This phenomenon creates a brutal incentive: postpone getting any data until you are certain of success. Of course, as we’ll see, such delays have the unfortunate effect of increasing the amount of wasted work, decreasing essential feedback, and dramatically increasing the risk that a startup will build something nobody wants.

focus on the tactics it illustrates: launching a low-quality early prototype, charging customers from day one, and using low-volume revenue targets as a way to drive accountability. These are useful techniques, but they are not the moral of the story.

encourage every employee to spend up to four hours a month of company time volunteering in his or her community; that volunteer work could take the form of any philanthropic effort: painting fences, building houses, or even using pro bono or work-based skills outside the company. Encouraging the latter type of volunteering was Caroline’s priority. Because of its talent and values, HP’s combined workforce has the potential to have a monumental positive impact. A designer could help a nonprofit with a new website design. A team of engineers could wire a school for Internet access.

social good. This is the kind of corporate initiative undertaken every day at companies around the world.

Do consumers recognize that they have the problem you are trying to solve? 2. If there was a solution, would they buy it? 3. Would they buy it from us? 4. Can we build a solution for that problem?”

To start experimenting immediately, the agency could start with the creation of a simple hotline number, using one of the new breed of low-cost and fast setup platforms such as Twilio. With a few hours’ work, they could add simple voice prompts, offering callers a menu of financial problems to choose from. In the first version, the prompts could be drawn straight from the existing research. Instead of a caseworker on the line, each prompt could offer the caller useful information about how to solve her or his problem.

Mark Zuckerberg, Dustin Moskovitz, and Chris Hughes of Facebook.

These two hypotheses represent two of the most important leap-of-faith questions any new startup faces.

In truth, those dot-com failures were little more than middlemen, effectively paying money to acquire customers’ attention and then planning to resell it to others.

The first challenge for an entrepreneur is to build an organization that can test these assumptions systematically.

The second challenge, as in all entrepreneurial situations, is to perform that rigorous testing without losing sight of the company’s overall vision.

Acting as if these assumptions are true is a classic entrepreneur superpower. They are called leaps of faith precisely because the success of the entire venture rests on them.

Large numbers of people already wanted access to the World Wide Web. They knew what it was, they could afford it, but they could not get access to it because the time it took to load images was too long. When progressive image loading was introduced, it allowed people to get onto the World Wide Web and tell their friends about it. Thus, company X won market Y. Similarly, there is already a large number of potential customers who want access to our product right now. They know they want it, they can afford it, but they cannot access it because the rendering is too slow. When we debut our

product with progressive rendering technology, they will flock to our software and tell their friends, and we will win market Y2.

ultimately value-destroying, such as the organizers of Ponzi schemes, and fraudulent or misguided companies (e.g., Enron and Lehman Brothers).

customer archetype, a brief document that seeks to

humanize the proposed target customer. This archetype is an essential guide for product development and ensures that the daily prioritization decisions that every product team must make are aligned with the customer to whom the company aims to appeal.

Lean User Experience (Lean UX).

entrepreneurs conduct market research and talk to customers. Followers of the just-do-it

They’d rather start building immediately, often after just a few cursory customer conversations.

can fall victim to analysis paralysis, endlessly refining their plans. In this case, talking to customers, reading research reports, and whiteboard strategizing are all equally unhelpful.

Unfortunately, most of these errors cannot be detected at the whiteboard because they depend on the subtle interactions between products and customers. If too much analysis is dangerous but none can lead to failure, how do entrepreneurs know when to stop analyzing and start building? The answer is a concept called the minimum viable product, the subject of Chapter 6

At IMVU, when we were raising money from venture investors, we were embarrassed. First of all, our product was still buggy and low-quality.

thrill of being the first one on the block to show off a new basketball shoe, music player, or cool phone. In enterprise products, it’s often about gaining a competitive advantage by taking a risk with something new that competitors don’t have yet. Early adopters are suspicious of something that is too polished: if it’s ready for everyone to adopt, how much advantage can one get by being early? As a result, additional features or polish beyond what early adopters demand is a form of wasted resources and time.

Most entrepreneurs approach a question like this by building the product and then checking to see how customers react to it. I consider this to be exactly backward because it can lead to a lot of waste. First, if it turns out that we’re building something nobody wants, the whole exercise will be an avoidable expense of time and money. If customers won’t sign up for the free trial, they’ll never get to experience the amazing features that await them.

Dropbox’s biggest competitive advantages is that the product works in such a seamless way that the competition struggles to emulate it.

The challenge was that it was impossible to demonstrate the working software in a prototype form. The product required that they overcome significant technical hurdles; it also had an online service component that required high reliability and availability. To avoid the risk of waking up after years of development with a product nobody wanted, Drew did something unexpectedly easy: he made a video.

Instead, they used Wizard of Oz testing to fake it. In a Wizard of Oz test, customers believe they are interacting with the actual product, but behind the scenes human beings are doing the work. Like the concierge MVP, this approach is incredibly inefficient.

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.

Craigslist, had refused to publish his humble e-mail newsletter because it lacked sufficient high design.

In fact, I have often given entrepreneurs fearful of this issue the following assignment: take one of your ideas (one of your lesser insights, perhaps), find the name of the relevant product manager at an established company who has responsibility for that area, and try to get that company to steal your idea. Call them up, write them a memo, send them a press release—go ahead, try it. The truth is that most managers in most companies are already overwhelmed with good ideas. Their challenge lies in prioritization and execution, and it is those challenges that give a startup hope of surviving.10