Creators of new products in environments of extreme uncertainty, startups face enormous risks. In the US, about 50% of small businesses fail in the first five years. Insufficient capital, over investment, and low sales are just some of the reasons leading to this sobering statistic.
As a startup owner, what can you do to improve your chances?
Enter “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses“, a New York Times bestseller by founder of IMVU (creator of 3D avatars) Eric Ries.
Borrowing heavily from lean manufacturing pioneered by Toyota as well as his own entrepreneurial experiences in IMVU, “The Lean Startup” proposes that companies can be a lot more capital efficient without hampering human creativity. Through rapid experimentation, short product development cycles, and rigorous measurements of the right metrics, they can ascertain what customers really want. This reduces guesswork, time, money and effort.
Embracing the principle of genchi gembutsu – translated in English as “go and see for yourself” – Ries regaled how Toyota’s manager for Sienna minivan Yuji Yokoya went on a 53,000 mile trip around North America to understand firsthand what consumers wanted in a minivan. Such direct experiences allows one to test critical “leap-of-faith” assumptions about what customers like and dislike.
Key ideas from the book include the following:
1. Customer development (the understanding of customer needs) must be married to agile development (a process which drives waste out of product development). Not doing so would end up in wasteful innovations and features that customers do not want.
2. Validated learning should be the goal of all entrepreneurs. Through learning milestones approximated to stages of a company’s development, one could achieve positive improvements in a it’s core metrics.
3. The Lean Startup’s core is represented by the Build-Measure-Learn feedback loop. Here, one should build a Minimum Viable Product (MVP) for early adopters, roll it out in the market and measure outcomes via innovation accounting, learn what works (and what doesn’t), and determine if one should stick to one’s hypothesis or switch course, ie pivot or persevere.
A good way to bring this all together is illustrated by Sacha Chua below:
Courtesy of Sacha Chua
4. As highlighted above, innovation accounting is a way of measuring progress through actionable metrics that help to tie in cause and effect. Unlike vanity metrics often found in standard accounting practices, innovation accounting leverages on an MVP to obtain real market data and uses these to propagate value adding improvements.
5. After learning what worked and what didn’t, entrepreneurs need to either pivot or persevere. This moment of truth should be viewed objectively (think scientific experiments). Pivots can take the form of changes to singular product features, customer segments, platforms, business architecture, growth engines, technology and more.
6. Small batches inherently work better than large ones. Changes are more easily made to any step of the process and the costs of rework are far lower.
7. There are principally three engines of growth in any startup. The sticky engine of growth entails retaining customers through minimizing attrition while growing slowly, the viral engine comprises exponential growth through word-of-mouth means, while the paid engine looks at advertising and other costs (sales staff) to drive growth.
8. Finally, entrepreneurs should build adaptive organisations which have cultures valuing learning from mistakes while operating with discipline. By asking the five Whys, root causes of problems can be more easily ferreted out. However, one must be mindful not to let it degenerate into a blame game.
In summary, “The Lean Startup” is an invaluable resource for anybody charged with starting a new business venture – be they entrepreneurs or intrapreneurs. By embracing the philosophy of thinking big and starting small coupled with a meticulous step-by-step analysis of what went right or wrong, startups can improve their chances of success.
Productivity (a huge bugbear here in Singapore) can also be raised as process efficiency can be linked more directly to the market. This is imperative in today’s inherently risky and uncertain business environment.
For more information, do check out The Lean Startup website which has many useful links to learning resources.