“Business from scratch. Lean Startup Method. Book in 15 minutes

Lean Startup is a concept for lean manufacturing. This technique helps to use a scientific approach to build a growing business and avoid unnecessary costs.

We recommend reading the summary of the bestseller Eric Rees entrepreneurs and all those whose work is related to innovation and product launches.

main idea

Despite sound calculations, serious business plans, thoughtful business models, large investments, most startups fail.
')
Why it happens? Eric Rees, the author of the Lean Startup methodology, is confident that the traditional approach to business development is not applicable to startups.

A startup operates in conditions of extreme uncertainty, and this must be considered when it is launched. At the initial stage of development, a startup needs to remain flexible in order to learn from mistakes and quickly test the founders' hypotheses, which means it is necessary to avoid large injections and costs. This approach underlies the Lean method, which aims to help entrepreneurs increase the chances of a startup to succeed.

Why startups fail?

According to Eric Rees, there are two main reasons for the failure of startups:

1. Passion for traditional business calculations, plans, strategy building, comprehensive market research. But the problem is that in the conditions of complete uncertainty in which startups operate, these classical management methods do not work.
2. The second reason may seem to be completely opposite to the first one: seeing that traditional management approaches do not work, entrepreneurs generally refuse any management tools. They let things take their course and are guided by the principle of “just do it.”

But as Eric Rees notes, such an approach will not lead to anything good either. Even such a chaotic and unpredictable phenomenon as a startup can and should be managed. And for this purpose use the Lean method.

What is an economical startup?

Many share the opinion that the success of an entrepreneur is a combination of perseverance, intelligence, good product and good luck to be at the right time in the right place. Routine, minor matters and boring details do not matter. From his experience of working with hundreds of entrepreneurs, Eric Rees knows that such a presentation is nothing more than a myth, partly imposed by mass culture. It is boring small things that are of fundamental importance in the success of a startup.

“The success of a startup is not a consequence of good genetics or lucky chance. This success can be planned, if you follow the correct processes. In other words, success can be learned. So, he can be taught. ”

Eric Rees invented his method in practice when he was the technical director of the Internet company IMVU he founded. Taught by the experience of previous failures, Eric Rees and his colleagues began to submit for testing to users not ideally verified, but a very raw product.

After they attracted the first users and received feedback from them, product developers began to quickly change the options and create new versions, sometimes even several times a day. And the most amazing thing is that this method effectively worked and helped to move quickly in development. The approach to the creation of innovations, invented in IMVU, became the basis of the Lean methodology, which absorbed, including lean manufacturing methods, design thinking, a consumer development model and a flexible development methodology.

Lean startup is a new approach to the continuous creation of innovations.

In essence, the goal of the Lean startup method is to help an entrepreneur avoid the risk of wasting huge amounts of money and energy to create an unnecessary product for anyone. Over time, the Lean technique has become very popular and is used not only in startups and not only within the IT industry.

The “Lean Startup” approach is based on five principles:

1. Entrepreneurs are everywhere. Eric Rees calls an entrepreneur anyone who has a startup. A startup is “an enterprise whose goal is to develop new products and services in conditions of extreme uncertainty. This means that an economical start-up approach can be applied in companies of any size, even in very large enterprises, in any sector and in any industry. ”
2. Entrepreneurship is management. A start-up needs a new type of management that will meet the conditions of extreme uncertainty. Eric Rees is confident that any modern company, the development of which depends on innovation, needs the position of an “entrepreneur”.
3. Confirmation of the facts. The task of a startup is not only to produce goods and earn money. A startup needs continuous learning using a scientific approach and testing hypotheses empirically.
4. The “create-evaluate-learn” cycle. Its essence: First, create a minimally working version of the product, evaluate the reaction of consumers, and then decide whether to continue the chosen course or change direction.
5. Accounting for innovation. This is what is commonly called boring details. But accounting for innovation is needed to improve the performance of a startup. Accounting for innovation is a system of criteria and indicators that help evaluate the success (or failure) of a startup's actions.

What kind of management does a startup need?

Despite the fact that traditional management approaches do not work well under conditions of complete uncertainty in which a startup operates, without management in general, entrepreneurs will not be able to effectively use their capabilities.

No strategy, no plans, nor a charismatic manager will help the startup if the product it launches is useless to anyone.

But whether the product needs a market no one will say before launching a startup. Therefore, the most important task of a startup is to develop the ability to very quickly understand what the market needs, what customers want and what they are willing to pay for.

Eric Rees compares start-up management with driving a car, when you can quickly change course, adjusting to the traffic situation, and opposes this approach to launching a rocket, when you need to figure everything out and plan ahead. He complains that many entrepreneurs are preparing the business plans of their start-ups as if they are going to launch a rocket into space. But for conditions of complete uncertainty, in which they will have to act, this is not appropriate.

“Instead of developing complex plans based on assumptions, you can make constant adjustments by just turning the steering wheel. This is called the “create-evaluate-learn” feedback loop.

Sitting behind the wheel of a car, we know exactly where we are going. If we are going to work, then we will not give up the trip just because we made a wrong turn, or because the road was blocked and we had to look for a detour. We are determined to get to your destination. Startups also know where they are going, what their destination is: a thriving business that can change the world. I call it a startup vision. In order for this vision to become a reality, it is necessary to develop a strategy that includes a business model, a product roadmap, data on partners and competitors, as well as suggestions on who new products or services are addressed to. ”

How to understand a startup?

The components of any startup are people, product, innovations, conditions of extreme uncertainty.

Eric Rees defines a startup as a new company that develops innovative products or services in complete uncertainty.

If we adopt this definition, then, in fact, startups include not only what we usually understand by them, but also anyone who creates a new product or business in complete uncertainty, and it does not matter in which sector of the economy and on what scale - in a business incubator, in a state institution, or in a subsidiary structure of a large company.

What is a startup product? Eric Rees defines it broadly - as any source of value for customers.

"Everything that these customers experience in the process of interaction with the company should be considered an element of its product."

What is a startup goal?

Eric Rees says that at the beginning of his activities, he and his colleagues spent a lot of time arguing about the different options for their product, but in the end, when they released the product, no one had downloaded it. The release of products that are not needed by anyone is a frequent problem for startups. A strategic analysis of the market will not help here, because clients cannot be relied on, because they themselves sometimes do not know what they want. More words can say the actions of people.

How to understand what people need without the waste of time and money?

The important question is which actions create value for the client and which lead to the waste of resources. As Eric Rees notes, it is this question that those who are learning the concept of lean manufacturing are beginning to ask. But when applying this concept to a startup, it is important to understand its features and differences from production, namely, that the startup operates in conditions of extreme uncertainty.

Uncertainty obscures the understanding of what actions carry value, since a start-up does not at all know who his client is and what he needs.

To apply the concept of lean manufacturing for a startup, an improved approach is required. It is based on learning how to learn about what actions lead to an understanding of customer desires and, accordingly, to improving the performance of a startup. Entrepreneurs do not just need to be able to make assumptions about what customers want. They need to streamline the process of obtaining empirical data - that is, learn to test their hypotheses in practice, figuring out the real needs of customers and quickly adjusting their product with this knowledge.

You can grind the product as much as you like, inventing new and new options, but the reality usually corrects everything. The Lean Startup method initially aims not at creating an ideal product, but at releasing a minimally working product (MVP) and constantly receiving feedback from customers in order to understand their real needs. If the initial assumptions are not confirmed by practice, then they are wrong and therefore you need to make a turn - to radically reconsider the direction of movement. Such an approach completely reduces the risk that a startup will create a product that is useless to no one.

The Lean Startup approach can be used in various fields of activity - in production and in the service sector. The point is to perceive all actions of a startup as experiments and to create opportunities for learning in advance. This method allows you to test each element of the business plan empirically and in this it is similar to the scientific method of testing hypotheses with the help of experiments. This approach helps to give yourself the right to failure in advance, because if a startup approach does not give such a right, then an entrepreneur cannot learn anything.

As an example, Eric Rees cites the story of the most successful online shoe store Zappos, which began with the hypothesis of its founder Nick Swinmern that people would buy shoes on the Internet. Swinmern conducted a small experiment to test his assumption by photographing an assortment of several shoe stores and posting photos on the Internet. If a customer left an order on the website, Swinmern simply bought shoes in the store at regular prices and sent them to the buyer.

Break the vision into pieces.

The first step for an entrepreneur is to divide his vision into components. The most important assumptions for any entrepreneur are the value hypothesis and the growth hypothesis.

The value hypothesis is aimed at understanding whether buyers will feel the value of a product or service when they begin to use it. Surveys will not give a reliable answer to this question, unlike the experiment, which will help to find more accurate indicators.

You can check the growth hypothesis by assessing how information about the project will spread after it is launched, how the first followers will behave and talk about the project.

How to go to practice?

The feedback that a startup gets during its experiments can be qualitative (what product options do you like and which don't) or quantitative (how many customers use the product, the number of people registered).

Understanding what helps to create a working business for a startup is much more important than rewards and media attention.

The concept of an economical startup is the “create-evaluate-learn” feedback cycle. The most important task and the essence of managing a startup is to strive to reduce the time of the feedback cycle. All elements of this cycle are equally noteworthy.

Create

For a startup, you need to start creating a minimum working product (MVP) as soon as possible.

"MVP is a product version that allows you to run the" create-evaluate-learn "cycle with minimal effort, spending as little time as possible on development."

Such a raw product may be deprived of the options that customers will most value in the future, but at the same time it is enough for it to be such that it can be judged by its success or failure - it should be understandable to the first non-expert users.

Estimate

It means determining whether efforts to create a product lead to the desired results. And this is the key difference of a lean start-up assessment from standard methods, when the implementation of deadlines and budget development is assessed, but it may not be taken into account that a startup has created something that nobody needs. The main evaluation method in Lean startup is accounting for innovations.

“This is a quantitative approach to find out how successful our attempts to launch the growth mechanism are. It will also enable the determination of intermediate learning outcomes. ”

Learn to

It means to understand whether to move further in the same way or if a turn is required - a cardinal revision of the business model. When an entrepreneur sees that the chosen path does not lead to success, he must be ready to find a new strategic hypothesis and stop spending money on following an unnecessary direction.

Jumps of faith

Facebook began with a social network for students. The company already had competitors with many options. When the company attracted the first investment, the number of people visiting the site was small. But, as Eric Rees notes, investors were attracted, firstly, by the fact that active users spent a lot of time on the site. That is, the value hypothesis was confirmed - active users considered the service valuable. And secondly, the speed with which new users came was very high. That is, the second major hypothesis was confirmed - the growth hypothesis.

But, trying to repeat the success of Facebook and, wondering what really ensured its success, it is easy to fall into the trap. Instead of fortune telling, it is better to start conducting experiments that will show what will work and what will not in your case.

Genti Genbutsu

Strategic decisions should be based on consumer knowledge. Eric Rees advises adopting the Japanese principle of genti genbutsu, which is translated as "go and see for yourself." This principle is guided, in particular, in Toyotas. The manager responsible for the development of the Sienna minivan traveled all US states and talked with families, finding out what kind of minivan the residents of America want to see and take into account the opinion of their children, which had a positive effect on the sales of this brand of car.

People always stand behind the numbers, you need to get knowledge first-hand, literally going outside. And the first thing you need to know is whether or not potential consumers have a serious problem that needs to be solved.

The main goal of the first contact with customers is to find out if we understand them.

Do what scares perfectionists

It is not uncommon for entrepreneurs to create a product first, and then find out the reaction of consumers. But the point is to do the opposite.

The goal of creating a minimally working product (MVP) is to start learning and testing in practice as quickly as possible. MVP is needed to test the hypotheses of entrepreneurs, it should not be perfect, it should be of high quality so as to attract first customers, but no more.

Accounting innovation

Taking innovations into account is a “planned, systematic approach to ascertaining whether we are making progress and whether we receive confirmation with facts”. In fact, it is an alternative to the traditional reporting system for companies operating in conditions of uncertainty. This is a new type of reporting system that allows you to correctly interpret and evaluate whether changes lead to an improvement in the situation.

“Accounting for innovations allows the founders of a startup to make sure that they really manage to create a working business.”

We need to start by turning the leaps of faith into a working financial model.

Three stages of innovation accounting:

1. Create a minimally working product and get feedback to understand the real situation.
2. “We must try to bring the baseline to the ideal. It may take many attempts. "
3. You need to decide whether to move in the same direction or take a turn.

If you are closer to the ideal indicators, you need to move in the same direction.

Cohort analysis

One of the most important analysis tools for a startup is a cohort analysis.

“It may seem complicated, but based on one simple premise. Instead of estimating cumulative overall indicators, such as total revenue and total number of consumers, we evaluate the indicators separately for each consumer group that comes into contact with the product independently of the other groups. Each such group is called a cohort. ”

Vanity rates

If your product turns out to be useless to anyone, then its optimization or marketing will have no meaning. A startup must make very clear and reasonable predictions to prove that a good business can be built with the product. But often the necessary indicators are replaced by those that look nicer, but useless ("vanity indicators").

Three aspects of innovation accounting

The author identifies three important aspects of innovation accounting: effective indicators, simplicity of presentation, and the ability to verify data.

1. Effective performance . Effective indicators should demonstrate causal relationships, show what needs to be done to get the required results. They help to learn from the results of their actions. "People have an innate talent for learning, they just need a clear and objective assessment." Otherwise it will be vanity indicators.
2. Simplicity of presentation . Reports should be plain and simple. It is worth remembering that behind any indicators are people. The report should be connected with people and their actions, it is better to avoid arrays of abstract data.
3. The ability to verify data - controllability. It is important that employees do not question the accuracy of the data. You need to be able to verify the reported data in practice, in the real world communicating with customers.

When do you need to make a turn?

When it becomes clear that the path chosen initially will not lead to success, the entrepreneur is required to make a turn - to radically change the strategy, create and test a new hypothesis about the product.

The essence of the turn is to take into account everything that has been learned before, but at the same time, radically change the strategy in order to get even more informed knowledge.

This is a combination of the scientific method of testing hypotheses and vision, intuition and creativity.

“Runway” of a startup

Usually, a runway “runway” is understood to mean the amount of the balance in its bank account.

“For example, if a startup has a million dollars in a bank and at the same time he spends $ 100,000 per month, his„ runway “is 10 months“.

Based on this definition, the “take-off strip” can be extended in two ways: by reducing costs or attracting additional funding.

However, Eris Rees proposes to determine the runway in another way - through the number of turns that a startup can make. Then, to extend it, you need to learn how to make turns as quickly as possible.

The need to make a turn is indicated by a decrease in the effectiveness of experiments with the product and the loss of productivity in the development process.

How to gain speed startup?

Small batch approach

At the core of the Lean startup methodology is a small batch approach borrowed from the concept of lean manufacturing.

“When working in small batches, the finished product is made every few seconds, and when large batches approach, all finished products are produced simultaneously, at the very end. Imagine what that means when it comes to hours, days, weeks. What if the customer suddenly decides that he doesn’t need a product? Would we like to know about this before? “.

In work in small batches such risk is reduced to a minimum.

How to achieve growth?

A startup needs viable growth and long-term results, not just some periodic actions and short-term effect.

Eric Rees deduces an important and simple rule of sustainable growth:

"New customers come thanks to the actions of customers who came before."

Three growth mechanisms

Their goal is to “ give a startup a relatively small set of indicators to focus on.”

1. The mechanism of “sticky” growth . “The rules that govern“ sticky ”growth are quite simple: if the rate of attracting new consumers exceeds the loss rate, then the popularity of the product grows .” Therefore, it is important for such companies to track consumer losses.
2. The mechanism of viral growth . “ It is called the viral cycle, and its speed is determined by the so-called viral coefficient. The higher this ratio, the faster the product will become popular. The viral multiplier shows how many more customers each new customer can bring. Each of his friends is also a potential client, and he can also bring his friends.
   If the viral coefficient is one, then only one out of every 10 customers will bring one friend with them. Such a cycle is not viable. Suppose a company has 100 customers. They will bring 10 friends with them. These 10 friends will bring just one person, and this cycle will end . ”
3. The mechanism of paid growth . “ In order for a company to grow steadily for a long time using the mechanism of paid growth, it needs a differentiated ability to“ monetize ”a certain group of users .”

For example, in the IMVU company, this was due to the introduction of the ability to debit funds from mobile phones and other methods, which helped the company to attract more customers than its competitors, which focused only on credit cards.

Adaptation

A startup can not afford to do without the system. To become successful, he needs to be an adaptive organization in which processes and actions in response to reality are quickly and automatically adjusted.

In addition to the speed mentioned above, a startup needs to have its regulators, with the help of which it will be able to find the desired pace of movement.

Finally

Success stories of entrepreneurs are usually presented in this way: insight with a brilliant idea, then a struggle of a strong character, a dizzying leap, and then the team gathers, deals are made, and success comes.

Act wisely - apply the concept of Lean startup, avoid unnecessary expenses, learn from practice and develop your business using the scientific method.

About Us

We talk about the key ideas from the best books of the genre of non-fiction. There are more than a hundred bestsellers in our library , including those that have not yet been published in Russian.

Subscribe to our telegram channel to keep abreast of all the latest business literature, as well as exclusive materials from our library.