Revisiting the Lean Startup Method
By: Zoussi Ley
Tags: Startup, Lean Startup, Startup Lessons, Entrepreneurship, Entrepreneur

Launching a new venture has always been a hit-or-miss. You write a business plan, put a team together, pitch your idea to investors, introduce a product, and then sell as hard as you can. Unfortunately, sometime during this process, chances are you will suffer fatal setback (over 90% of all start-ups fail). Standard business practices can indeed be harmful to startups. However, the chances of being successful can be increased by taking a rational and systematic approach that makes the process of launching a startup less risky. This methodology is called the Lean Startup and it favours customer feedback over intuition, and experimentation over exhaustive planning.

Inspired by Toyota’s lean manufacturing, which seeks to increase value creation and eliminate wasteful practices, Eric Ries introduced the concept of Lean Startup on his blog 2008. He later dedicated a book to the concept.

Let’s take a look at some main insights from the book, and how the methodology can help businesses innovate and create value for their customers.

Entrepreneurs are Everywhere

You don’t need to own a business to be an entrepreneur. The definition of the word is morphing, as technology puts the fundamental tools for starting, managing and organizing a business into anybody’s hands. You can be an entrepreneur from within a small or big company, while still school, or even selling iced water in Lagos traffic. Being an entrepreneur is more a way of life more than an approach to business.

Entrepreneurship is Management

Entrepreneurs often forget the importance of good management principles. A startup is an institution, not just a product, hence why it requires a specific kind of management principles geared to its nature of extreme uncertainties. In such a context, you must accept that all you have on day 1 is a set of untested hypotheses. Hence, instead of writing a detailed business plan, you should summarize your hypotheses in a framework called business model canvas, which is essentially a diagram of how your company creates value for itself and its customers.

Build-Measure-Learn

Lean startups hit the ground running by building the simplest product with just enough features to satisfy early adopters, and provide feedback for future development. This product is called Minimum Viable Product (MVP). Lean startups turn ideas into MVPs, measure how customers respond, and decide whether to pivot or persevere. You need to get back to “build” as quickly as possible after learning from the market. The faster you learn what the market values, the better chance you have of surviving and building a sustainable business. In practice, you don’t necessarily need an actual product. You can create a landing page that features pricing plans for instance. That way, you are able to evaluate the need for your product/service, and determine how much customers are willing to pay. You can also come up with an explainer video MVP, like Dropbox did.

Validated Learning

A fundamental requirement for lean startups is to ensure you are testing a hypothesis with the right learning mentality. It’s easy to focus on vanity metrics, which may give you the feeling of making progress, but actually don’t give any insights on the value of the product. Vanity metrics are things like number of likes on Facebook, registered users or downloads. These do not necessarily correlate to numbers that actually matter. As an entrepreneur, you must rely on actionable metrics such as the number of active users, engagement, Customer Acquisition Cost (CAC) and ultimately revenues and profits. You can get more actionable metrics from split-tests: A/B experiments produce in fact the most actionable metrics because they clearly refute or confirm a specific hypothesis (Check out “getting started with split-testing”).

Innovation Accounting

In Ries’ words, “Innovation accounting enables startups to prove objectively that they are learning how to grow a sustainable business.”

The process is done with three steps, as follows:

Establish a baseline. Run an MVP test to set some benchmark data points. This can be a smoke test, with marketing only, to take the customers’ temperature and see if they would buy your product or service. Tuning the Engine. Once the baseline is established, you can make a single change which can be tested to improve upon it. It’s best to focus on one single thing at a time. This could be the design of a signup form: does it increase or decrease the number of conversations? Pivot or persevere. After making multiple iterations through the cycle, you should be moving up from the baseline towards your ideal goal.

Holding entrepreneurs accountable for their results throughout the startup process is the best way to measure progress. Using milestones, such as monthly KPIs, to measure results is the best way to know if a startup is headed in the right direction.

On pivoting

“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.”

Making the decision to pivot is one of the toughest aspects of the Lean Startup method, mostly because entrepreneurs are emotionally tied to their products. Vanity metrics and not testing the right hypothesis can lead you down the wrong path. A pivot is not necessarily a failure. It only means that you change one of the fundamental hypothesis you started out with. There are different ways to pivot:

Zoom-in pivot : when a single feature of your product becomes the entire product. Let’s take the example of a 24/7 breakfast restaurant, called Freddy’s. After a few months of operations, Freddy’s manager realized that most of the customers come in between 10PM and 10AM. A zoom-in pivot would be to turn the 24/7 restaurant into a late night diner.

: when a single feature of your product becomes the entire product. Let’s take the example of a 24/7 breakfast restaurant, called Freddy’s. After a few months of operations, Freddy’s manager realized that most of the customers come in between 10PM and 10AM. A zoom-in pivot would be to turn the 24/7 restaurant into a late night diner. Zoom-out pivot : when your product is too narrow to support a business, so you decide to make a broader product. Resuming with the example of Freddy’s, the manager notices that many customers come to the late diner expecting other food items than breakfast. A zoom-out pivot would be for Freddy’s to start serving appetizers, entrées and desserts, rather than just breakfast food.

: when your product is too narrow to support a business, so you decide to make a broader product. Resuming with the example of Freddy’s, the manager notices that many customers come to the late diner expecting other food items than breakfast. A zoom-out pivot would be for Freddy’s to start serving appetizers, entrées and desserts, rather than just breakfast food. Customer segment pivot : when you realize you are building a product that solves a need for a customer segment that is different from the one you started targeting. In the case of Freddy’s, the original target is the bar crowd. However, nightclubs are rather far from Freddy’s location, and the manager also notices that a group of cyclists comes in the restaurant every night before training. A customer segment pivot would be for Freddy’s to shift target to cyclists and other athletes training early mornings.

: when you realize you are building a product that solves a need for a customer segment that is different from the one you started targeting. In the case of Freddy’s, the original target is the bar crowd. However, nightclubs are rather far from Freddy’s location, and the manager also notices that a group of cyclists comes in the restaurant every night before training. A customer segment pivot would be for Freddy’s to shift target to cyclists and other athletes training early mornings. Business architecture pivot : that’s when you go from a high margin and low volume solution to a low margin and high volume solution. Freddy’s initial menu only included gourmet foods cooked from premium ingredients. A business architecture pivot would be for the restaurant to start serving lower production cost items such as burgers and fries.

: that’s when you go from a high margin and low volume solution to a low margin and high volume solution. Freddy’s initial menu only included gourmet foods cooked from premium ingredients. A business architecture pivot would be for the restaurant to start serving lower production cost items such as burgers and fries. Technology pivot: when you realize that you could solve the exact same problem using a completely different — and usually cheaper — technology. Freddy’s having changed its menu, the chefs do not need sophisticated culinary tools anymore.

There are other types of pivots. The point is that whichever you pick, it should always be rigorously tested. You may pivot 100 times before hitting gold!

In essence, a lean startup model is not about failing quickly. It is about failing cheaply and giving your start-up a chance to develop and refine a product that allows you to build a sustainable business.

In Steve Blank’s words, “Business plans rarely survive first contact with customers.” And as the boxer Mike Tyson once said about his opponents’ pre fight strategies: “Everybody has a plan until they get punched in the mouth.”

The Lean Startup teaches us that entrepreneurship can succeed in any organization, any industry and any market as it is a process, and processes can be learned.

So, to avoid a punch in the mouth, you must master the Build-Measure-Learn feedback loop.