The Lean Startup by Eric Ries | Book Summary and PDF
In The Lean Startup PDF summary, you will learn:
- What exactly is a lean startup and why it leads to a successful business
- The most fundamental goal of a startup, which many of us get wrong
- The 3 stages that successful startups go through
- The 3 engines of growth for startups
- An effective way to get to the root cause of startup problems and get the answer
Why read The Lean Startup
We’ve heard this fantasy before: a heroic entrepreneur has this one great idea, starts it in the garage, implements it, and then builds a billion-dollar company. It’s a popular myth many of us have fallen for. We think the big companies we now know got rich just like that.
Contrary to all these is the fact that most entrepreneurs just start where they are, with the idea that they have, and it’s usually not a really good idea at first.
How startup entrepreneurs get to success once they start implementing the idea and test it in the market:
They get feedback ➜ they keep changing/iterating ➜ they keep learning
The Lean Startup by Eric Ries is useful for starting entrepreneurs as it claims to show where the true nature of successful startups can be found. It emphasizes a startup as one giant experiment.
The book holds the premise that the key to a startup’s success is being able to learn very fast about what the market is giving and then being able to pivot it to something that is much more useful for the market.
This is how the startup becomes a sustainable product or solution. You do not think of efficiently producing something, rather you think of how fast you are learning.
1) What Exactly is a Startup?
A startup is something that is designed to confront situations of extreme uncertainty. Most tools of general management are not really designed to flourish in such an environment.
Learning is the Key
Validated learning = the most fundamental goal of a startup. We call it such because we are going to put it out in the market, conduct experiments, get results, and get validation on what we want to learn.
As a startup is one giant experiment — everything that we do is to validate learning in the early phases of the product design.
One of the most important lessons, not only in business but also probably in all areas of life, is that:
If we cannot fail, we cannot learn.
If you are out there to learn something new, you have to allow yourself to fail — valiantly, in epic proportions, whichever way you need to fail. Failures drive valuable lessons.
2) Lean Startup: The 3 Stages
1. Setting the Vision
🔑 Think of where to start.
If we think of the roots of the concept of lean startup, the whole idea is about being able to validate our learning.
In order to do that, we have to go through the Feedback Loop:
Build… Measure… Learn
In this loop, we build something, we test it out and measure, and then we learn something from our hypothesis. Depending on what we learn, we go back and make the changes and build from there.
Even though the build-measure-learn loop happens in that order, the planning for this happens in the exact opposite order:
- First, we figure out what we want to learn. (The true north of the startup)
- Next, we figure out how we’re going to measure it. (The roadmap)
- Then we figure out what we are going to build. (The product as the end result of the process)
That is the way to think of a lean startup.
While the vision hardly changes, the strategy changes a little more often and the product changes all the time because it’s the optimization portion of the whole equation.
2. Steering the Vision
The next part of the equation is steering the vision that we have. Steering involves the following steps:
This is the first step in this phase. How do you test it fast so that you can learn fast?
🔑: A minimum viable product (MVP) – What we want to do as entrepreneurs is to go out and figure out a minimum viable product for the purpose of testing the hypothesis. This starts the process of learning.
The first product does not need to be perfect. In fact, it should not be perfect, otherwise we’re wasting time.
When we think of quality and design of our minimum viable product —
- We do not need to go high-quality right away.
- The product does not need to have great features.
- We just need to have the right level of quality to validate our learning.
After testing comes measurement, where we don’t just do it for the sake of measurements.
🔑 Innovation accounting – this means accounting for the innovation that is happening in the company.
- Are they taking effect?
- Are they making the product better?
- Are they making the service better?
- Are they bringing in more money?
- What learning and what changes are causing the right things to happen?
- What changes are causing the wrong things to happen too?
The idea is to understand where the innovation is coming from and what good learning is happening to be able to promote that and to take away the other parts.
We use our MVP to get started on the process of measurement in order to figure out where we are as a company, and then to figure out some measurement statistics and continue on with constant measurement. It’s all about constant innovative accounting.
How we can validate the precise learning that we have:
In a traditional business, we measure in chunks, specifically in terms of overall customer intake versus revenue and profits and so on. But in Lean Startup, just like in every experiment we do, we must have a cohort. We must have a new group of data for that.
Therefore: if we start with Hypothesis A and do an experiment, Hypothesis B and do another experiment, and Hypothesis C and do another experiment, we need to have results of them separately and be able to understand what happened, what the outcome was for each of them, and hence learn from every experiment done.
The key is to come up with actionable metrics as a result of these measurements.
After these measurements are done, one of the bigger keys is to be able to say — “At this time, do we pivot or shall we persevere?”
Pivoting means to hold one foot firmly on where you are with everything that you have learned, and to move the other foot around your new learning so you know where you were and what you have learned so far.
This enables you to pivot around this learning that you have and say, “This is where we need to go now.”
Again, it’s not about the big idea. While 5% of entrepreneurship is a big idea, 95% of it is just gritty work, in the sense that you pivot and persevere, and then you change course and strategies in order to get to your vision.
To Pivot or to Persevere?
Do we pivot and change course, or do we persevere with the direction that we have?
The only way we can get there:
– validated learning from all that we have done
– all the accounting we’ve had for that learning
🔑: Figure out how many pivots it can afford. But even while we’re answering this fundamental question, what we need to keep in mind is the faster we can do it, the more time we have to get to take off.
“Runway” – the amount of time you have before you run out of money. Here you’ll see whether you launch or fail. So starting from where you are to get to the end of the runway, you have to be able to pivot really fast so you can get to the fastest validated learning.
The more pivots you can afford, the faster you can learn, and the better your chances of success.
There are many different kinds of pivots that go into the book, but just as an overview here are some of them:
- Zoom-In: you just think of a feature of a product and make it the whole product
- Zoom-Out: the whole product becomes a part of a much larger product and on and on
- Customer Segment
- Customer Needs
- Business Architecture
- Value Capture
A pivot is simply another hypothesis. As soon as you pivot, think of it as a new hypothesis that will require a new MVP to test. So you will go through the build-measure-learn feedback loop again.
The key for a startup is to be able to execute on those as fast as possible to learn as fast as possible and, as a result, to be able to survive.
Taking the leap of hypothesis
Every time a startup starts to execute, we have to identify which hypothesis we’re going to test. The hypotheses are the ones on which the whole business hinges, so these assumptions we have made are leaps of faith and we need to test them out.
Our whole strategy is usually based on these assumptions, and the goal of a startup should be to test the riskiest assumptions as soon as possible to build a system in an organization. That is the leap. We have to be able to test those leaps of faith that we make as entrepreneurs.
🔑: Batch sizes
In traditional management and traditional manufacturing, they go with large batch sizes to minimize production costs and efficiency cost and to maximize profits.
But in a lean startup, what we need to do is to not produce stuff more efficiently but be able to learn as quickly as possible. In order to do that, we need to work in small batches in order to validate the learning that we’re going through.
So even though the loop that we need to go through is Build – Measure – Learn, the planning for it goes backwards. We say, “This is what we need to learn, hence this is what we need to measure, and hence, this is what we need to build.”
We need to learn to operate in small batches so that we can validate our learning much faster.
3) Growing a Lean Startup: The 3 Engines of Growth
There are 3 ways to grow a startup based on customer use of your product through which you can sustainably grow. These are the metrics to help startups figure out growth:
- Sticky engine – This is by word of mouth as a side effect of prior use. Here, the product just transmits from person to person.
- Paid engine – This covers funded advertising for your products.
- Viral engine – An example of this is Facebook, where if one person becomes a member and they want their friend to become a member, it’s a person to person transmission, hence the viral effect.
A caveat for lean startups is to not jump into all these 3 engines of growth but to start and stick with one. Once it matures, they should move on to another one.
There are times when a startup goes too fast; it builds a product that is of such low quality that the learning that was intended could not happen. The product could not be used in the market. That is the caveat in terms of going too fast.
4) 5 Whys to Get to the Root Cause of Problems
How it works:
You ask — “Why did that problem happen?”
And the answer comes — “Well, it happened because A happened.”
And then you say — “Well, why did A happen?”
And the answer comes again. “Well, it’s because B happened.”
“Why did B happen?”
“Because C happened.”
Ask this question of “why” 5 times, one after the other, until you get to the root cause.
Usually after 5 whys, you would get to the answer to the problem.
- Learning is the fundamental goal of a startups. Figuring out what you want to learn is the first step.
- Learn very fast.
- Pivot very fast — when a pivot is required.
- Shorten the pivot times so that you can make as many pivots as possible in order to take off before the runway runs out.