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Kindle Notes & Highlights
by
Eric Ries
Read between
December 14 - December 17, 2014
Most products—even the ones that fail—do not have zero traction. Most products have some customers, some growth, and some positive results. One of the most dangerous outcomes for a startup is to bumble along in the land of the living dead. Employees and entrepreneurs tend to be optimistic by nature. We want to keep believing in our ideas even when the writing is on the wall.
Innovation accounting enables startups to prove objectively that they are learning how to grow a sustainable business. Innovation accounting begins by turning the leap-of-faith assumptions discussed in Chapter 5 into a quantitative financial model.
so that they can measure differences in the response rates of the two groups. Engineers, of course, are skilled at improving a product’s performance, just as designers are talented at making products easier to use. All these activities in a well-run traditional organization offer incremental benefit for incremental effort. As long as we are executing the plan well, hard work yields results.
In the example above, early in the company’s life, the product development team was incredibly productive because the company’s founders had identified a large unmet need in the target market. The initial product, while flawed, was popular with early adopters. Adding the major features that customers asked for seemed to work wonders,
This is what tempts managers to resort to the usual bag of success theater tricks: last-minute ad buys, channel stuffing, and whiz-bang demos, in a desperate attempt to make the gross numbers look better.
version of the agile development methodology known as Extreme Programming (described below), thanks to their partnership with a San Francisco–based company called Pivotal Labs. Their early product was hailed by the press as a breakthrough.
they were not seeing sufficient growth in the use of the product by customers. Grockit is an excellent case study because its problems were not a matter of failure of execution or discipline. Following standard agile practice, Grockit’s work proceeded in a series of sprints, or one-month iteration cycles. For each sprint, Farb would prioritize the work to be done that month by writing a series of user stories, a technique taken from agile development. Instead of writing a specification for a new feature that described it in technical terms, Farb would write a story that described the feature
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For example, why build a new feature that is not part of a split-test experiment? It may save you time in the short run, but it will take more time later to test, during the validation phase. The same logic applies to a story that an engineer doesn’t understand. Under the old system, he or she would just build it and find out later what it was for. In the new system, that behavior is clearly counterproductive: without a clear hypothesis, how can a story ever be validated?
actionable, accessible, and auditable.
Each cohort analysis says: among the people who used our product in this period, here’s how many of them exhibited each of the behaviors we care about.
technique we developed at IMVU. Instead of housing the analytics or data in a separate system, our reporting data and its infrastructure were considered part of the product itself and were owned by the product development team.
more common than most managers would admit, and unfortunately, most data reporting systems are not designed to answer them successfully. Sometimes this is the result of a well-intentioned but misplaced desire to protect the privacy of customers. More often, the lack of such supporting documentation is simply a matter of neglect.
“Metrics are people, too.”
Companies that cannot bring themselves to pivot to a new direction on the basis of feedback from the marketplace can get stuck in the land of the
living dead, neither growing enough nor dying, consuming resources and commitment from employees and other stakeholders but not moving ahead.
INNOVATION ACCOUNTING LEADS TO FASTER PIVOTS To see this process in action,
It happens when a company has achieved a modicum of success—just enough to stay alive—but is not living up to the expectations of its founders and investors. Such companies are a terrible drain of human energy. Out of loyalty, the employees and founders don’t want to give in; they feel that success might be just around the corner.
Despite being committed to a significant vision, he had done his best to launch early and iterate.
Failure is a prerequisite to learning. The problem with the notion of shipping a product and then seeing what happens is that you are guaranteed to succeed—at seeing what happens. But then what? As soon as you have a handful of customers, you’re likely to have five opinions about what to do next. Which should you listen to? Votizen’s
I always wanted to get more involved; this makes it so much easier.” 2. “The fact that you prove I’m a voter matters.” 3. “There’s no one here. What’s the point of coming back?”
Company after company procrastinated, delayed, and ultimately passed up the opportunity.
On the basis of the letters of intent, David had increased his head count, taking on additional sales staff and engineers in anticipation of having to service higher-margin business-to-business accounts.
Returning to his leap-of-faith questions, David concluded that the results refuted his business-to-business hypothesis, and so he decided to pivot once again.
Votizen’s story exhibits some common patterns. One of the most important to note is the acceleration of MVPs. The first MVP took eight months, the next four months, then three, then one. Each
They recently raised $1.5 million from Facebook’s initial investor Peter Thiel,
The true measure of runway is how many pivots a startup has left: the number of opportunities it has to make a fundamental change to its business strategy.
entrepreneurs who have a high profile, either because of personal fame or because they are operating as part of a famous brand,
Path was started by experienced entrepreneurs: Dave Morin, who previously had overseen Facebook’s platform initiative;
Unfortunately, their product was not targeted at technology early adopters, and as a result, the early blogger reaction was quite negative. (Many entrepreneurs fail to launch because they are afraid of this kind of reaction, worrying that it will harm the morale of the entire company. The allure of positive press, especially in our “home” industry, is quite strong.)
anathema.
The decision to pivot is emotionally charged for any startup and has to be addressed in a structured way. One way to mitigate this challenge is to schedule the meeting in advance. I recommend that every startup have a regular “pivot or persevere” meeting.
Successful professional money managers felt they had nothing to fear from transparency, since they believed it would validate their skills. 2. Money managers faced significant challenges in managing and scaling their own businesses. They were hampered by the difficulty of servicing their own accounts and therefore had to require high minimum investments as a way to screen new clients.
blending of virtual and real portfolio management on the kaChing website confusing. Far from being a clever way of acquiring customers, the freemium strategy was getting in the way by promoting confusion about the company’s positioning.
Today, Wealthfront is prospering as a result of its pivot, with over $180 million invested on the platform and more than forty professional managers.3 It recently was named one of Fast Company’s ten most innovative companies in finance.4 The company continues to operate with agility, scaling in line with the growth principles outlined in Chapter 12. Wealthfront is also a leading advocate of the development technique known as continuous deployment, which we’ll discuss in Chapter
These sources of sustainable growth power feedback loops that I have termed engines of growth. Each is like a combustion engine, turning over and over. The faster the loop turns, the faster the company will grow. Each engine has an intrinsic set of metrics that determine how fast a company can grow when using it.
There are always a zillion new ideas about how to make the product better floating around, but the hard truth is that most of those ideas make a difference only at the margins. They are mere optimizations. Startups have to focus on the big experiments that lead to validated learning. The engines of growth framework helps them stay focused on the metrics that matter.
sale or trade. The startup database vendor relies on repeat usage for a very different reason. Database technology is used only as the foundation for a customer’s own products, such as a website or a point of sale system. Once you build a product on top of a particular database technology, it is extremely difficult to switch.
customers are said to be locked in to the vendor they choose. For such a product to grow, it has to offer such a compelling new capability that customers are willing to risk being tied to a proprietary vendor for a potentially long time. Thus, both businesses rely on having a high customer retention rate. They have an expectation that once you start using their product, you will continue to do so. This is the same dynamic as a mobile telephone service provider: when a customer cancels his or her service, it generally means that he or she is extremely dissatisfied or is switching to a
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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.
In relating the IMVU story in Chapter 3, I talked about how we made a major early mistake in setting up the IMVU strategy.
primarily to enterprises, nongovernmental organizations (NGOs), and other extremely large organizations.
Technically, more than one engine of growth can operate in a business at a time.
Marc Andreessen, the legendary entrepreneur and investor and one of the fathers of the World Wide Web, coined the term product/market fit to describe the moment when a startup finally finds a widespread set of customers that resonate with its product: In a great market—a market with lots of real potential customers—the market pulls product out of the startup. This is the story of search keyword advertising, Internet auctions, and TCP/IP routers. Conversely, in a
terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter—you’re going to fail.
they think they are making progress when they see their numbers growing. They falsely believe they are making their product better when in fact they are having no impact on customer behavior. The growth is all coming from an engine of growth that is working—running efficiently to bring in new customers—not from improvements driven by product development. Thus, when the growth suddenly slows, it provokes a crisis.
However, on a couple of occasions I suddenly realized that I was failing at my job. For an achievement-oriented person, that is incredibly disarming.
Congratulations! The job you used to do at this company is no longer available. However, you have been transferred to a new job in the company. Actually, it’s not the same company anymore, even though it has the same name and many of the same people. And although the job has the same title, too, and you used to be good at your old job, you’re already failing at the new one. This transfer is effective as of six months ago, so this is to alert you that you’ve already been failing at it for quite some time.
Having no system at all was not an option for IMVU and is not an option for you. There are so many ways for a startup to fail. I’ve lived through the overarchitecture failure, in which attempting to prevent all the various kinds of problems that could occur wound up delaying the company from putting out any product.
Friendster effect, suffering a high-profile technical failure just when
Should a startup invest in a training program for new employees? If you had asked me a few years ago, I would have laughed and said, “Absolutely not. Training programs are for big companies that can afford them.” Yet at IMVU we wound up building a training program that was so good, new hires were productive on their first day of employment. Within just a few weeks, those employees were contributing at a high level. It required a huge effort to standardize our work processes and prepare a curriculum of the concepts that new employees should learn.
