Sections of 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.

New look

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.

Tiny errors –> Catastrophe

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.

Constant iterations

you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop.

Pivot

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).

Good currently, but struggle in innovation

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.

Characteristics of innovation

Innovation is a bottoms-up, decentralized, and unpredictable thing, but that

Business leaders !== Analysts

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.

Continuous

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.

Creative environment

Leadership requires creating conditions that enable employees to do the kinds of experimentation that entrepreneurship requires.

Validated learning

Validated learning is the process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects.

Validated learning » Market forecasting

It is more concrete, more accurate, and faster than market forecasting or classical business planning.

Network effect

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.

High network –> High switching cost

Because of the power of network effects, IM products have high switching costs.

Common cause of failure

We were making the product better every day, yet our customers’ behavior remained unchanged: they still wouldn’t use it.

Learning lessons in cheap, fast way

if the goal of those months was to learn these important insights about customers, why did it take so long? How much of our effort 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?

Waste

Learning to see waste and then systematically eliminate it has allowed lean companies such as Toyota to dominate entire industries.

Ship fast!

think of all the debate and prioritization of effort that went into features that customers would never discover. If we had shipped sooner, we could have avoided that waste.

Validated learning –> positive improvements

validated learning because it is always demonstrated by positive improvements in the startup’s core metrics.

Funding

The irony is that it is often easier to raise money or acquire other resources when you have zero revenue, zero customers

Squandering

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.

Questions to ask

  1. Do consumers recognize that they have the problem you are trying to solve? 2. If there was a solution, would they buy it? 3. Would they buy it from us? 4. Can we build a solution for that problem?”

Lean of faith assumptions === Risk!

I call the riskiest elements of a startup’s plan, the parts on which everything depends, leap-of-faith assumptions.

Hypothesis

The two most important assumptions are the value hypothesis and the growth hypothesis.

Quantity approach

innovation accounting, a quantitative approach that allows us to see whether our engine-tuning efforts are bearing fruit.

Test hypothesis systematically

challenge for an entrepreneur is to build an organization that can test these assumptions systematically.

Success stories

What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.

Value creating or destroying?

there are many organizations that are wildly profitable in the short term but ultimately value-destroying, such as the organizers of Ponzi schemes, and fraudulent or misguided companies

Value destroying elements

a business that grows through continuous fund-raising from investors and lots of paid advertising but does not develop a value-creating product.

Theatre

Such businesses are engaged in what I call success theater, using the appearance of growth to make it seem that they are successful.

Selling to consumers harder

It is common to think of selling to consumers as easier than selling to enterprises, because customers lack the complexity of multiple departments and different people playing different roles in the purchasing process. Yokoya discovered this was untrue for his customers:

Customers

Numbers tell a compelling story, but I always remind entrepreneurs that metrics are people, too. No matter how many intermediaries lie between a company and its customers, at the end of the day, customers are breathing, thinking, buying individuals. Their behavior is measurable and changeable.

Conversations –> Answers

Those early conversations were designed to answer this leap-of-faith question:

Feedback loop

If a competitor can out execute a startup once the idea is known, the startup is doomed anyway. The reason to build a new team to pursue an idea is that you believe you can accelerate through the Build-Measure-Learn feedback loop faster than anyone else can.

Measure –> Experiment

A startup’s job is to (1) rigorously measure where it is right now, confronting the hard truths that assessment reveals, and then (2) devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan.

Myth of blind perseverance

We want to keep believing in our ideas even when the writing is on the wall. This is why the myth of perseverance is so dangerous. We all know stories of epic entrepreneurs who managed to pull out a victory when things seemed incredibly bleak.

Real data

Innovation accounting works in three steps: first, use a minimum viable product to establish real data on where the company is right now.

Smoke test

This is an old direct marketing technique in which customers are given the opportunity to preorder a product that has not yet been built. A smoke test measures only one thing: whether customers are interested in trying a product.

Funnel metrics

We tracked the “funnel metrics” behaviors that were critical to our engine of growth: customer registration, the download of our application, trial, repeat usage, and purchase.

Success theater

This is what tempts managers to resort to the usual bag of success theater tricks: last-minute ad buys, channel stuffing, and whiz-bang demos, in a desperate attempt to make the gross numbers look better. Energy invested in success theater is energy that could have been used to help build a sustainable business. I call the traditional numbers used to judge startups “vanity metrics,”

Split test

switched to cohort-based metrics, and instead of looking for cause-and-effect relationships after the fact, Grockit would launch each new feature as a true split-test experiment.

Lazy registrations

lazy registration is considered one of the design best practices for online services. In this system, customers do not have to register for the service up front. Instead, they immediately begin using the service and are asked to register only after they have had a chance to experience the service’s benefit.

Metrics are:

the three A’s of metrics: actionable, accessible, and auditable.

Not a vanity metrics

Actionable For a report to be considered actionable, it must demonstrate clear cause and effect. Otherwise, it is a vanity metric.

Destroyer of creative potential

there is no bigger destroyer of creative potential than the misguided decision to persevere.

Runway

Seasoned entrepreneurs often speak of the runway that their startup has left: the amount of time remaining in which a startup must either achieve lift-off or fail. This usually is defined as the remaining cash in the bank divided by the monthly burn rate, or net drain on that account balance.

Reasons for not pivoting earlier

Ask most entrepreneurs who have decided to pivot and they will tell you that they wish they had made the decision sooner. I believe there are three reasons why this happens. First, vanity metrics can allow entrepreneurs to form false conclusions and live in their own private reality. Second, when an entrepreneur has an unclear hypothesis, it’s almost impossible to experience complete failure, and without failure there is usually no impetus to embark on the radical change a pivot requires. Third, many entrepreneurs are afraid.

Type of Pivots: Zooms

Zoom-in Pivot In this case, what previously was considered a single feature in a product becomes the whole product… Zoom-out Pivot In the reverse situation, sometimes a single feature is insufficient to support a whole product.

Other types of pivots

  1. Customer Segment Pivot In this pivot, the company realizes that the product it is building solves a real problem for real customers but that they are not the type of customers it originally planned to serve.
    • Customer Need Pivot As a result of getting to know customers extremely well, it sometimes becomes clear that the problem we’re trying to solve for them is not very important.
    • Platform Pivot A platform pivot refers to a change from an application to a platform or vice versa.
    • Business Architecture Pivot This pivot borrows a concept from Geoffrey Moore, who observed that companies generally follow one of two major business architectures: high margin, low volume (complex systems model) or low margin, high volume (volume operations model).
    • Value Capture Pivot There are many ways to capture the value a company creates. These methods are referred to commonly as monetization or revenue models. These terms are much too limiting.
    • Engine of Growth Pivot As we’ll see in Chapter 10, there are three primary engines of growth that power startups: the viral, sticky, and paid growth models.
    • Channel Pivot In traditional sales terminology, the mechanism by which a company delivers its product to customers is called the sales channel or distribution channel.
    • Technology Pivot Occasionally, a company discovers a way to achieve the same solution by using a completely different technology.

Sustainable growth

Sustainable growth follows one of three engines of growth: paid, viral, or sticky.

Single piece flow

The father won the race, and not just because he is an adult. It happened because the one envelope at a time approach is a faster way of getting the job done even though it seems inefficient. This has been confirmed in many studies, including one that was recorded on video. The one envelope at a time approach is called “single-piece flow” in lean manufacturing. It works because of the surprising power of small batches. When we do work that proceeds in stages, the “batch size” refers to how much work moves from one stage to the next at a time.

General purpose > Specialised

Instead of buying large specialized machines that could produce thousands of parts at a time, Toyota used smaller general-purpose machines that could produce a wide variety of parts in small batches.

Small batches

The biggest advantage of working in small batches is that quality problems can be identified much sooner.

Be like an assembly line - always be shipping

This is another very counterintuitive practice. An assembly line works best when it is functioning smoothly, rolling car after car off the end of the line. The andon cord can interrupt this careful flow as the line is halted repeatedly. However, the benefits of finding and fixing problems faster outweigh this cost. This process of continuously driving out defects has been a win-win for Toyota and its customers. It is the root cause of Toyota’s historic high quality ratings and low costs.

Feedback and versions

this capability will allow the designers of products to get much faster feedback about new versions. When the design changes, there is no excess inventory of the old version to slow things down. Since machines are designed for rapid changeovers, as soon as the new design is ready, new versions can be produced quickly.

Batch sizes

The essential lesson is not that everyone should be shipping fifty times per day but that by reducing batch size, we can get through the Build-Measure-Learn feedback loop more quickly than our competitors can. The ability to learn faster from customers is the essential competitive advantage that startups must possess.

Single piece flow + small batches

The ideal goal is to achieve small batches all the way down to single-piece flow along the entire supply chain. Each step in the line pulls the parts it needs from the previous step. This is the famous Toyota just-in-time production method.

Sustainability

Sustainable growth is characterized by one simple rule: New customers come from the actions of past customers. There are four primary ways past customers drive sustainable growth:

  1. Word of mouth. Embedded in most products is a natural level of growth that is caused by satisfied customers’ enthusiasm for the product.
    • As a side effect of product usage. Fashion or status, such as luxury goods products, drive awareness of themselves whenever they are used.
    • Through funded advertising. Most businesses employ advertising to entice new customers to use their products.
    • Through repeat purchase or use. Some products are designed to be purchased repeatedly either through a subscription plan (a cable company) or through voluntary repurchases (groceries or lightbulbs).

Churn

The churn rate is defined as the fraction of customers in any period who fail to remain engaged with the company’s product.

Cons of viral

A consequence of this is that many viral products do not charge customers directly but rely on indirect sources of revenue such as advertising. This is the case because viral products cannot afford to have any friction impede the process of signing customers up and recruiting their friends. This can make testing the value hypothesis for viral products especially challenging.

Increasing rate of growth

If either company wants to increase its rate of growth, it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer. That’s the paid engine of growth at work.

Paradox

It is epitomized in the paradoxical Toyota proverb, “Stop production so that production never has to stop.” The key to the andon cord is that it brings work to a stop as soon as an uncorrectable quality problem surfaces which forces it to be investigated.

Attributes

startup teams require three structural attributes: scarce but secure resources, independent authority to develop their business, and a personal stake in the outcome.

Agile

Without the ability to experiment in a more agile manner, this company eventually would suffer the fate described in The Innovator’s Dilemma: ever-higher profits and margins year after year until the business suddenly collapsed.

Sandboxing

The sandbox also promotes rapid iteration. When people have a chance to see a project through from end to end and the work is done in small batches and delivers a clear verdict quickly, they benefit from the power of feedback.

Real goal

By focusing on functional efficiency, we lose sight of the real goal of innovation: to learn that which is currently unknown.