The Lean Startup: The Million Copy Bestseller Driving Entrepreneurs to Success

by Eric Ries

He explains the analog-antilog concept by using the iPod as an example. “If you were looking for analogs, you would have to look at the Walkman,” he says. “It solved a critical question that Steve Jobs never had to ask himself: Will people listen to music in a public place using earphones? We think of that as a nonsense question today, but it is fundamental. When Sony asked the question, they did not have the answer. Steve Jobs had [the answer] in the analog [version]” Sony’s Walkman was the analog. Jobs then had to face the fact that although people were willing to download music, they were not willing to pay for it. “Napster was an antilog. That antilog had to lead him to address his business in a particular way,” Komisar says. “Out of these analogs and antilogs come a series of unique, unanswered questions. Those are leaps of faith that I, as an entrepreneur, am taking if I go through with this business venture. They are going to make or break my business. In the iPod business, one of those leaps of faith was that people would pay for music.” Of course that leap of faith turned out to be correct.4

However, for every successful entrepreneur who was in the right place in the right time, there are many more who were there, too, in that right place at the right time but still managed to fail. Henry Ford was joined by nearly five hundred other entrepreneurs in the early twentieth century.

We saw the same phenomenon with Facebook, which faced early competition from other college-based social networks whose head start proved irrelevant.

What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.

Value and Growth As we saw in the Facebook story, two leaps of faith stand above all others: the value creation hypo...

A similar thing is true for growth. As with value, it’s essential that entrepreneurs understand the reasons behind a startup’s growth. There are many value-destroying kinds of growth that should be avoided. An example would be a business that grows through continuous fund-raising from investors and lots of paid advertising but does not develop a value-creating product.

Such businesses are engaged in what I call success theater, using the appearance of growth to make it seem that they are successful. One of the goals of innovation accounting, which is discussed in depth in Chapter 7, is to help differentiate these false startups from true innovators.

A startup’s earliest strategic plans are likely to be hunch- or intuition-guided, and that is a good thing. To translate those instincts into data, entrepreneurs must, in Steve Blank’s famous phrase, “get out of the building” and start learning.

The importance of basing strategic decisions on firsthand understanding of customers is one of the core principles that underlies the Toyota Production System. At Toyota, this goes by the Japanese term genchi gembutsu, which is one of the most important phrases in the lean manufacturing vocabulary. In English, it is usually translated as a directive to “go and see for yourself” so that business decisions can be based on deep firsthand knowledge.

“The parents and grandparents may own the minivan. But it’s the kids who rule it. It’s the kids who occupy the rear two-thirds of the vehicle. And it’s the kids who are the most critical—and the most appreciative of their environment. If I learned anything in my travels, it was the new Sienna would need kid appeal.”7 Identifying these assumptions helped guide the car’s development. For example, Yokoya spent an unusual amount of the Sienna’s development budget on internal comfort features, which are critical to a long-distance family road trip (such trips are much more common in America than in Japan). The results were impressive, boosting the Sienna’s market share dramatically. The 2004 model’s sales were 60 percent higher than those in 2003.

As Steve Blank has been teaching entrepreneurs for years, the facts that we need to gather about customers, markets, suppliers, and channels exist only “outside the building.” Startups need extensive contact with potential customers to understand them, so get out of your chair and get to know them.

Design and the Customer Archetype The goal of such early contact with customers is not to gain definitive answers. Instead, it is to clarify at a basic, coarse level that we understand our potential customer and what problems they have. With that understanding, we can craft a 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.

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.

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. Contrary to traditional product development, which usually involves a long, thoughtful incubation period and strives for product perfection, the goal of the MVP is to begin the process of learning, not end it. Unlike a prototype or concept test, an MVP is designed not just to answer product design or technical questions. Its goal is to test fundamental business hypotheses.

These numbers were so low that we’d often have investors ask us, “What are the units on these charts? Are those numbers in thousands?” We’d have to reply, “No, sir, those are in ones.” However, those early results were extremely significant in predicting IMVU’s future path. As you’ll see in Chapter 7, we were able to validate two of our leap-of-faith assumptions: IMVU was providing value for customers, and we had a working engine of growth.

The gross numbers were small because we were selling the product to visionary early customers called early adopters. Before new products can be sold successfully to the mass market, they have to be sold to early adopters. These people are a special breed of customer. They accept—in fact prefer—an 80 percent solution; you don’t need a perfect solution to capture their interest.4

Early adopters use their imagination to fill in what a product is missing. They prefer that state of affairs, because what they care about above all is being the first to use or adopt a new product or technology. In consumer products, it’s often the 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.

Minimum viable products range in complexity from extremely simple smoke tests (little more than an advertisement) to actual early prototypes complete with problems and missing features. Deciding exactly how complex an MVP needs to be cannot be done formulaically. It requires judgment. Luckily, this judgment is not difficult to develop: most entrepreneurs and product development people dramatically overestimate how many features are needed in an MVP. When in doubt, simplify.

For example, consider a service sold with a one-month free trial. Before a customer can use the service, he or she has to sign up for the trial. One obvious assumption, then, of the business model is that customers will sign up for a free trial once they have a certain amount of information about the service. A critical question to consider is whether customers will in fact sign up for the free trial given a certain number of promised features (the value hypothesis).

Somewhere in the business model, probably buried in a single cell in a spreadsheet, it specifies the “percentage of customers who see the free trial offer who then sign up.” Maybe in our projections we say that this number should be 10 percent. If you think about it, this is a leap-of-faith question. It really should be represent...

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 sig...

Even if they do sign up, there are many other opportunities for waste. For example, how many features do we really need to include to appeal to early adopters? Every extra feature is a form of waste, and if we delay the test for these extra features, it comes ...

The lesson of the MVP is that any additional work beyond what was required to start learning is waste, no matter how importan...

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. The video is banal, a simple three-minute demonstration of the technology as it is meant to work, but it was targeted at a community of technology early adopters. Drew narrates the video personally, and as he’s narrating, the viewer is watching his screen. As he describes the kinds of files he’d like to synchronize, the viewer can watch his mouse manipulate his computer. Of course, if you’re paying attention, you start to notice that the files he’s moving around are full of in-jokes and humorous references that were appreciated by this community of early adopters. Drew recounted, “It drove hundreds of thousands of people to the website. Our beta waiting list went from 5,000 people to 75,000 people literally overnight. It totally blew us away.” Today, Dropbox is one of Silicon Valley’s hottest companies, rumored to be worth more than $1 billion.5

In this case, the video was the minimum viable product. The MVP validated Drew’s leap-of-faith assumption that customers wanted the product he was developing not because they said so in a focus group or because of a hopeful analogy to another business, but because they actually signed up.

Most important, each week they would collect a check for $9.95. Talk about inefficient! Measured according to traditional criteria, this is a terrible system, entirely nonscalable and a complete waste of time. The CEO and VP of product, instead of building their business, are engaged in the drudgery of solving just one customer’s problem. Instead of marketing themselves to millions, they sold themselves to one. Worst of all, their efforts didn’t appear to be leading to anything tangible. They had no product, no meaningful revenue, no databases of recipes, not even a lasting organization. However, viewed through the lens of the Lean Startup, they were making monumental progress. Each week they were learning more and more about what was required to make their product a success. After a few weeks they were ready for another customer. Each customer they brought on made it easier to get the next one, because FotT could focus on the same grocery store, getting to know its products and the kinds of people who shopped there well. Each new customer got the concierge treatment: personal in-home visits, the works. But after a few more customers, the overhead of serving them one-on-one started to increase. Only at the point where the founders were too busy to bring on additional customers did Manuel and his team start to invest in automation in the form of product development. Each iteration of their minimum viable product allowed them to save a little more time and serve a few more c...

Before long, they had built a substantial service offering, first in the Austin area and eventually nationwide.

But along the way, their product development team was always focused on scaling something that was working rather than trying to invent something that might work in the future. As a result, their development efforts involve...

To solve this problem, Max and Damon created a product called Aardvark. With their deep technical knowledge and industry experience, it would have been reasonable to expect them to dive in and start programming. Instead, they took six months to figure out what they should be building. But they didn’t spend that year at the whiteboard strategizing or engage in a lengthy market research project.

Instead, they built a series of functioning products, each designed to test a way of solving this problem for their customers. Each product was then offered to beta testers, whose behavior was used to validate or refute each specific hypothesis (see examples in sidebar).

Instead, they were MVPs designed to test a more important question: what would be required to get customers to engage with the product and tell their friends about it?

“As we refined the product, we would bring in six to twelve people weekly to react to mockups, prototypes, or simulations that we were working on. It was a mix of existing users and people who never saw the product before. We had our engineers join for many of these sessions, both so that they could make modifications in real time, but also so we could all experience the pain of a user not knowing what to do.”8

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.

Even a “low-quality” MVP can act in service of building a great high-quality product. Yes, MVPs sometimes are perceived as low-quality by customers. If so, we should use this as an opportunity to learn what attributes customers care about. This is infinitely better than mere speculation or whiteboard strategizing, because it provides a solid empirical foundation on which to build future products.

No walking, no obstacle avoidance. The avatar disappeared and then reappeared an instant later in the new place. We couldn’t even afford fancy teleportation graphics or sound effects. We felt lame shipping this feature, but it was all we could afford. You can imagine our surprise when we started to get positive customer feedback. We never asked about the movement feature directly (we were too embarrassed). But when asked to name the top things about IMVU they liked best, customers consistently listed avatar “teleportation” among the top three (unbelievably, they often specifically described it as “more advanced than The Sims”). 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. Our customers preferred the quick teleportation feature because it allowed them to get where they wanted to go as fast as possible.

In retrospect, this makes sense. Wouldn’t we all like to get wherever we’re going in an instant? No lines, no hours on a plane or sitting on the tarmac, no connections, no cabs or subways. Beam me up, Scotty. Our expensive “real-world” approach was beaten handily by a cool fa...

So which version of the product is low-quality, again? 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 su...

Thus, the Lean Startup method is not opposed to building high-quality products, but only in service of the ...

Legal risks may be daunting, but you may be surprised to learn that the most common objection I have heard over the years to building an MVP is fear of competitors—especially large established companies—stealing a startup’s ideas. If only it were so easy to have a good idea stolen! Part of the special challenge of being a startup is the near impossibility of having your idea, company, or product be noticed by anyone, let alone a competitor.

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. If it’s not true, a startup has much bigger problems, and secrecy won’t fix them.

Sooner or later, a successful startup will face competition from fast followers. A head start is rarely large enough to matter, and 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.

Many startups plan to invest in building a great brand, and an MVP can seem like a dangerous branding risk. Similarly, entrepreneurs in existing organizations often are constrained by the fear of damaging the parent company’s established brand. In either of these cases, there is an easy solution: launch the MVP under a different brand name. In addition, a long-term reputat...

When a product fails to live up to those pronouncements, real long-term damage can happen to a corporate brand. But 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 ...

Finally, it helps to prepare for the fact that MVPs often result in bad news. Unlike traditional concept tests or prototypes, they are designed to speak to the full range of business questions, not just design or technical ones, and they often provide a needed dose of realit...

A 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.

We all know stories of epic entrepreneurs who managed to pull out a victory when things seemed incredibly bleak. Unfortunately, we don’t hear stories about the countless nameless others who persevered too long, leading their companies to failure.

WHY SOMETHING AS SEEMINGLY DULL AS ACCOUNTING WILL CHANGE YOUR LIFE

Accounting allowed GM to set clear milestones for each of its divisions and then hold each manager accountable for his or her division’s success in reaching those goals. All modern corporations use some variation of that approach. Accounting is the key to their success.