The Lean Startup

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11 Interesting paragraph from the book “The Lean Startup” by “Eric Ries”

The lean startup takes its name from the lean manufacturing revolution that Taiichi Ohno and Shigeo Shingo are credited with developing at Toyota. Lean Thinking is radically altering the way the supply chains and production system are run. Among its tenets are drawing on the knowledge and creativity of individual workers, the shrinking of batch sizes, just-in-time production and inventory control, and on acceleration of cycle times. It taught the world the difference between value-creating activities and waste and showed how to build quality into products from the inside out.

It goes against the grain of what people have been taught in business and what leaders have been taught. The problem isn’t with the teams or the entrepreneurs. They love the chance to quickly get their babies out into the market. They love the chance to have the customer vote instead of the suits voting. The real issue is with the leaders and middle managers. There are many business leaders who have been successful because of analysis. They think they’re analysts, and their job is to do the great planning and analyzing and have a plan.

In the Lean Startup model, we are rehabilitating learning with a concept I call Validated Learning. 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. Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a start up’s present and future business prospects. It is more concrete, more accurate, and faster than market forecasting or classical business planning. It is the principal antidote to the lethal problem of achieving failure. Successfully executing a plan that leads nowhere.

At its heart, a startup is a catalyst that performs ideas into products. As customers interact with those products, they generate feedback and data. The feedback is both qualitative and quantitative. As we saw in part one, the products a startup builds are really experiments; the learning about how to build a sustainable business is the outcome of those experiments. For startups, that information is much more important than dollars, rewards or mentions in the press, because it can influence and reshape the next set of ideas.

When we enter the measure phase, the biggest challenge will be determining whether the product development efforts are leading to real progress. Remember, if we’re building something that nobody wants, it doesn’t much matter if we’re doing it on time and on budget. The method I recommend is called innovation accounting, a quantitative approach that allows us to see whether our engine-tuning efforts are bearing fruit. It also allows us to create learning milestones. Which are an alternative to traditional business and product milestones. Learning milestones are useful for entrepreneurs as a way of accessing their progress accurately and objectively; They are also invaluable the managers and investors who must hold entrepreneurs accountable. However, not all metrics are created equal, and in chapter 7 I’ll clarify the danger of vanity metrics, which help to analyze customer behavior in ways that support innovative accounting.

By all accounts, what impressed investors the most were two facts about Facebook’s early growth. The first fact was the raw amount of time the Facebook active user spends on the site. More than half of the user come back to the site every single day. This is an example of how a company validates in value hypothesis – that the customers find the product valuable. The rate of growth was staggering: Facebook launch on February 4, 2004, and by the end of that month almost three-quarters of Harvard’s undergraduates are using it, without a dollar of marketing and advertising have been spent. In other words, Facebook also validated its growth hypothesis. These two hypotheses represent two of the most important leap of faith question any new startup faces.

Vanity matrices wreak havoc because they prey on a weakness of the human mind. In my experience, when the numbers go up, people think the improvement was caused by their actions, by whatever they are working on at the time. That is why its so common to have a meeting in which marketing thinks the number went up because of new PR or marketing efforts and engineering thinks the better number is the results of new features it added. Finding out what is actually going on is extremely costly, and so most manager simply moves on, doing the best they can to form their own judgment on the basis of their experience and the collective intelligence in the room.

There is a good news about our reliance on judgment, though. We are able to learn, we are innately creative, and we have a remarkable ability to see signal in the noise. In fact, we are so good at this that sometimes we see signals that aren’t there. The heart of the scientific method is the realization that although human judgment has been faulty, we can improve our judgment by subjecting our theories to repeated testing. Startup’s productive is not about cranking out more widgets or features. It is about aligning our efforts with a business and product that are working to create value and drive growth. In other words, successful pivots put us on a path toward growing a sustainable business.

Why does stuffing one envelope at a time get the job done faster even though it seems like it would be slower? Because our intuition doesn’t take into account the extra time required to sort, stack, and move around the large piles of half complete envelops when it’s done the other ways. It seems more efficient to repeat the same task over and over, in part because we expect that we will get better at this simple task the more we do it. Unfortunately, in process-oriented work like this, individual performance is not nearly as important as the overall performance of the system.

Like the other engines of growth, the viral engine is powered by a feedback loop that can be quantified. It is called the viral loop, and its speed is determined by a single mathematical term called the viral coefficient. The higher these coefficient is, the faster the product will spread. The viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up. Put another way, how many friends will each customer bring with him or her? Since each friend is also a new customer, he or she has an opportunity to recruit yet more friends.

I strongly recommend that startup teams be completely cross-functional, that is, have full-time representation from every functional department in the company that will be involved in the creation or launch of their early products. They have to be able to build and ship actual functioning products and services, not just prototypes, handoffs and approvals slow down the Build-Measure-Learn feedback loop and inhibit both learning and accountability. Startups require that they are kept to an absolute minimum.

Interesting and educational. Concepts are explained with the help of examples and these examples are pure gold like the one about Facebook written above. The Lean Startup, A must read book for every modern entrepreneur.

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