When I went on my first book ‘shopping spree’ of 2018 to find some promising reading material to prepare me for my transition from corporate to startup life, one of the few books that kept coming up in most ‘best-of’ lists was The Lean Startup.
Written by Eric Ries and first published in 2011, it lays out a scientific approach to new business building with the ambition of helping aspiring founders decrease waste and improve their chances of success. Ries has previously worked on quite a few startups and liberally shares from his experience as the CTO and co-founder at IMVU and as advisor to many other startups (including some rather well known ones like Dropbox).
Key ideas:
- Validated learning: Ries argues in favor of a new goal for startups operating under conditions of extreme uncertainty – validated learning. This means empirically discovering valuable truths about the business prospects of the company by measuring what’s really going on, especially around actual customer needs.
- Core assumptions: To get to validated learning, we should state our hypotheses clearly in advance and then test them. The two main hypotheses for most startups are the value hypothesis (will, and if yes, how will a new product or service deliver value to its customers) and the growth hypothesis (how will new customers discover the product or service).
- Build-Measure-Learn feedback loop: A key theme is getting to real-world evidence fast by completing something Ries calls the ‘Build-Measure-Learn’ feedback loop. This is also where the idea of the minimum viable product (MVP) is introduced – a concept that’s by now penetrated corporate thinking quite successfully. The goal behind an MVP is building a version of a new product that can go through the full feedback loop as quickly as possible and thus generate the desired evidence.
- Innovation accounting: Linked to the feedback loop is the concept of ‘innovation accounting’. Ries proposes a new kind of accounting for startups to replace traditional accounting (which is not really appropriate for a startup setting). The first step towards innovation accounting is to quickly build an MVP and establish a baseline for actionable metrics. After this comes ‘tuning the engine’ by rapidly and continuously optimizing the product aiming at improving those metrics. In the third step comes the moment of truth: pivot (i.e., adjust the strategy) or persevere. For all of these metrics, we should ideally use cohort analysis (looking at each batch of new customers as they come in) instead of traditional gross metrics.
- Engines of growth: Diving a bit deeper into the growth hypothesis from above, the book outlines 3 main possible engines of growth. First, there’s ‘sticky growth’ which focuses on customer retention. Second, there’s ‘viral growth’ were every new customer acquires additional new customers for the company (resulting in a ‘viral loop’). Finally, there’s paid growth which works if acquisition costs are smaller than a new customer’s lifetime value.
- Fives Whys: As a new business grows, the balance between continued speed and fixing newly developing problems requires a new approach to maintain the agility and responsiveness that comes with the methods presented. Here, the Lean principle of asking ‘why’ 5 times is introduced. This allows for identifying human root causes behind seemingly technical problems. By making ‘proportional investments’ into fixing problems (depending on how much pain an issue causes), a startup can stay nimble as it grows.
- Innovation sandboxes: In the end, Ries also discusses how to get the Lean Startup principles into a corporate environment and develop new business while protecting the existing core business as much as necessary. His favored setup are clearly defined innovation sandboxes where ever increasing aspects of a product or service (he uses the example of the pricing page in a sales process) are exposed to the new methods.
I’ve come across many of the concepts of The Lean Startup in the past few years – testament to the exceptional success the book and its ideas have enjoyed. At the same time, reading them in the original context and with vibrant examples did add quite a bit to my own understanding. I’m convinced I’ll be able to quickly apply many things, especially around testing leap-of-faith assumptions and cohort analyses. The latter comes somewhat unnaturally to classically trained managers and I remember quite a tough time trying to get them implemented and used at my last role.
The only bits that seemed a bit less thought through came in the end with the prescriptions (e.g., for expansive research programs). While I liked some ideas (such as the overall approach of a long-term stock market), I wasn’t fully convinced.
Would I read it again: Yes.
Recommended for: Entrepreneurs (or ‘innovation managers’) both in startups as well as established corporates.