Acclaim for THE LEAN STARTUP Acclaim for THE LEAN STARTUP “The Lean Startup isn’t just about how to create a more successful entrepreneurial business; it’s about what we can learn from those businesses to improve virtually everything we do. I imagine Lean Startup principles applied to government programs, to health care, and to solving the world’s great problems. It’s ultimately an answer to the question How can we learn more quickly what works and discard what doesn’t?” —Tim O’Reilly, CEO, O’Reilly Media “Eric Ries unravels the mysteries of entrepreneurship and reveals that magic and genius are not the necessary ingredients for success but instead proposes a scienti c process that can be learned and replicated. Whether you are a startup entrepreneur or corporate entrepreneur, there are important lessons here for you on your quest toward the new and unknown.” —Tim Brown, CEO, IDEO “The road map for innovation for the twenty-first century. The ideas in The Lean Startup will help create the next industrial revolution.” —Steve Blank, lecturer, Stanford University, UC Berkeley Hass Business School “Every founding team should stop for forty-eight hours and read The Lean Startup. Seriously, stop and read this book now.” —Scott Case, CEO, Startup America Partnership “The key lesson of this book is that startups happen in the present —that messy place between the past and the future where nothing happens according to PowerPoint. Ries’s ‘read and react’ approach to this sport, his relentless focus on validated learning, the neverending anxiety of hovering between ‘persevere’ and ‘pivot,’ all bear witness to his appreciation for the dynamics of entrepreneurship.” —Geoffrey Moore, author, Crossing the Chasm “If you are an entrepreneur, read this book. If you are thinking about becoming an entrepreneur, read this book. If you are just curious about entrepreneurship, read this book. Starting Lean is today’s best practice for innovators. Do yourself a favor and read this book.” —Randy Komisar, founding director of TiVo and author of the bestselling The Monk and the Riddle “How do you apply the fty-year-old ideas of Lean to the fastpaced, high-uncertainty world of startups? This book provides a brilliant, well-documented, and practical answer. It is sure to become a management classic.” —Don Reinertsen, author, The Principles of Product Development Flow “What would happen if businesses were built from the ground up to learn what their customers really wanted? The Lean Startup is the foundation for reimagining almost everything about how work works. Don’t let the word startup in the title confuse you. This is a cookbook for entrepreneurs in organizations of all sizes.” —Roy Bahat, president, IGN Entertainment “The Lean Startup is a foundational must-read for founders, enabling them to reduce product failures by bringing structure and science to what is usually informal and an art. It provides actionable ways to avoid product-learning mistakes, rigorously evaluate early signals from the market through validated learning, and decide whether to persevere or to pivot, all challenges that heighten the chance of entrepreneurial failure.” —Noam Wasserman, professor, Harvard Business School “One of the best and most insightful new books on entrepreneurship and management I’ve ever read. Should be entrepreneurship and management I’ve ever read. Should be required reading not only for the entrepreneurs that I work with, but for my friends and colleagues in various industries who have inevitably grappled with many of the challenges that The Lean Startup addresses.” —Eugene J. Huang, partner, True North Venture Partner “In business, a ‘lean’ enterprise is sustainable e ciency in action. Eric Ries’s revolutionary Lean Startup method will help bring your new business idea to an end result that is successful and sustainable. You’ll nd innovative steps and strategies for creating and managing your own startup while learning from the real-life successes and collapses of others. This book is a must-read for entrepreneurs who are truly ready to start something great!” —Ken Blanchard, coauthor of The One Minute Manager® and The One Minute Entrepreneur Copyright © 2011 by Eric Ries All rights reserved. Published in the United States by Crown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., New York. www.crownpublishing.com CROWN BUSINESS is a trademark and CROWN and the Rising Sun colophon are registered trademarks of Random House, Inc. Library of Congress Cataloging-in-Publication Data Ries, Eric, 1978– The lean startup / Eric Ries. — 1st ed. p. cm. 1. New business enterprises. 2. Consumers’ preferences. 3. Organizational effectiveness. I. Title. HD62.5.R545 2011 658.1′1—dc22 2011012100 eISBN: 978-0-307-88791-7 Book design by Lauren Dong Illustrations by Fred Haynes Jacket design by Marcus Gosling v3.1 For Tara Contents Cover Title Page Copyright Dedication Introduction Part One VISION 1. Start 2. Define 3. Learn 4. Experiment Part Two STEER 5. Leap 6. Test 7. Measure 8. Pivot (or Persevere) Part Three ACCELERATE 9. Batch 10. Grow 11. Adapt 12. Innovate 13. Epilogue: Waste Not 14. Join the Movement Endnotes Disclosures Acknowledgments About the Author Introduction me if you’ve heard this one before. Brilliant college kids Stopsitting in a dorm are inventing the future. Heedless of boundaries, possessed of new technology and youthful enthusiasm, they build a new company from scratch. Their early success allows them to raise money and bring an amazing new product to market. They hire their friends, assemble a superstar team, and dare the world to stop them. Ten years and several startups ago, that was me, building my rst company. I particularly remember a moment from back then: the moment I realized my company was going to fail. My cofounder and I were at our wits’ end. The dot-com bubble had burst, and we had spent all our money. We tried desperately to raise more capital, and we could not. It was like a breakup scene from a Hollywood movie: it was raining, and we were arguing in the street. We couldn’t even agree on where to walk next, and so we parted in anger, heading in opposite directions. As a metaphor for our company’s failure, this image of the two of us, lost in the rain and drifting apart, is perfect. It remains a painful memory. The company limped along for months afterward, but our situation was hopeless. At the time, it had seemed we were doing everything right: we had a great product, a brilliant team, amazing technology, and the right idea at the right time. And we really were on to something. We were building a way for college kids to create online pro les for the purpose of sharing … with employers. Oops. But despite a promising idea, we were nonetheless doomed from day one, because we did not know the process we would need to use to turn our product insights into a great company. If you’ve never experienced a failure like this, it is hard to describe the feeling. It’s as if the world were falling out from under you. You realize you’ve been duped. The stories in the magazines are lies: hard work and perseverance don’t lead to success. Even worse, the many, many, many promises you’ve made to employees, friends, and family are not going to come true. Everyone who thought you were foolish for stepping out on your own will be proven right. It wasn’t supposed to turn out that way. In magazines and newspapers, in blockbuster movies, and on countless blogs, we hear the mantra of the successful entrepreneurs: through determination, brilliance, great timing, and—above all—a great product, you too can achieve fame and fortune. There is a mythmaking industry hard at work to sell us that story, but I have come to believe that the story is false, the product of selection bias and after-the-fact rationalization. In fact, having worked with hundreds of entrepreneurs, I have seen rsthand how often a promising start leads to failure. The grim reality is that most startups fail. Most new products are not successful. Most new ventures do not live up to their potential. Yet the story of perseverance, creative genius, and hard work persists. Why is it so popular? I think there is something deeply appealing about this modern-day rags-to-riches story. It makes success seem inevitable if you just have the right stu . It means that the mundane details, the boring stu , the small individual choices don’t matter. If we build it, they will come. When we fail, as so many of us do, we have a ready-made excuse: we didn’t have the right stu . We weren’t visionary enough or weren’t in the right place at the right time. After more than ten years as an entrepreneur, I came to reject that line of thinking. I have learned from both my own successes and failures and those of many others that it’s the boring stu that matters the most. Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be engineered by following the right process, which means it can be learned, which means it can be taught. Entrepreneurship is a kind of management. No, you didn’t read that wrong. We have wildly divergent associations with these two words, entrepreneurship and management. Lately, it seems that one is cool, innovative, and exciting and the other is dull, serious, and bland. It is time to look past these preconceptions. Let me tell you a second startup story. It’s 2004, and a group of founders have just started a new company. Their previous company had failed very publicly. Their credibility is at an all-time low. They have a huge vision: to change the way people communicate by using a new technology called avatars (remember, this was before James Cameron’s blockbuster movie). They are following a visionary named Will Harvey, who paints a compelling picture: people connecting with their friends, hanging out online, using avatars to give them a combination of intimate connection and safe anonymity. Even better, instead of having to build all the clothing, furniture, and accessories these avatars would need to accessorize their digital lives, the customers would be enlisted to build those things and sell them to one another. The engineering challenge before them is immense: creating virtual worlds, user-generated content, an online commerce engine, micropayments, and—last but not least—the three-dimensional avatar technology that can run on anyone’s PC. I’m in this second story, too. I’m a cofounder and chief technology o cer of this company, which is called IMVU. At this point in our careers, my cofounders and I are determined to make new mistakes. We do everything wrong: instead of spending years perfecting our technology, we build a minimum viable product, an early product that is terrible, full of bugs and crash-your-computer-yes-really stability problems. Then we ship it to customers way before it’s ready. And we charge money for it. After securing initial customers, we change the product constantly—much too fast by traditional standards—shipping new versions of our product dozens of times every single day. We really did have customers in those early days—true visionary early adopters—and we often talked to them and asked for their early adopters—and we often talked to them and asked for their feedback. But we emphatically did not do what they said. We viewed their input as only one source of information about our product and overall vision. In fact, we were much more likely to run experiments on our customers than we were to cater to their whims. Traditional business thinking says that this approach shouldn’t work, but it does, and you don’t have to take my word for it. As you’ll see throughout this book, the approach we pioneered at IMVU has become the basis for a new movement of entrepreneurs around the world. It builds on many previous management and product development ideas, including lean manufacturing, design thinking, customer development, and agile development. It represents a new approach to creating continuous innovation. It’s called the Lean Startup. Despite the volumes written on business strategy, the key attributes of business leaders, and ways to identify the next big thing, innovators still struggle to bring their ideas to life. This was the frustration that led us to try a radical new approach at IMVU, one characterized by an extremely fast cycle time, a focus on what customers want (without asking them), and a scienti c approach to making decisions. ORIGINS OF THE LEAN STARTUP I am one of those people who grew up programming computers, and so my journey to thinking about entrepreneurship and management has taken a circuitous path. I have always worked on the product development side of my industry; my partners and bosses were managers or marketers, and my peers worked in engineering and operations. Throughout my career, I kept having the experience of working incredibly hard on products that ultimately failed in the marketplace. At rst, largely because of my background, I viewed these as technical problems that required technical solutions: better architecture, a better engineering process, better discipline, focus, or product vision. These supposed xes led to still more failure. So I read everything I could get my hands on and was blessed to have had some of the top minds in Silicon Valley as my mentors. By the time I became a cofounder of IMVU, I was hungry for new ideas about how to build a company. I was fortunate to have cofounders who were willing to experiment with new approaches. They were fed up—as I was—by the failure of traditional thinking. Also, we were lucky to have Steve Blank as an investor and adviser. Back in 2004, Steve had just begun preaching a new idea: the business and marketing functions of a startup should be considered as important as engineering and product development and therefore deserve an equally rigorous methodology to guide them. He called that methodology Customer Development, and it o ered insight and guidance to my daily work as an entrepreneur. Meanwhile, I was building IMVU’s product development team, using some of the unorthodox methods I mentioned earlier. Measured against the traditional theories of product development I had been trained on in my career, these methods did not make sense, yet I could see rsthand that they were working. I struggled to explain the practices to new employees, investors, and the founders of other companies. We lacked a common language for describing them and concrete principles for understanding them. I began to search outside entrepreneurship for ideas that could help me make sense of my experience. I began to study other industries, especially manufacturing, from which most modern theories of management derive. I studied lean manufacturing, a process that originated in Japan with the Toyota Production System, a completely new way of thinking about the manufacturing of physical goods. I found that by applying ideas from lean manufacturing to my own entrepreneurial challenges—with a few tweaks and changes—I had the beginnings of a framework for making sense of them. This line of thought evolved into the Lean Startup: the application of lean thinking to the process of innovation. IMVU became a tremendous success. IMVU customers have created more than 60 million avatars. It is a pro table company with annual revenues of more than $50 million in 2011, employing more than a hundred people in our current o ces in Mountain View, California. IMVU’s virtual goods catalog—which seemed so risky years ago—now has more than 6 million items in it; more than 7,000 are added every day, almost all created by customers. As a result of IMVU’s success, I began to be asked for advice by other startups and venture capitalists. When I would describe my experiences at IMVU, I was often met with blank stares or extreme skepticism. The most common reply was “That could never work!” My experience so ew in the face of conventional thinking that most people, even in the innovation hub of Silicon Valley, could not wrap their minds around it. Then I started to write, rst on a blog called Startup Lessons Learned, and speak—at conferences and to companies, startups, and venture capitalists—to anyone who would listen. In the process of being called on to defend and explain my insights and with the collaboration of other writers, thinkers, and entrepreneurs, I had a chance to re ne and develop the theory of the Lean Startup beyond its rudimentary beginnings. My hope all along was to nd ways to eliminate the tremendous waste I saw all around me: startups that built products nobody wanted, new products pulled from the shelves, countless dreams unrealized. Eventually, the Lean Startup idea blossomed into a global movement. Entrepreneurs began forming local in-person groups to discuss and apply Lean Startup ideas. There are now organized communities of practice in more than a hundred cities around the world.1 My travels have taken me across countries and continents. Everywhere I have seen the signs of a new entrepreneurial renaissance. The Lean Startup movement is making entrepreneurship accessible to a whole new generation of founders who are hungry for new ideas about how to build successful companies. Although my background is in high-tech software entrepreneurship, the movement has grown way beyond those entrepreneurship, the movement has grown way beyond those roots. Thousands of entrepreneurs are putting Lean Startup principles to work in every conceivable industry. I’ve had the chance to work with entrepreneurs in companies of all sizes, in di erent industries, and even in government. This journey has taken me to places I never imagined I’d see, from the world’s most elite venture capitalists, to Fortune 500 boardrooms, to the Pentagon. The most nervous I have ever been in a meeting was when I was attempting to explain Lean Startup principles to the chief information o cer of the U.S. Army, who is a three-star general (for the record, he was extremely open to new ideas, even from a civilian like me). Pretty soon I realized that it was time to focus on the Lean Startup movement full time. My mission: to improve the success rate of new innovative products worldwide. The result is the book you are reading. THE LEAN STARTUP METHOD This is a book for entrepreneurs and the people who hold them accountable. The ve principles of the Lean Startup, which inform all three parts of this book, are as follows: 1. Entrepreneurs are everywhere. You don’t have to work in a garage to be in a startup. The concept of entrepreneurship includes anyone who works within my de nition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty. That means entrepreneurs are everywhere and the Lean Startup approach can work in any size company, even a very large enterprise, in any sector or industry. 2. Entrepreneurship is management. A startup is an institution, not just a product, and so it requires a new kind of management speci cally geared to its context of extreme uncertainty. In fact, as I will argue later, I believe “entrepreneur” should be considered a will argue later, I believe “entrepreneur” should be considered a job title in all modern companies that depend on innovation for their future growth. 3. Validated learning. Startups exist not just to make stu , make money, or even serve customers. They exist to learn how to build a sustainable business. This learning can be validated scienti cally by running frequent experiments that allow entrepreneurs to test each element of their vision. 4. Build-Measure-Learn. The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop. 5. Innovation accounting. To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stu : how to measure progress, how to set up milestones, and how to prioritize work. This requires a new kind of accounting designed for startups—and the people who hold them accountable. Why Startups Fail Why are startups failing so badly everywhere we look? The rst problem is the allure of a good plan, a solid strategy, and thorough market research. In earlier eras, these things were indicators of likely success. The overwhelming temptation is to apply them to startups too, but this doesn’t work, because startups operate with too much uncertainty. Startups do not yet know who their customer is or what their product should be. As the world becomes more uncertain, it gets harder and harder to predict the future. The old management methods are not up to the task. Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment. Startups have neither. The second problem is that after seeing traditional management fail to solve this problem, some entrepreneurs and investors have thrown up their hands and adopted the “Just Do It” school of startups. This school believes that if management is the problem, chaos is the answer. Unfortunately, as I can attest rsthand, this doesn’t work either. It may seem counterintuitive to think that something as disruptive, innovative, and chaotic as a startup can be managed or, to be accurate, must be managed. Most people think of process and management as boring and dull, whereas startups are dynamic and exciting. But what is actually exciting is to see startups succeed and change the world. The passion, energy, and vision that people bring to these new ventures are resources too precious to waste. We can— and must—do better. This book is about how. HOW THIS BOOK IS ORGANIZED This book is divided into three parts: “Vision,” “Steer,” and “Accelerate.” “Vision” makes the case for a new discipline of entrepreneurial management. I identify who is an entrepreneur, de ne a startup, and articulate a new way for startups to gauge if they are making progress, called validated learning. To achieve that learning, we’ll see that startups—in a garage or inside an enterprise—can use scienti c experimentation to discover how to build a sustainable business. “Steer” dives into the Lean Startup method in detail, showing one major turn through the core Build-Measure-Learn feedback loop. Beginning with leap-of-faith assumptions that cry out for rigorous testing, you’ll learn how to build a minimum viable product to test those assumptions, a new accounting system for evaluating whether you’re making progress, and a method for deciding whether to pivot (changing course with one foot anchored to the ground) or persevere. In “Accelerate,” we’ll explore techniques that enable Lean Startups to speed through the Build-Measure-Learn feedback loop as quickly as possible, even as they scale. We’ll explore lean manufacturing concepts that are applicable to startups, too, such as the power of small batches. We’ll also discuss organizational design, how products grow, and how to apply Lean Startup principles beyond the proverbial garage, even inside the world’s largest companies. MANAGEMENT’S SECOND CENTURY As a society, we have a proven set of techniques for managing big companies and we know the best practices for building physical products. But when it comes to startups and innovation, we are still shooting in the dark. We are relying on vision, chasing the “great shooting in the dark. We are relying on vision, chasing the “great men” who can make magic happen, or trying to analyze our new products to death. These are new problems, born of the success of management in the twentieth century. This book attempts to put entrepreneurship and innovation on a rigorous footing. We are at the dawn of management’s second century. It is our challenge to do something great with the opportunity we have been given. The Lean Startup movement seeks to ensure that those of us who long to build the next big thing will have the tools we need to change the world. Part One Part One VISION 1 START ENTREPRENEURIAL MANAGEMENT uilding a startup is an exercise in institution building; thus, it necessarily involves management. This often comes as a surprise to aspiring entrepreneurs, because their associations with these two words are so diametrically opposed. Entrepreneurs are rightly wary of implementing traditional management practices early on in a startup, afraid that they will invite bureaucracy or stifle creativity. Entrepreneurs have been trying to t the square peg of their unique problems into the round hole of general management for decades. As a result, many entrepreneurs take a “just do it” attitude, avoiding all forms of management, process, and discipline. Unfortunately, this approach leads to chaos more often than it does to success. I should know: my rst startup failures were all of this kind. The tremendous success of general management over the last century has provided unprecedented material abundance, but those management principles are ill suited to handle the chaos and uncertainty that startups must face. B I believe that entrepreneurship requires a managerial discipline to harness the entrepreneurial opportunity we have been given. There are more entrepreneurs operating today than at any previous time in history. This has been made possible by dramatic previous time in history. This has been made possible by dramatic changes in the global economy. To cite but one example, one often hears commentators lament the loss of manufacturing jobs in the United States over the previous two decades, but one rarely hears about a corresponding loss of manufacturing capability. That’s because total manufacturing output in the United States is increasing (by 15 percent in the last decade) even as jobs continue to be lost (see the charts below). In e ect, the huge productivity increases made possible by modern management and technology have created more productive capacity than rms know what to do with.1 We are living through an unprecedented worldwide entrepreneurial renaissance, but this opportunity is laced with peril. Because we lack a coherent management paradigm for new innovative ventures, we’re throwing our excess capacity around with wild abandon. Despite this lack of rigor, we are nding some ways to make money, but for every success there are far too many failures: products pulled from shelves mere weeks after being launched, high-pro le startups lauded in the press and forgotten a few months later, and new products that wind up being used by nobody. What makes these failures particularly painful is not just the economic damage done to individual employees, companies, and investors; they are also a colossal waste of our civilization’s most precious resource: the time, passion, and skill of its people. The Lean Startup movement is dedicated to preventing these failures. THE ROOTS OF THE LEAN STARTUP The Lean Startup takes its name from the lean manufacturing revolution that Taiichi Ohno and Shigeo Shingo are credited with developing at Toyota. Lean thinking is radically altering the way supply chains and production systems are run. Among its tenets are drawing on the knowledge and creativity of individual workers, the shrinking of batch sizes, just-in-time production and inventory control, and an acceleration of cycle times. It taught the world the di erence between value-creating activities and waste and showed how to build quality into products from the inside out. The Lean Startup adapts these ideas to the context of entrepreneurship, proposing that entrepreneurs judge their progress di erently from the way other kinds of ventures do. Progress in manufacturing is measured by the production of high-quality physical goods. As we’ll see in Chapter 3, the Lean Startup uses a di erent unit of progress, called validated learning. With scientific learning as our yardstick, we can discover and eliminate the sources of waste that are plaguing entrepreneurship. A comprehensive theory of entrepreneurship should address all the functions of an early-stage venture: vision and concept, product development, marketing and sales, scaling up, partnerships and distribution, and structure and organizational design. It has to provide a method for measuring progress in the context of extreme uncertainty. It can give entrepreneurs clear guidance on how to make the many trade-o decisions they face: whether and when to invest in process; formulating, planning, and creating infrastructure; when to go it alone and when to partner; when to respond to feedback and when to stick with vision; and how and when to invest in scaling the business. Most of all, it must allow entrepreneurs to make testable predictions. For example, consider the recommendation that you build crossfunctional teams and hold them accountable to what we call learning milestones instead of organizing your company into strict functional departments (marketing, sales, information technology, human resources, etc.) that hold people accountable for performing well in their specialized areas (see Chapter 7). Perhaps you agree with this recommendation, or perhaps you are skeptical. Either way, if you decide to implement it, I predict that you pretty quickly will get feedback from your teams that the new process is reducing their productivity. They will ask to go back to the old way of working, in which they had the opportunity to “stay e cient” by working in larger batches and passing work between departments. It’s safe to predict this result, and not just because I have seen it many times in the companies I work with. It is a straightforward prediction of the Lean Startup theory itself. When people are used to evaluating their productivity locally, they feel that a good day is one in which they did their job well all day. When I worked as a programmer, that meant eight straight hours of programming without interruption. That was a good day. In contrast, if I was without interruption. That was a good day. In contrast, if I was interrupted with questions, process, or—heaven forbid—meetings, I felt bad. What did I really accomplish that day? Code and product features were tangible to me; I could see them, understand them, and show them off. Learning, by contrast, is frustratingly intangible. The Lean Startup asks people to start measuring their productivity di erently. Because startups often accidentally build something nobody wants, it doesn’t matter much if they do it on time and on budget. The goal of a startup is to gure out the right thing to build—the thing customers want and will pay for—as quickly as possible. In other words, the Lean Startup is a new way of looking at the development of innovative new products that emphasizes fast iteration and customer insight, a huge vision, and great ambition, all at the same time. Henry Ford is one of the most successful and celebrated entrepreneurs of all time. Since the idea of management has been bound up with the history of the automobile since its rst days, I believe it is tting to use the automobile as a metaphor for a startup. An internal combustion automobile is powered by two important and very di erent feedback loops. The rst feedback loop is deep inside the engine. Before Henry Ford was a famous CEO, he was an engineer. He spent his days and nights tinkering in his garage with the precise mechanics of getting the engine cylinders to move. Each tiny explosion within the cylinder provides the motive force to turn the wheels but also drives the ignition of the next explosion. Unless the timing of this feedback loop is managed precisely, the engine will sputter and break down. Startups have a similar engine that I call the engine of growth. The markets and customers for startups are diverse: a toy company, a consulting rm, and a manufacturing plant may not seem like they have much in common, but, as we’ll see, they operate with the same engine of growth. Every new version of a product, every new feature, and every Every new version of a product, every new feature, and every new marketing program is an attempt to improve this engine of growth. Like Henry Ford’s tinkering in his garage, not all of these changes turn out to be improvements. New product development happens in ts and starts. Much of the time in a startup’s life is spent tuning the engine by making improvements in product, marketing, or operations. The second important feedback loop in an automobile is between the driver and the steering wheel. This feedback is so immediate and automatic that we often don’t think about it, but it is steering that di erentiates driving from most other forms of transportation. If you have a daily commute, you probably know the route so well that your hands seem to steer you there on their own accord. We can practically drive the route in our sleep. Yet if I asked you to close your eyes and write down exactly how to get to your o ce—not the street directions but every action you need to take, every push of hand on wheel and foot on pedals—you’d nd it impossible. The choreography of driving is incredibly complex when one slows down to think about it. By contrast, a rocket ship requires just this kind of in-advance calibration. It must be launched with the most precise instructions on what to do: every thrust, every ring of a booster, and every change in direction. The tiniest error at the point of launch could yield catastrophic results thousands of miles later. Unfortunately, too many startup business plans look more like they are planning to launch a rocket ship than drive a car. They prescribe the steps to take and the results to expect in excruciating detail, and as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes. One company I worked with had the misfortune of forecasting signi cant customer adoption—in the millions—for one of its new products. Powered by a splashy launch, the company successfully executed its plan. Unfortunately, customers did not ock to the product in great numbers. Even worse, the company had invested in massive infrastructure, hiring, and support to handle the in ux of customers it expected. When the customers failed to materialize, the customers it expected. When the customers failed to materialize, the company had committed itself so completely that they could not adapt in time. They had “achieved failure”—successfully, faithfully, and rigorously executing a plan that turned out to have been utterly flawed. The Lean Startup method, in contrast, is designed to teach you how to drive a startup. Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop. Through this process of steering, we can learn when and if it’s time to make a sharp turn called a pivot or whether we should persevere along our current path. Once we have an engine that’s revved up, the Lean Startup o ers methods to scale and grow the business with maximum acceleration. Throughout the process of driving, you always have a clear idea of where you’re going. If you’re commuting to work, you don’t give up because there’s a detour in the road or you made a wrong turn. You remain thoroughly focused on getting to your destination. Startups also have a true north, a destination in mind: creating a thriving and world-changing business. I call that a startup’s vision. To achieve that vision, startups employ a strategy, which includes a business model, a product road map, a point of view about partners and competitors, and ideas about who the customer will be. The product is the end result of this strategy (see the chart on this page). Products change constantly through the process of optimization, what I call tuning the engine. Less frequently, the strategy may have to change (called a pivot). However, the overarching vision rarely changes. Entrepreneurs are committed to seeing the startup through to that destination. Every setback is an opportunity for learning how to get where they want to go (see the chart below). In real life, a startup is a portfolio of activities. A lot is happening simultaneously: the engine is running, acquiring new customers and serving existing ones; we are tuning, trying to improve our product, marketing, and operations; and we are steering, deciding if and when to pivot. The challenge of entrepreneurship is to balance all these activities. Even the smallest startup faces the challenge of supporting existing customers while trying to innovate. Even the most established company faces the imperative to invest in innovation lest it become obsolete. As companies grow, what changes is the mix of these activities in the company’s portfolio of work. Entrepreneurship is management. And yet, imagine a modern manager who is tasked with building a new product in the context of an established company. Imagine that she goes back to her company’s chief nancial o cer (CFO) a year later and says, “We have failed to meet the growth targets we predicted. In fact, we have almost no new customers and no new revenue. However, we have learned an incredible amount and are on the cusp of a breakthrough new line of business. All we need is another year.” Most of the time, this would be the last report this intrapreneur would give her employer. The reason is that in general management, a failure to deliver results is due to either a failure to plan adequately or a failure to execute properly. Both are signi cant lapses, yet new product development in our modern economy routinely requires exactly this kind of failure on the way to greatness. In the Lean Startup movement, we have come to realize that these internal innovators are actually entrepreneurs, too, and that entrepreneurial management can help them succeed; this is the subject of the next chapter. 2 DEFINE WHO, EXACTLY, IS AN ENTREPRENEUR? s I travel the world talking about the Lean Startup, I’m consistently surprised that I meet people in the audience who seem out of place. In addition to the more traditional startup entrepreneurs I meet, these people are general managers, mostly working in very large companies, who are tasked with creating new ventures or product innovations. They are adept at organizational politics: they know how to form autonomous divisions with separate pro t and loss statements (P&Ls) and can shield controversial teams from corporate meddling. The biggest surprise is that they are visionaries. Like the startup founders I have worked with for years, they can see the future of their industries and are prepared to take bold risks to seek out new and innovative solutions to the problems their companies face. Mark, for example, is a manager for an extremely large company who came to one of my lectures. He is the leader of a division that recently had been chartered to bring his company into the twentyrst century by building a new suite of products designed to take advantage of the Internet. When he came to talk to me afterward, I started to give him the standard advice about how to create innovation teams inside big companies, and he stopped me in midstream: “Yeah, I’ve read The Innovator’s Dilemma.1 I’ve got that all taken care of.” He was a long-term employee of the company and a successful manager to boot, so managing internal politics was A and a successful manager to boot, so managing internal politics was the least of his problems. I should have known; his success was a testament to his ability to navigate the company’s corporate policies, personnel, and processes to get things done. Next, I tried to give him some advice about the future, about cool new highly leveraged product development technologies. He interrupted me again: “Right. I know all about the Internet, and I have a vision for how our company needs to adapt to it or die.” Mark has all the entrepreneurial prerequisites nailed—proper team structure, good personnel, a strong vision for the future, and an appetite for risk taking—and so it nally occurred to me to ask why he was coming to me for advice. He said, “It’s as if we have all of the raw materials: kindling, wood, paper, int, even some sparks. But where’s the re?” The theories of management that Mark had studied treat innovation like a “black box” by focusing on the structures companies need to put in place to form internal startup teams. But Mark found himself working inside the black box—and in need of guidance. What Mark was missing was a process for converting the raw materials of innovation into real-world breakthrough successes. Once a team is set up, what should it do? What process should it use? How should it be held accountable to performance milestones? These are questions the Lean Startup methodology is designed to answer. My point? Mark is an entrepreneur just like a Silicon Valley hightech founder with a garage startup. He needs the principles of the Lean Startup just as much as the folks I thought of as classic entrepreneurs do. Entrepreneurs who operate inside an established organization sometimes are called “intrapreneurs” because of the special circumstances that attend building a startup within a larger company. As I have applied Lean Startup ideas in an ever-widening variety of companies and industries, I have come to believe that intrapreneurs have much more in common with the rest of the community of entrepreneurs than most people believe. Thus, when I use the term entrepreneur, I am referring to the whole startup ecosystem regardless of company size, sector, or stage of ecosystem regardless of company size, sector, or stage of development. This book is for entrepreneurs of all stripes: from young visionaries with little backing but great ideas to seasoned visionaries within larger companies such as Mark—and the people who hold them accountable. IF I’M AN ENTREPRENEUR, WHAT’S A STARTUP? The Lean Startup is a set of practices for helping entrepreneurs increase their odds of building a successful startup. To set the record straight, it’s important to define what a startup is: A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty. I’ve come to realize that the most important part of this de nition is what it omits. It says nothing about size of the company, the industry, or the sector of the economy. Anyone who is creating a new product or business under conditions of extreme uncertainty is an entrepreneur whether he or she knows it or not and whether working in a government agency, a venture-backed company, a nonpro t, or a decidedly for-pro t company with financial investors. Let’s take a look at each of the pieces. The word institution connotes bureaucracy, process, even lethargy. How can that be part of a startup? Yet successful startups are full of activities associated with building an institution: hiring creative employees, coordinating their activities, and creating a company culture that delivers results. We often lose sight of the fact that a startup is not just about a product, a technological breakthrough, or even a brilliant idea. A startup is greater than the sum of its parts; it is an acutely human enterprise. The fact that a startup’s product or service is a new innovation is also an essential part of the de nition and a tricky part too. I prefer to use the broadest de nition of product, one that encompasses any to use the broadest de nition of product, one that encompasses any source of value for the people who become customers. Anything those customers experience from their interaction with a company should be considered part of that company’s product. This is true of a grocery store, an e-commerce website, a consulting service, and a nonpro t social service agency. In every case, the organization is dedicated to uncovering a new source of value for customers and cares about the impact of its product on those customers. It’s also important that the word innovation be understood broadly. Startups use many kinds of innovation: novel scienti c discoveries, repurposing an existing technology for a new use, devising a new business model that unlocks value that was hidden, or simply bringing a product or service to a new location or a previously underserved set of customers. In all these cases, innovation is at the heart of the company’s success. There is one more important part of this definition: the context in which the innovation happens. Most businesses—large and small alike—are excluded from this context. Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business all the way down to the business model, pricing, target customer, and product may be an attractive economic investment, but it is not a startup because its success depends only on execution—so much so that this success can be modeled with high accuracy. (This is why so many small businesses can be nanced with simple bank loans; the level of risk and uncertainty is understood well enough that a loan o cer can assess its prospects.) Most tools from general management are not designed to ourish in the harsh soil of extreme uncertainty in which startups thrive. The future is unpredictable, customers face a growing array of alternatives, and the pace of change is ever increasing. Yet most startups—in garages and enterprises alike—still are managed by using standard forecasts, product milestones, and detailed business plans. THE SNAPTAX STORY In 2009, a startup decided to try something really audacious. They wanted to liberate taxpayers from expensive tax stores by automating the process of collecting information typically found on W-2 forms (the end-of-year statement that most employees receive from their employer that summarizes their taxable wages for the year). The startup quickly ran into di culties. Even though many consumers had access to a printer/scanner in their home or o ce, few knew how to use those devices. After numerous conversations with potential customers, the team lit upon the idea of having customers take photographs of the forms directly from their cell phone. In the process of testing this concept, customers asked something unexpected: would it be possible to nish the whole tax return right on the phone itself? That was not an easy task. Traditional tax preparation requires consumers to wade through hundreds of questions, many forms, and a lot of paperwork. This startup tried something novel by deciding to ship an early version of its product that could do much less than a complete tax package. The initial version worked only for consumers with a very simple return to le, and it worked only in California. Instead of having consumers ll out a complex form, they allowed the customers to use the phone’s camera to take a picture of their W-2 forms. From that single picture, the company developed the technology to compile and le most of the 1040 EZ tax return. Compared with the drudgery of traditional tax ling, the new product—called SnapTax—provides a magical experience. From its modest beginning, SnapTax grew into a signi cant startup success story. Its nationwide launch in 2011 showed that customers loved it, to the tune of more than 350,000 downloads in the rst three weeks. This is the kind of amazing innovation you’d expect from a new startup. However, the name of this company may surprise you. SnapTax was developed by Intuit, America’s largest producer of nance, tax, and accounting tools for individuals and small businesses. With more than 7,700 employees and annual revenues in the billions, Intuit is not a typical startup.2 The team that built SnapTax doesn’t look much like the archetypal image of entrepreneurs either. They don’t work in a garage or eat ramen noodles. Their company doesn’t lack for resources. They are paid a full salary and benefits. They come into a regular office every day. Yet they are entrepreneurs. Stories like this one are not nearly as common inside large corporations as they should be. After all, SnapTax competes directly with one of Intuit’s agship products: the fully featured TurboTax desktop software. Usually, companies like Intuit fall into the trap described in Clayton Christensten’s The Innovator’s Dilemma: they are very good at creating incremental improvements to existing products and serving existing customers, which Christensen called sustaining innovation, but struggle to create breakthrough new products—disruptive innovation—that can create new sustainable sources of growth. One remarkable part of the SnapTax story is what the team leaders said when I asked them to account for their unlikely success. Did they hire superstar entrepreneurs from outside the company? No, they assembled a team from within Intuit. Did they face constant meddling from senior management, which is the bane of innovation teams in many companies? No, their executive sponsors created an “island of freedom” where they could experiment as necessary. Did they have a huge team, a large budget, and lots of marketing dollars? Nope, they started with a team of five. What allowed the SnapTax team to innovate was not their genes, destiny, or astrological signs but a process deliberately facilitated by Intuit’s senior management. Innovation is a bottoms-up, decentralized, and unpredictable thing, but that doesn’t mean it cannot be managed. It can, but to do so requires a new management discipline, one that needs to be mastered not just by practicing entrepreneurs seeking to build the next big thing but also by the people who support them, nurture them, and hold them accountable. In other words, cultivating entrepreneurship is the accountable. In other words, cultivating entrepreneurship is the responsibility of senior management. Today, a cutting-edge company such as Intuit can point to success stories like SnapTax because it has recognized the need for a new management paradigm. This is a realization that was years in the making.3 A SEVEN-THOUSAND-PERSON LEAN STARTUP In 1983, Intuit’s founder, the legendary entrepreneur Scott Cook, had the radical notion (with cofounder Tom Proulx) that personal accounting should happen by computer. Their success was far from inevitable; they faced numerous competitors, an uncertain future, and an initially tiny market. A decade later, the company went public and subsequently fended o well-publicized attacks from larger incumbents, including the software behemoth Microsoft. Partly with the help of famed venture capitalist John Doerr, Intuit became a fully diversi ed enterprise, a member of the Fortune 1000 that now provides dozens of market-leading products across its major divisions. This is the kind of entrepreneurial success we’re used to hearing about: a ragtag team of underdogs who eventually achieve fame, acclaim, and significant riches. Flash-forward to 2002. Cook was frustrated. He had just tabulated ten years of data on all of Intuit’s new product introductions and had concluded that the company was getting a measly return on its massive investments. Simply put, too many of its new products were failing. By traditional standards, Intuit is an extremely wellmanaged company, but as Scott dug into the root causes of those failures, he came to a di cult conclusion: the prevailing management paradigm he and his company had been practicing was inadequate to the problem of continuous innovation in the modern economy. By fall 2009, Cook had been working to change Intuit’s management culture for several years. He came across my early work on the Lean Startup and asked me to give a talk at Intuit. In Silicon Valley this is not the kind of invitation you turn down. I Silicon Valley this is not the kind of invitation you turn down. I admit I was curious. I was still at the beginning of my Lean Startup journey and didn’t have much appreciation for the challenges faced by a Fortune 1000 company like his. My conversations with Cook and Intuit chief executive o cer (CEO) Brad Smith were my initiation into the thinking of modern general managers, who struggle with entrepreneurship every bit as much as do venture capitalists and founders in a garage. To combat these challenges, Scott and Brad are going back to Intuit’s roots. They are working to build entrepreneurship and risk taking into all their divisions. For example, consider one of Intuit’s agship products. Because TurboTax does most of its sales around tax season in the United States, it used to have an extremely conservative culture. Over the course of the year, the marketing and product teams would conceive one major initiative that would be rolled out just in time for tax season. Now they test over ve hundred di erent changes in a two-and-a-half-month tax season. They’re running up to seventy di erent tests per week. The team can make a change live on its website on Thursday, run it over the weekend, read the results on Monday, and come to conclusions starting Tuesday; then they rebuild new tests on Thursday and launch the next set on Thursday night. As Scott put it, “Boy, the amount of learning they get is just immense now. And what it does is develop entrepreneurs, because when you have only one test, you don’t have entrepreneurs, you have politicians, because you have to sell. Out of a hundred good ideas, you’ve got to sell your idea. So you build up a society of politicians and salespeople. When you have ve hundred tests you’re running, then everybody’s ideas can run. And then you create entrepreneurs who run and learn and can retest and relearn as opposed to a society of politicians. So we’re trying to drive that throughout our organization, using examples which have nothing to do with high tech, like the website example. Every business today has a website. You don’t have to be high tech to use fast-cycle testing.” This kind of change is hard. After all, the company has a signi cant number of existing customers who continue to demand exceptional service and investors who expect steady, growing returns. Scott says, It goes against the grain of what people have been taught in business and what leaders have been taught. The problem isn’t with the teams or the entrepreneurs. They love the chance to quickly get their baby out into the market. They love the chance to have the customer vote instead of the suits voting. The real issue is with the leaders and the middle managers. There are many business leaders who have been successful because of analysis. They think they’re analysts, and their job is to do great planning and analyzing and have a plan. The amount of time a company can count on holding on to market leadership to exploit its earlier innovations is shrinking, and this creates an imperative for even the most entrenched companies to invest in innovation. In fact, I believe a company’s only sustainable path to long-term economic growth is to build an “innovation factory” that uses Lean Startup techniques to create disruptive innovations on a continuous basis. In other words, established companies need to gure out how to accomplish what Scott Cook did in 1983, but on an industrial scale and with an established cohort of managers steeped in traditional management culture. Ever the maverick, Cook asked me to put these ideas to the test, and so I gave a talk that was simulcast to all seven thousand–plus Intuit employees during which I explained the theory of the Lean Startup, repeating my de nition: an organization designed to create new products and services under conditions of extreme uncertainty. What happened next is etched in my memory. CEO Brad Smith had been sitting next to me as I spoke. When I was done, he got up and said before all of Intuit’s employees, “Folks, listen up. You heard Eric’s definition of a startup. It has three parts, and we here at Intuit match all three parts of that definition.” Scott and Brad are leaders who realize that something new is needed in management thinking. Intuit is proof that this kind of thinking can work in established companies. Brad explained to me how they hold themselves accountable for their new innovation e orts by measuring two things: the number of customers using products that didn’t exist three years ago and the percentage of revenue coming from offerings that did not exist three years ago. Under the old model, it took an average of 5.5 years for a successful new product to start generating $50 million in revenue. Brad explained to me, “We’ve generated $50 million in o erings that did not exist twelve months ago in the last year. Now it’s not one particular o ering. It’s a combination of a whole bunch of innovation happening, but that’s the kind of stu that’s creating some energy for us, that we think we can truly short-circuit the ramp by killing things that don’t make sense fast and doubling down on the ones that do.” For a company as large as Intuit, these are modest results and early days. They have decades of legacy systems and legacy thinking to overcome. However, their leadership in adopting entrepreneurial management is starting to pay off. Leadership requires creating conditions that enable employees to do the kinds of experimentation that entrepreneurship requires. For example, changes in TurboTax enabled the Intuit team to develop ve hundred experiments per tax season. Before that, marketers with great ideas couldn’t have done those tests even if they’d wanted to, because they didn’t have a system in place through which to change the website rapidly. Intuit invested in systems that increased the speed at which tests could be built, deployed, and analyzed. As Cook says, “Developing these experimentation systems is the responsibility of senior management; they have to be put in by the leadership. It’s moving leaders from playing Caesar with their thumbs up and down on every idea to—instead—putting in the culture and the systems so that teams can move and innovate at the speed of the experimentation system.” 3 LEARN an entrepreneur, nothing plagued me more than the question Asofsuccessful whether my company was making progress toward creating a business. As an engineer and later as a manager, I was accustomed to measuring progress by making sure our work proceeded according to plan, was high quality, and cost about what we had projected. After many years as an entrepreneur, I started to worry about measuring progress in this way. What if we found ourselves building something that nobody wanted? In that case what did it matter if we did it on time and on budget? When I went home at the end of a day’s work, the only things I knew for sure were that I had kept people busy and spent money that day. I hoped that my team’s e orts took us closer to our goal. If we wound up taking a wrong turn, I’d have to take comfort in the fact that at least we’d learned something important. Unfortunately, “learning” is the oldest excuse in the book for a failure of execution. It’s what managers fall back on when they fail to achieve the results we promised. Entrepreneurs, under pressure to succeed, are wildly creative when it comes to demonstrating what we have learned. We can all tell a good story when our job, career, or reputation depends on it. However, learning is cold comfort to employees who are following an entrepreneur into the unknown. It is cold comfort to the investors who allocate precious money, time, and energy to entrepreneurial teams. It is cold comfort to the organizations—large entrepreneurial teams. It is cold comfort to the organizations—large and small—that depend on entrepreneurial innovation to survive. You can’t take learning to the bank; you can’t spend it or invest it. You cannot give it to customers and cannot return it to limited partners. Is it any wonder that learning has a bad name in entrepreneurial and managerial circles? Yet if the fundamental goal of entrepreneurship is to engage in organization building under conditions of extreme uncertainty, its most vital function is learning. We must learn the truth about which elements of our strategy are working to realize our vision and which are just crazy. We must learn what customers really want, not what they say they want or what we think they should want. We must discover whether we are on a path that will lead to growing a sustainable business. In the Lean Startup model, we are rehabilitating learning with a concept I call validated learning. Validated learning is not after-thefact rationalization or a good story designed to hide failure. It is a rigorous method for demonstrating progress when one is embedded in the soil of extreme uncertainty in which startups grow. Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects. It is more concrete, more accurate, and faster than market forecasting or classical business planning. It is the principal antidote to the lethal problem of achieving failure: successfully executing a plan that leads nowhere. VALIDATED LEARNING AT IMVU Let me illustrate this with an example from my career. Many audiences have heard me recount the story of IMVU’s founding and the many mistakes we made in developing our rst product. I’ll now elaborate on one of those mistakes to illustrate validated learning clearly. Those of us involved in the founding of IMVU aspired to be serious strategic thinkers. Each of us had participated in previous ventures that had failed, and we were loath to repeat that ventures that had failed, and we were loath to repeat that experience. Our main concerns in the early days dealt with the following questions: What should we build and for whom? What market could we enter and dominate? How could we build durable value that would not be subject to erosion by competition?1 Brilliant Strategy We decided to enter the instant messaging (IM) market. In 2004, that market had hundreds of millions of consumers actively participating worldwide. However, the majority of the customers who were using IM products were not paying for the privilege. Instead, large media and portal companies such as AOL, Microsoft, and Yahoo! operated their IM networks as a loss leader for other services while making modest amounts of money through advertising. IM is an example of a market that involves strong network effects. Like most communication networks, IM is thought to follow Metcalfe’s law: the value of a network as a whole is proportional to the square of the number of participants. In other words, the more people in the network, the more valuable the network. This makes intuitive sense: the value to each participant is driven primarily by how many other people he or she can communicate with. Imagine a world in which you own the only telephone; it would have no value. Only when other people also have a telephone does it become valuable. In 2004, the IM market was locked up by a handful of incumbents. The top three networks controlled more than 80 percent of the overall usage and were in the process of consolidating their gains in market share at the expense of a number of smaller players.2 The common wisdom was that it was more or less impossible to bring a new IM network to market without spending an extraordinary amount of money on marketing. The reason for that wisdom is simple. Because of the power of network e ects, IM products have high switching costs. To switch from one network to another, customers would have to convince from one network to another, customers would have to convince their friends and colleagues to switch with them. This extra work for customers creates a barrier to entry in the IM market: with all consumers locked in to an incumbent’s product, there are no customers left with whom to establish a beachhead. At IMVU we settled on a strategy of building a product that would combine the large mass appeal of traditional IM with the high revenue per customer of three-dimensional (3D) video games and virtual worlds. Because of the near impossibility of bringing a new IM network to market, we decided to build an IM add-on product that would interoperate with the existing networks. Thus, customers would be able to adopt the IMVU virtual goods and avatar communication technology without having to switch IM providers, learn a new user interface, and—most important—bring their friends with them. In fact, we thought this last point was essential. For the add-on product to be useful, customers would have to use it with their existing friends. Every communication would come embedded with an invitation to join IMVU. Our product would be inherently viral, spreading throughout the existing IM networks like an epidemic. To achieve that viral growth, it was important that our add-on product support as many of the existing IM networks as possible and work on all kinds of computers. Six Months to Launch With this strategy in place, my cofounders and I began a period of intense work. As the chief technology o cer, it was my responsibility, among other things, to write the software that would support IM interoperability across networks. My cofounders and I worked for months, putting in crazy hours struggling to get our rst product released. We gave ourselves a hard deadline of six months —180 days—to launch the product and attract our rst paying customers. It was a grueling schedule, but we were determined to launch on time. The add-on product was so large and complex and had so many moving parts that we had to cut a lot of corners to get it done on time. I won’t mince words: the rst version was terrible. We spent endless hours arguing about which bugs to x and which we could live with, which features to cut and which to try to cram in. It was a wonderful and terrifying time: we were full of hope about the possibilities for success and full of fear about the consequences of shipping a bad product. Personally, I was worried that the low quality of the product would tarnish my reputation as an engineer. People would think I didn’t know how to build a quality product. All of us feared tarnishing the IMVU brand; after all, we were charging people money for a product that didn’t work very well. We all envisioned the damning newspaper headlines: “Inept Entrepreneurs Build Dreadful Product.” As launch day approached, our fears escalated. In our situation, many entrepreneurial teams give in to fear and postpone the launch date. Although I understand this impulse, I am glad we persevered, since delay prevents many startups from getting the feedback they need. Our previous failures made us more afraid of another, even worse, outcome than shipping a bad product: building something that nobody wants. And so, teeth clenched and apologies at the ready, we released our product to the public. Launch And then—nothing happened! It turned out that our fears were unfounded, because nobody even tried our product. At rst I was relieved because at least nobody was nding out how bad the product was, but soon that gave way to serious frustration. After all the hours we had spent arguing about which features to include and which bugs to x, our value proposition was so far o that customers weren’t getting far enough into the experience to nd out how bad our design choices were. Customers wouldn’t even download our product. Over the ensuing weeks and months, we labored to make the product better. We brought in a steady ow of customers through our online registration and download process. We treated each day’s customers as a brand-new report card to let us know how we were doing. We eventually learned how to change the product’s positioning so that customers at least would download it. We were making improvements to the underlying product continuously, shipping bug xes and new changes daily. However, despite our best e orts, we were able to persuade only a pathetically small number of people to buy the product. In retrospect, one good decision we made was to set clear revenue targets for those early days. In the rst month we intended to make $300 in total revenue, and we did—barely. Many friends and family members were asked (okay, begged). Each month our small revenue targets increased, rst to $350 and then to $400. As they rose, our struggles increased. We soon ran out of friends and family; our frustration escalated. We were making the product better every day, yet our customers’ behavior remained unchanged: they still wouldn’t use it. Our failure to move the numbers prodded us to accelerate our e orts to bring customers into our o ce for in-person interviews and usability tests. The quantitative targets created the motivation to engage in qualitative inquiry and guided us in the questions we asked; this is a pattern we’ll see throughout this book. I wish I could say that I was the one to realize our mistake and suggest the solution, but in truth, I was the last to admit the problem. In short, our entire strategic analysis of the market was utterly wrong. We gured this out empirically, through experimentation, rather than through focus groups or market research. Customers could not tell us what they wanted; most, after all, had never heard of 3D avatars. Instead, they revealed the truth through their action or inaction as we struggled to make the product better. Talking to Customers Out of desperation, we decided to talk to some potential customers. We brought them into our o ce, and said, “Try this new product; it’s IMVU.” If the person was a teenager, a heavy user of IM, or a tech early adopter, he or she would engage with us. In constrast, if it was a mainstream person, the response was, “Right. So exactly what would you like me to do?” We’d get nowhere with the mainstream group; they thought IMVU was too weird. Imagine a seventeen-year-old girl sitting down with us to look at this product. She chooses her avatar and says, “Oh, this is really fun.” She’s customizing the avatar, deciding how she’s going to look. Then we say, “All right, it’s time to download the instant messaging add-on,” and she responds, “What’s that?” “Well, it’s this thing that interoperates with the instant messaging client.” She’s looking at us and thinking, “I’ve never heard of that, my friends have never heard of that, why do you want me to do that?” It required a lot of explanation; an instant messaging add-on was not a product category that existed in her mind. But since she was in the room with us, we were able to talk her into doing it. She downloads the product, and then we say, “Okay, invite one of your friends to chat.” And she says, “No way!” We say, “Why not?” And she says, “Well, I don’t know if this thing is cool yet. You want me to risk inviting one of my friends? What are they going to think of me? If it sucks, they’re going to think I suck, right?” And we say, “No, no, it’s going to be so much fun once you get the person in there; it’s a social product.” She looks at us, her face lled with doubt; you can see that this is a deal breaker. Of course, the rst time I had that experience, I said, “It’s all right, it’s just this one person, send her away and get me a new one.” Then the second customer comes in and says the same thing. Then the third customer comes in, and it’s the same thing. You start to see patterns, and no matter how stubborn you are, there’s obviously something wrong. Customers kept saying, “I want to use it by myself. I want to try it out rst to see if it’s really cool before I invite a friend.” Our team was from the video game industry, so we understood what that meant: single-player mode. So we built a single-player version. meant: single-player mode. So we built a single-player version. We’d bring new customers into our o ce. They’d customize the avatar and download the product like before. Then they would go into single-player mode, and we’d say, “Play with your avatar and dress it up; check out the cool moves it can make.” Followed by, “Okay, you did that by yourself; now it’s time to invite one of your friends.” You can see what’s coming. They’d say, “No way! This isn’t cool.” And we’d say, “Well, we told you it wasn’t going to be cool! What is the point of a single-player experience for a social product?” See, we thought we should get a gold star just for listening to our customers. Except our customers still didn’t like the product. They would look at us and say, “Listen, old man, you don’t understand. What is the deal with this crazy business of inviting friends before I know if it’s cool?” It was a total deal breaker. Out of further desperation, we introduced a feature called ChatNow that allows you to push a button and be randomly matched with somebody else anywhere in the world. The only thing you have in common is that you both pushed the button at the same time. All of a sudden, in our customer service tests, people were saying, “Oh, this is fun!” So we’d bring them in, they’d use ChatNow, and maybe they would meet somebody they thought was cool. They’d say, “Hey, that guy was neat; I want to add him to my buddy list. Where’s my buddy list?” And we’d say, “Oh, no, you don’t want a new buddy list; you want to use your regular AOL buddy list.” Remember, this was how we planned to harness the interoperability that would lead to network e ects and viral growth. Picture the customer looking at us, asking, “What do you want me to do exactly?” And we’d say, “Well, just give the stranger your AIM screen name so you can put him on your buddy list.” You could see their eyes go wide, and they’d say, “Are you kidding me? A stranger on my AIM buddy list?” To which we’d respond, “Yes; otherwise you’d have to download a whole new IM client with a new buddy list.” And they’d say, “Do you have any idea how many IM clients I already run?” “No. One or two, maybe?” That’s how many clients each of us in the o ce used. To which the teenager would say, “Duh! I run eight.” We had no idea how many instant messaging clients there were in the world. We had the incorrect preconception that it’s a challenge to learn new software and it’s tricky to move your friends over to a new buddy list. Our customers revealed that this was nonsense. We wanted to draw diagrams on the whiteboard that showed why our strategy was brilliant, but our customers didn’t understand concepts like network e ects and switching costs. If we tried to explain why they should behave the way we predicted, they’d just shake their heads at us, bewildered. We had a mental model for how people used software that was years out of date, and so eventually, painfully, after dozens of meetings like that, it started to dawn on us that the IM add-on concept was fundamentally flawed.3 Our customers did not want an IM add-on; they wanted a standalone IM network. They did not consider having to learn how to use a new IM program a barrier; on the contrary, our early adopters used many di erent IM programs simultaneously. Our customers were not intimidated by the idea of having to take their friends with them to a new IM network; it turned out that they enjoyed that challenge. Even more surprising, our assumption that customers would want to use avatar-based IM primarily with their existing friends was also wrong. They wanted to make new friends, an activity that 3D avatars are particularly well suited to facilitating. Bit by bit, customers tore apart our seemingly brilliant initial strategy. Throwing My Work Away Perhaps you can sympathize with our situation and forgive my obstinacy. After all, it was my work over the prior months that needed to be thrown away. I had slaved over the software that was required to make our IM program interoperate with other networks, which was at the heart of our original strategy. When it came time to pivot and abandon that original strategy, almost all of my work—thousands of lines of code—was thrown out. I felt betrayed. I was a devotee of the latest in software development methods (known collectively as agile development), which promised to help drive waste out of product development. However, despite that, I had committed the biggest waste of all: building a product that our customers refused to use. That was really depressing. I wondered: in light of the fact that my work turned out to be a waste of time and energy, would the company have been just as well o if I had spent the last six months on a beach sipping umbrella drinks? Had I really been needed? Would it have been better if I had not done any work at all? There is, as I mentioned at the beginning of this chapter, always one last refuge for people aching to justify their own failure. I consoled myself that if we hadn’t built this rst product—mistakes and all—we never would have learned these important insights about customers. We never would have learned that our strategy was awed. There is truth in this excuse: what we learned during those critical early months set IMVU on a path that would lead to our eventual breakout success. For a time, this “learning” consolation made me feel better, but my relief was short-lived. Here’s the question that bothered me most of all: if the goal of those months was to learn these important insights about customers, why did it take so long? How much of our e ort contributed to the essential lessons we needed to learn? Could we have learned those lessons earlier if I hadn’t been so focused on making the product “better” by adding features and fixing bugs? VALUE VS. WASTE In other words, which of our e orts are value-creating and which are wasteful? This question is at the heart of the lean manufacturing revolution; it is the rst question any lean manufacturing adherent is trained to ask. Learning to see waste and then systematically eliminate it has allowed lean companies such as Toyota to dominate entire industries. In the world of software, the agile development methodologies I had practiced until that time had their origins in lean thinking. They were designed to eliminate waste too. Yet those methods had led me down a road in which the majority of my team’s efforts were wasted. Why? The answer came to me slowly over the subsequent years. Lean thinking de nes value as providing bene t to the customer; anything else is waste. In a manufacturing business, customers don’t care how the product is assembled, only that it works correctly. But in a startup, who the customer is and what the customer might nd valuable are unknown, part of the very uncertainty that is an essential part of the de nition of a startup. I realized that as a startup, we needed a new de nition of value. The real progress we had made at IMVU was what we had learned over those rst months about what creates value for customers. Anything we had done during those months that did not contribute to our learning was a form of waste. Would it have been possible to learn the same things with less e ort? Clearly, the answer is yes. For one thing, think of all the debate and prioritization of e ort that went into features that customers would never discover. If we had shipped sooner, we could have avoided that waste. Also consider all the waste caused by our incorrect strategic assumptions. I had built interoperability for more than a dozen di erent IM clients and networks. Was this really necessary to test our assumptions? Could we have gotten the same feedback from our customers with half as many networks? With only three? With only one? Since the customers of all IM networks found our product equally unattractive, the level of learning would have been the same, but our effort would have been dramatically less. Here’s the thought that kept me up nights: did we have to support any networks at all? Is it possible that we could have discovered how awed our assumptions were without building anything? For example, what if we simply had o ered customers anything? For example, what if we simply had o ered customers the opportunity to download the product from us solely on the basis of its proposed features before building anything? Remember, almost no customers were willing to use our original product, so we wouldn’t have had to do much apologizing when we failed to deliver. (Note that this is di erent from asking customers what they want. Most of the time customers don’t know what they want in advance.) We could have conducted an experiment, o ering customers the chance to try something and then measuring their behavior. Such thought experiments were extremely disturbing to me because they undermined my job description. As the head of product development, I thought my job was to ensure the timely delivery of high-quality products and features. But if many of those features were a waste of time, what should I be doing instead? How could we avoid this waste? I’ve come to believe that learning is the essential unit of progress for startups. The e ort that is not absolutely necessary for learning what customers want can be eliminated. I call this validated learning because it is always demonstrated by positive improvements in the startup’s core metrics. As we’ve seen, it’s easy to kid yourself about what you think customers want. It’s also easy to learn things that are completely irrelevant. Thus, validated learning is backed up by empirical data collected from real customers. WHERE DO YOU FIND VALIDATION? As I can attest, anybody who fails in a startup can claim that he or she has learned a lot from the experience. They can tell a compelling story. In fact, in the story of IMVU so far, you might have noticed something missing. Despite my claims that we learned a lot in those early months, lessons that led to our eventual success, I haven’t o ered any evidence to back that up. In hindsight, it’s easy to make such claims and sound credible (and you’ll see some evidence later in the book), but imagine us in IMVU’s early months trying to convince investors, employees, family members, and most of all ourselves that we had not squandered our time and resources. What evidence did we have? Certainly our stories of failure were entertaining, and we had fascinating theories about what we had done wrong and what we needed to do to create a more successful product. However, the proof did not come until we put those theories into practice and built subsequent versions of the product that showed superior results with actual customers. The next few months are where the true story of IMVU begins, not with our brilliant assumptions and strategies and whiteboard gamesmanship but with the hard work of discovering what customers really wanted and adjusting our product and strategy to meet those desires. We adopted the view that our job was to nd a synthesis between our vision and what customers would accept; it wasn’t to capitulate to what customers thought they wanted or to tell customers what they ought to want. As we came to understand our customers better, we were able to improve our products. As we did that, the fundamental metrics of our business changed. In the early days, despite our e orts to improve the product, our metrics were stubbornly at. We treated each day’s customers as a new report card. We’d pay attention to the percentage of new customers who exhibited product behaviors such as downloading and buying our product. Each day, roughly the same number of customers would buy the product, and that number was pretty close to zero despite the many improvements. However, once we pivoted away from the original strategy, things started to change. Aligned with a superior strategy, our product development e orts became magically more productive—not because we were working harder but because we were working smarter, aligned with our customers’ real needs. Positive changes in metrics became the quantitative validation that our learning was real. This was critically important because we could show our stakeholders—employees, investors, and ourselves—that we were making genuine progress, not deluding ourselves. It is also the right way to think about productivity in a startup: not in terms of how much stu we are building but in terms of how much validated learning we’re getting for our efforts.4 For example, in one early experiment, we changed our entire website, home page, and product registration ow to replace “avatar chat” with “3D instant messaging.” New customers were split automatically between these two versions of the site; half saw one, and half saw the other. We were able to measure the di erence in behavior between the two groups. Not only were the people in the experimental group more likely to sign up for the product, they were more likely to become long-term paying customers. We had plenty of failed experiments too. During one period in which we believed that customers weren’t using the product because they didn’t understand its many bene ts, we went so far as to pay customer service agents to act as virtual tour guides for new customers. Unfortunately, customers who got that VIP treatment were no more likely to become active or paying customers. Even after ditching the IM add-on strategy, it still took months to understand why it hadn’t worked. After our pivot and many failed experiments, we nally gured out this insight: customers wanted to use IMVU to make new friends online. Our customers intuitively grasped something that we were slow to realize. All the existing social products online were centered on customers’ real-life identity. IMVU’s avatar technology, however, was uniquely well suited to help people get to know each other online without compromising safety or opening themselves up to identity theft. Once we formed this hypothesis, our experiments became much more likely to produce positive results. Whenever we would change the product to make it easier for people to nd and keep new friends, we discovered that customers were more likely to engage. This is true startup productivity: systematically guring out the right things to build. These were just a few experiments among hundreds that we ran week in and week out as we started to learn which customers would use the product and why. Each bit of knowledge we gathered suggested new experiments to run, which moved our metrics closer and closer to our goal. THE AUDACITY OF ZERO Despite IMVU’s early success, our gross numbers were still pretty small. Unfortunately, because of the traditional way businesses are evaluated, this is a dangerous situation. The irony is that it is often easier to raise money or acquire other resources when you have zero revenue, zero customers, and zero traction than when you have a small amount. Zero invites imagination, but small numbers invite questions about whether large numbers will ever materialize. Everyone knows (or thinks he or she knows) stories of products that achieved breakthrough success overnight. As long as nothing has been released and no data have been collected, it is still possible to imagine overnight success in the future. Small numbers pour cold water on that hope. This phenomenon creates a brutal incentive: postpone getting any data until you are certain of success. Of course, as we’ll see, such delays have the unfortunate e ect of increasing the amount of wasted work, decreasing essential feedback, and dramatically increasing the risk that a startup will build something nobody wants. However, releasing a product and hoping for the best is not a good plan either, because this incentive is real. When we launched IMVU, we were ignorant of this problem. Our earliest investors and advisers thought it was quaint that we had a $300-per-month revenue plan at rst. But after several months with our revenue hovering around $500 per month, some began to lose faith, as did some of our advisers, employees, and even spouses. In fact, at one point, some investors were seriously recommending that we pull the product out of the market and return to stealth mode. Fortunately, as we pivoted and experimented, incorporating what we learned into our product development and marketing e orts, our numbers started to improve. But not by much! On the one hand, we were lucky to see a growth pattern that started to look like the famous hockey stick graph. On the other hand, the graph went up only to a few thousand dollars per month. These early graphs, although promising, were not by themselves su cient to combat the loss of faith caused by our early failure, and we lacked the language of validated learning to provide an alternative concept to rally around. We were quite fortunate that some of our early investors understood its importance and were willing to look beyond our small gross numbers to see the real progress we were making. (You’ll see the exact same graphs they did in Chapter 7.) Thus, we can mitigate the waste that happens because of the audacity of zero with validated learning. What we needed to demonstrate was that our product development e orts were leading us toward massive success without giving in to the temptation to fall back on vanity metrics and “success theater”—the work we do to make ourselves look successful. We could have tried marketing gimmicks, bought a Super Bowl ad, or tried amboyant public relations (PR) as a way of juicing our gross numbers. That would have given investors the illusion of traction, but only for a short time. Eventually, the fundamentals of the business would win out and the PR bump would pass. Because we would have squandered precious resources on theatrics instead of progress, we would have been in real trouble. Sixty million avatars later, IMVU is still going strong. Its legacy is not just a great product, an amazing team, and promising nancial results but a whole new way of measuring the progress of startups. LESSONS BEYOND IMVU I have had many opportunities to teach the IMVU story as a business case ever since Stanford’s Graduate School of Business wrote an o cial study about IMVU’s early years.5 The case is now part of the entrepreneurship curriculum at several business schools, including Harvard Business School, where I serve as an entrepreneur in residence. I’ve also told these stories at countless workshops, lectures, and conferences. Every time I teach the IMVU story, students have an overwhelming temptation to focus on the tactics it illustrates: launching a low-quality early prototype, charging customers from day one, and using low-volume revenue targets as a way to drive accountability. These are useful techniques, but they are not the moral of the story. There are too many exceptions. Not every kind of customer will accept a low-quality prototype, for example. If the students are more skeptical, they may argue that the techniques do not apply to their industry or situation, but work only because IMVU is a software company, a consumer Internet business, or a non-mission-critical application. None of these takeaways is especially useful. The Lean Startup is not a collection of individual tactics. It is a principled approach to new product development. The only way to make sense of its recommendations is to understand the underlying principles that make them work. As we’ll see in later chapters, the Lean Startup model has been applied to a wide variety of businesses and industries: manufacturing, clean tech, restaurants, and even laundry. The tactics from the IMVU story may or may not make sense in your particular business. Instead, the way forward is to learn to see every startup in any industry as a grand experiment. The question is not “Can this product be built?” In the modern economy, almost any product that can be imagined can be built. The more pertinent questions are “Should this product be built?” and “Can we build a sustainable business around this set of products and services?” To answer those questions, we need a method for systematically breaking down a business plan into its component parts and testing each part empirically. In other words, we need the scienti c method. In the Lean Startup model, every product, every feature, every marketing campaign—everything a startup does—is understood to be an experiment designed to achieve validated learning. This experimental approach works across industries and sectors, as we’ll see in Chapter 4. 4 EXPERIMENT across many startups that are struggling to answer the Icome following questions: Which customer opinions should we listen to, if any? How should we prioritize across the many features we could build? Which features are essential to the product’s success and which are ancillary? What can be changed safely, and what might anger customers? What might please today’s customers at the expense of tomorrow’s? What should we work on next? These are some of the questions teams struggle to answer if they have followed the “let’s just ship a product and see what happens” plan. I call this the “just do it” school of entrepreneurship after Nike’s famous slogan.1 Unfortunately, if the plan is to see what happens, a team is guaranteed to succeed—at seeing what happens —but won’t necessarily gain validated learning. This is one of the most important lessons of the scienti c method: if you cannot fail, you cannot learn. FROM ALCHEMY TO SCIENCE The Lean Startup methodology reconceives a startup’s e orts as experiments that test its strategy to see which parts are brilliant and which are crazy. A true experiment follows the scienti c method. It begins with a clear hypothesis that makes predictions about what is supposed to happen. It then tests those predictions empirically. Just as scienti c experimentation is informed by theory, startup experimentation is guided by the startup’s vision. The goal of every startup experiment is to discover how to build a sustainable business around that vision. Think Big, Start Small Zappos is the world’s largest online shoe store, with annual gross sales in excess of $1 billion. It is known as one of the most successful, customer-friendly e-commerce businesses in the world, but it did not start that way. Founder Nick Swinmurn was frustrated because there was no central online site with a great selection of shoes. He envisioned a new and superior retail experience. Swinmurn could have waited a long time, insisting on testing his complete vision complete with warehouses, distribution partners, and the promise of signi cant sales. Many early e-commerce pioneers did just that, including infamous dot-com failures such as Webvan and Pets.com. Instead, he started by running an experiment. His hypothesis was that customers were ready and willing to buy shoes online. To test it, he began by asking local shoe stores if he could take pictures of their inventory. In exchange for permission to take the pictures, he would post the pictures online and come back to buy the shoes at full price if a customer bought them online. Zappos began with a tiny, simple product. It was designed to answer one question above all: is there already su cient demand for a superior online shopping experience for shoes? However, a well-designed startup experiment like the one Zappos began with does more than test a single aspect of a business plan. In the course of testing this rst assumption, many other assumptions were tested as well. To sell the shoes, Zappos had to interact with customers: taking payment, handling returns, and dealing with customer support. This is decidedly di erent from market research. If Zappos had relied on existing market research or conducted a survey, it could have asked what customers thought they wanted. By building a product instead, albeit a simple one, the company learned much more: 1. It had more accurate data about customer demand because it was observing real customer behavior, not asking hypothetical questions. 2. It put itself in a position to interact with real customers and learn about their needs. For example, the business plan might call for discounted pricing, but how are customer perceptions of the product affected by the discounting strategy? 3. It allowed itself to be surprised when customers behaved in unexpected ways, revealing information Zappos might not have known to ask about. For example, what if customers returned the shoes? Zappos’ initial experiment provided a clear, quanti able outcome: either a su cient number of customers would buy the shoes or they would not. It also put the company in a position to observe, interact with, and learn from real customers and partners. This qualitative learning is a necessary companion to quantitative testing. Although the early e orts were decidedly small-scale, that did not prevent the huge Zappos vision from being realized. In fact, in 2009 Zappos was acquired by the e-commerce giant Amazon.com for a reported $1.2 billion.2 For Long-Term Change, Experiment Immediately Caroline Barlerin is a director in the global social innovation division at Hewlett-Packard (HP), a multinational company with more than three hundred thousand employees and more than $100 billion in annual sales. Caroline, who leads global community involvement, is a social entrepreneur working to get more of HP’s employees to take advantage of the company’s policy on volunteering. Corporate guidelines encourage every employee to spend up to four hours a month of company time volunteering in his or her community; that volunteer work could take the form of any philanthropic e ort: painting fences, building houses, or even using philanthropic e ort: painting fences, building houses, or even using pro bono or work-based skills outside the company. Encouraging the latter type of volunteering was Caroline’s priority. Because of its talent and values, HP’s combined workforce has the potential to have a monumental positive impact. A designer could help a nonpro t with a new website design. A team of engineers could wire a school for Internet access. Caroline’s project is just beginning, and most employees do not know that this volunteering policy exists, and only a tiny fraction take advantage of it. Most of the volunteering has been of the lowimpact variety, involving manual labor, even when the volunteers were highly trained experts. Barlerin’s vision is to take the hundreds of thousands of employees in the company and transform them into a force for social good. This is the kind of corporate initiative undertaken every day at companies around the world. It doesn’t look like a startup by the conventional de nition or what we see in the movies. On the surface it seems to be suited to traditional management and planning. However, I hope the discu...
Purchase answer to see full attachment