Book Summary 1: The Lean Startup
OK, so I’d decided to read one startup book every two weeks in 2017, and share the summary on this blog… The first book I read is Eric Reis’ The Lean Startup.
There are books which make one point in twenty different ways. And then there are books like the Lean Startup, which makes valid new points in every chapter. It is difficult to summarize the book as the entire book is packed with great content. Here, I’ve shared some of the ideas which had the most appeal to me.
What is a Startup?
According to the book, “A startup is a human institution designed to create a new product or a service under conditions of extreme uncertainty.”
Try things to know (instead of knowing things before you try)
Most startups succeed after pivoting, iterating, failing, and completely rewriting their original business plans and models.
Running a big company is like launching a rocket. It requires accurate data, detailed planning and a lot of investments before the project can be executed.
Running a startup is like driving a car. The destination (the mission for which the company exists) remains the same. But when you drive a car- you may change the route if there’s heavy traffic. And if you took the wrong turn, you’ll just take a U-turn again and get back on track. The level of planning is far less, the flexibility far more. At times you make a sharp turn in your original route, a “pivot”. At other times, you may just persevere on the original route. And the only thing which doesn’t change is the destination.
The process involves experimentation, hence a lot of learning. The learning has to be validated by the market results for it to be considered authentic learning… Companies which learn the fastest have the best odds of survival. The Lean Startup measures a company’s progress through this validated learning.
The MOST important thing a startup must do right is to figure out what people in their market want and will pay for – as quickly as possible.
For this, the author suggests the build-measure-learn loop. This is essentially the ‘steering wheel’ of your startup. You get real-time feedback when you try something (a new advertising channel, a new sales script, new pricing etc.) and you adapt your route accordingly. This is better than hypothetical assumptions about the market and the various other decisions a startup takes, because market reality is nearly impossible to simulate or research accurately. In other words, what you think will happen when you go to market is almost always different from what really happens. (Occasionally, there are pleasant surprises; though more often it is initial disappointment.)
The key is to know what part of your plan is the ‘leap of faith’. For example, in the early 2000s Apple knew that people will listen to music in public places with earphones, as the Sony Walkman was already popular. This is the ‘analog’ example – an example of a successful experiment similar to what the company was trying. Also, Napster had shown that downloading music is preferred to visiting the local record store. However, there was an ‘antilog’- an example of a failed approach. (Subscription models for paid music downloads had failed.) So Apple knew there was a risk involved in starting their venture (would people pay to download music?), but they also knew exactly where the risk was.
If there’s one thing which doesn’t (or, shouldn’t) change much in a startup through its tumultuous journey, it is its culture. An average entrepreneur has the micro-management approach with his team. “Do this”, “do that”. This is tiresome, slow and ineffective in the long run.
A better approach is to create a mission, a culture (through values), and systems so that teams can take decisions in alignment with it and the company can experiment faster. Innovation has to be in the DNA of the startup for it to survive and succeed, and that DNA cannot come from the micro-management paradigm.
Every startup is an experiment because of the degree of uncertainty. (Think about it – if you had all the data from the last five years, could you fairly accurately predict Coca-Cola’s turnover for this year? On the other hand, if a new entrepreneur gave you his/ her entire business plan, could you predict its turnover to any accurate degree?)
There are certain assumptions which the entrepreneur starts off with, and these get tested when the startup meets the market. The two major assumptions are:
- The Value Hypothesis: does the product really deliver value to customers using it?
- The Growth Hypothesis: how will customers discover the product/service?
It is important that entrepreneurs build a company which can test these assumptions systematically.
The Feedback Loop:
Ideas lead to building products, products lead to measuring data, and data from the market interactions leads to learning. This learning, in turn, generates ideas. This is the feedback loop of a startup.
Take a minute to think about — Which of these elements do you think is the most important in this loop?
The answer? None! The important thing is NOT to optimize for any of the elements, but to minimize the total time taken by a single iteration of this feedback loop. Come up with ideas. Turn them into products. As these products ‘interact’ with the world, measure data (sales? Conversion rate? Cost of acquisition? Net promoter score? etc.) Use this data to come up with more accurate ideas that will resonate with the market, adapt them to the products, and keep repeating this loop to get a better marriage between your product and your market.
It doesn’t matter how fast you can build. It doesn’t matter how fast you can measure. What matters is how fast you can go through one iteration of the entire loop.
Here the author talks about creating the MVP, which is the fastest form of the product you can build to start the feedback loop and test the hypotheses.
Also, a new product/service has to be first sold to the early adopters. These are a special breed of customers – who like trying new products. They prefer a product which feels 80% complete and NOT ready for the mass market. Being early gives them more satisfaction than being in the herd with the masses.
The author goes on to talk about quality. In my personal interactions with startup founders, I always see an emphasis on ‘high quality’. There is a problem, though. Many entrepreneurs have little clue about the attributes of the product the customer cares about. If we don’t understand who the customer is like, we don’t know what quality is.
So the real question is: does the user care about this as much as we do?
(A great example of this is the many horrible movies that have been made by technicians-turned-directors. Their focus is on the technical aspects of a movie – the camera usage, the angles, colours, effects…whereas the audience cares far more about the story and content.)
To answer this question, you have to let go of your personal standards to start the process of validated learning as soon as possible.
Your job as an entrepreneur is:
- Figure out where you are right now – this means confronting (and not being in denial of) the hard truths that assessment will reveal.
- Find ways to move this reality to your ideal place; whether it is in terms of sales, revenue, or other metrics
When you try all the micro-level changes in your product to fit the market, and your numbers are still nowhere close to the ‘ideals’; it could be time to ‘pivot’ your business to a new direction.
(I’ve done this pivoting for growthfoundation.in, which was initially a certifications website for MBA graduates interested in startups, to a full-fledged startup mentoring portal. The reason was entirely based on customer interactions and feedback. We multiplied revenue by 3x in 6 months after the pivot.)
Just like the lean manufacturing concept of ‘just-in-time’ for building products (reducing inventory needs); lean startups practice just-in-time scalability (reducing needs of upfront investments while the market validation is still unclear.) So, you should try to start with a model which DOES NOT scale. You do not need the complex systems of a big company right away. Use your small size to your advantage and ‘jugaad’ your way through the initial phase.
Once you have validated learning about the market to build a sustainable business; you can then metamorphose gradually into a scalable business with systems and processes in place.
There are 4 ways customers drive sustainable growth:
First – Word of mouth. (The products should have something that makes people want to talk about it to others in a positive light. Quality is a factor here but how enthusiastic people are to talk about something depends on many other factors, ‘delight’ being a chief one. )
Second – As a side effect of products usage. Fashion or status products like expensive cars drive awareness to themselves whenever they are used.
Third– Paid ads… As long as the the cost of acquiring a new customer (CAC) is less than he revenue that customers generates in a given period of time (Lifetime value – LTV, or say, LTV for 12 months), the excess (marginal profit) can be used to acquire more customers. The more marginal profit, the faster the growth.
Fourth– Through repeat purchase or use. Like subscriptions or repurchases.
Engines of growth:
- Sticky Growth: Companies like Practo (which has a subscription model for doctors), track metrics like the churn rate very carefully. The logic is simple – if more customers are acquired in a given period of time than the customers which are lost; the product will grow.
- Viral Growth: Person-to-person transmission leads to viral growth. An example is facebook which went from a few hundred users to a billion in one decade; primarily through word-of-mouth growth.
- Paid Growth: Through ads; as explained above in the CAC-LTV discussion.
The Five Whys Approach
At the root of every technical problem is usually a human problem. The Five Why approach helps you reach that underlying root issue.
1. A new release disabled a feature for customers. Why? Because a particular server failed.
2. Why did the server fail? Because an obscure subsystem was used in the wrong way.
3. Why was it used in the wrong way? The engineer who used it didn’t know how to use it properly.
4. Why didn’t he know? Because he was never trained.
5. Why wasn’t he trained? Because his manager doesn’t believe in training new engineers because he and his team are “too busy.”
SOME APPLICATIONS OF THE BOOK FOR ENTREPRENEURS:
- Focus on launching your business VERY quickly – and assume your plan a is partly (or completely) wrong. Now based on real-time feedback, you need to evolve it into plan b, which will be more accurate about market reality. And then plan c, and so on… each iteration reflecting a more and more accurate grasp of the market.
- The time between the moment you decide to start a business and the moment you receive accurate market feedback needs to be minimized. Through Minimum Viable Products, you can start taking feedback on your idea almost immediately.
- Assume that you will make mistakes, that many of your initial assumptions will get questioned, and the market will throw new surprises at you when you venture into it.
- Don’t try to learn everything by your own mistakes though. A better approach is to consider the analogs/antilogs of your industry.
- Remember that entrepreneurial success is NOT about giving a new feature or two; but learning how to understand and solve the customer’s problem.
- Adopt “Lean Thinking” – value is anything providing benefit to the customer, anything else is a waste of your startup’s time/energy/other resources.
- Work on creating a mission statement, a company mantra, and values. The three together will form the DNA of your business as it scales. Do this in the early days, and be flexible to iterate on it as you go along.
- Ask what aspects of your product are you spending the most time, energy and money on. Have you tested if those aspects are the ones that your market most cares about?
If a summary would suffice, there would be no need for entire books. This one is quite theoretical, but one of the best. For anyone who has a startup or wants to, this has to be in the must-read section.