AcclaimforTHELEANSTARTUP

AcclaimforTHELEANSTARTUP

“TheLeanStartupisn’tjustabouthowtocreateamoresuccessful

entrepreneurialbusiness;it’saboutwhatwecanlearnfromthose

businessestoimprovevirtualyeverythingwedo.IimagineLean

Startupprinciplesappliedtogovernmentprograms,tohealthcare,

andtosolvingtheworld’sgreatproblems.It’sultimatelyananswer

tothequestionHowcanwelearnmorequicklywhat

worksand

discardwhatdoesn’t?”

—TimO’Reily,CEO,O’ReilyMedia

“EricRiesunravelsthemysteriesofentrepreneurshipandreveals

thatmagicandgeniusarenotthenecessaryingredientsforsuccess

butinsteadproposesascienticprocessthatcanbelearnedand

replicated.Whetheryouareastartupentrepreneurorcorporate

entrepreneur,thereareimportantlessonshereforyouonyour

questtowardthenewandunknown.”

—TimBrown,CEO,IDEO

“Theroadmapforinnovationforthetwenty-firstcentury.Theideas

inTheLeanStartupwilhelpcreatethenextindustrialrevolution.”

—SteveBlank,lecturer,StanfordUniversity,

UCBerkeleyHassBusiness

School

“Everyfoundingteamshouldstopforforty-eighthoursandread

TheLeanStartup.Seriously,stopandreadthisbooknow.”

—ScotCase,CEO,StartupAmericaPartnership

“Thekeylessonofthisbookisthatstartupshappeninthe

present

—thatmessyplacebetweenthepastandthefuturewherenothing

happensaccordingtoPowerPoint.Ries’s‘readandreact’approach

tothissport,hisrelentlessfocusonvalidatedlearning,thenever-

endinganxietyofhoveringbetween‘persevere’and‘pivot,’albear

witnesstohisappreciationforthedynamicsofentrepreneurship.”

witnesstohisappreciationforthedynamicsofentrepreneurship.”

—GeofreyMoore,author,CrossingtheChasm

“Ifyouareanentrepreneur,readthisbook.Ifyouarethinking

aboutbecominganentrepreneur,readthisbook.Ifyouarejust

curiousaboutentrepreneurship,readthisbook.StartingLeanis

today’sbestpracticeforinnovators.Doyourselfa

favorandread

thisbook.”

—RandyKomisar,foundingdirectorofTiVoandauthorofthe

bestselingTheMonkandtheRiddle

“Howdoyouapplythefty-year-oldideasofLeantothefast-

paced,high-uncertaintyworldofstartups?Thisbookprovidesa

briliant,wel-documented,andpracticalanswer.Itissureto

becomeamanagementclassic.”

—DonReinertsen,author,ThePrinciplesofProductDevelopment

Flow

“Whatwouldhappenifbusinesseswerebuiltfromthegroundup

tolearnwhattheircustomersrealywanted?TheLeanStartupis

thefoundationforreimaginingalmosteverythingabouthowwork

works.Don’tletthewordstartupinthetitleconfuseyou.Thisisa

cookbookforentrepreneursinorganizationsofalsizes.”

—RoyBahat,president,IGNEntertainment

“TheLeanStartupisafoundationalmust-readforfounders,

enablingthemtoreduceproductfailuresbybringingstructureand

sciencetowhatisusualyinformalandanart.Itprovides

actionablewaystoavoidproduct-learningmistakes,rigorously

evaluateearlysignalsfromthemarketthroughvalidated

learning,

anddecidewhethertopersevereortopivot,alchalengesthat

heightenthechanceofentrepreneurialfailure.”

—NoamWasserman,professor,HarvardBusinessSchool

“Oneofthebestandmost

insightfulnewbookson

entrepreneurshipandmanagementI’veeverread.Shouldbe

entrepreneurshipandmanagementI’veeverread.Shouldbe

requiredreadingnotonlyfortheentrepreneursthatIworkwith,

butformyfriendsandcoleaguesinvariousindustrieswhohave

inevitablygrappledwithmanyofthechalengesthatTheLean

Startupaddresses.”

—EugeneJ.Huang,partner,TrueNorthVenturePartner

“Inbusiness,a‘lean’

enterpriseissustainableeciencyinaction.

EricRies’srevolutionaryLeanStartupmethodwilhelpbringyour

newbusinessideatoanendresultthatissuccessfulandsustainable.

You’lndinnovativestepsandstrategiesforcreatingand

managingyourownstartupwhilelearningfromthereal-life

successesandcolapsesofothers.Thisbookisamust-readfor

entrepreneurswhoaretrulyreadytostartsomethinggreat!”

—KenBlanchard,coauthorofTheOneMinute

Manager®

andTheOneMinuteEntrepreneur

Copyright©2011byEricRies

Allrightsreserved.

PublishedintheUnitedStatesbyCrownBusiness,animprintoftheCrownPublishing

Group,adivisionofRandomHouse,Inc.,NewYork.www.crownpublishing.com

CROWNBUSINESSisatrademarkandCROWNandtheRisingSuncolophonare

registeredtrademarksofRandomHouse,Inc.

LibraryofCongressCataloging-in-PublicationData

Ries,Eric,1978–

Theleanstartup/EricRies.

—1sted.

p.cm.

1.Newbusinessenterprises.2.Consumers’preferences.3.Organizational

effectiveness.I.Title.

HD62.5.R5452011

658.1′1—dc222011012100

eISBN:978-0-307-88791-7

BookdesignbyLaurenDong

IllustrationsbyFredHaynes

JacketdesignbyMarcusGosling

v3.1

ForTara

Contents

Cover

TitlePage

Copyright

Dedication

Introduction

PartOneVISION

1.Start

2.Define

3.Learn

4.Experiment

PartTwoSTEER

5.Leap

6.Test

7.Measure

8.Pivot(orPersevere)

PartThreeACCELERATE

9.Batch

10.Grow

11.Adapt

12.Innovate

13.Epilogue:WasteNot

14.JointheMovement

Endnotes

Disclosures

Disclosures

Acknowledgments

AbouttheAuthor

Introduction

Stopmeifyou’veheardthisonebefore.Briliantcolegekids

sitinginadormareinventingthefuture.Heedlessofboundaries,

possessedofnewtechnologyandyouthfulenthusiasm,theybuild

anewcompanyfromscratch.Theirearlysuccessalowsthemto

raisemoneyandbringanamazingnewproducttomarket.They

hiretheirfriends,assembleasuperstarteam,anddaretheworldto

stopthem.

Tenyearsandseveralstartupsago,thatwasme,buildingmyrst

company.Iparticularlyrememberamomentfrombackthen:the

momentIrealizedmycompanywasgoingtofail.Mycofounder

andIwereatourwits’end.Thedot-combubblehad

burst,andwe

hadspentalourmoney.Wetrieddesperatelytoraisemore

capital,andwecouldnot.Itwaslikeabreakupscenefroma

Holywoodmovie:itwasraining,andwewerearguinginthe

street.Wecouldn’tevenagreeonwheretowalknext,andsowe

partedinanger,headinginoppositedirections.Asametaphorfor

ourcompany’sfailure,thisimageofthetwoofus,lostintherain

anddriftingapart,isperfect.

Itremainsapainfulmemory.Thecompanylimpedalongfor

monthsafterward,butoursituationwashopeless.Atthetime,it

hadseemedweweredoingeverythingright:wehadagreat

product,abriliantteam,amazingtechnology,andthe

rightideaat

therighttime.Andwerealywereontosomething.Wewere

buildingawayforcolegekidstocreateonlineprolesforthe

purposeofsharing…withemployers.Oops.Butdespitea

promisingidea,wewerenonethelessdoomedfromdayone,

becausewedidnotknowtheprocesswewouldneedtousetoturn

becausewedidnotknowtheprocesswewouldneedtousetoturn

ourproductinsightsintoagreatcompany.

Ifyou’veneverexperiencedafailurelikethis,itishardto

describethefeeling.It’sasiftheworldwerefalingoutfromunder

you.Yourealizeyou’vebeenduped.Thestoriesinthemagazines

arelies:hardworkandperseverancedon’tleadtosuccess.Even

worse,themany,many,manypromisesyou’vemadetoemployees,

friends,andfamilyarenotgoingtocometrue.Everyonewho

thoughtyouwerefoolishforsteppingoutonyourownwilbe

provenright.

Itwasn’tsupposedtoturnoutthatway.Inmagazinesand

newspapers,inblockbustermovies,andoncountlessblogs,wehear

themantraofthesuccessfulentrepreneurs:throughdetermination,

briliance,greattiming,and—aboveal—agreatproduct,youtoo

canachievefameandfortune.

Thereisamythmakingindustryhardatworktoselusthatstory,

butIhavecometobelievethatthestoryisfalse,theproductof

selectionbiasandafter-the-factrationalization.Infact,having

workedwithhundredsofentrepreneurs,Ihaveseenrsthandhow

oftenapromisingstartleadstofailure.Thegrimrealityisthatmost

startupsfail.Mostnewproductsarenotsuccessful.Mostnew

venturesdonotliveuptotheirpotential.

Yetthestoryofperseverance,creativegenius,andhardwork

persists.Whyisitsopopular?Ithinkthereissomethingdeeply

appealingaboutthismodern-dayrags-to-richesstory.Itmakes

successseeminevitableifyoujusthavetherightstu.It

meansthat

themundanedetails,theboringstu,thesmalindividualchoices

don’tmater.Ifwebuildit,theywilcome.Whenwefail,asso

manyofusdo,wehaveaready-madeexcuse:wedidn’thavethe

rightstu.Weweren’tvisionaryenoughorweren’tintheright

placeattherighttime.

Aftermorethantenyearsasanentrepreneur,Icametoreject

thatlineofthinking.Ihavelearnedfrombothmyownsuccesses

andfailuresandthoseofmanyothersthatit’stheboringstuthat

matersthemost.Startupsuccessisnotaconsequenceofgood

genesorbeingintherightplaceattherighttime.Startupsuccess

canbeengineeredbyfolowingtherightprocess,

whichmeansit

canbeengineeredbyfolowingtherightprocess,whichmeansit

canbelearned,whichmeansitcanbetaught.

Entrepreneurshipisakindofmanagement.No,youdidn’tread

thatwrong.Wehavewildly

divergentassociationswiththesetwo

words,entrepreneurshipandmanagement.Lately,itseemsthatone

iscool,innovative,andexcitingandtheotherisdul,serious,and

bland.Itistimetolookpastthesepreconceptions.

Letmetelyouasecondstartupstory.It’s2004,andagroupof

foundershavejuststartedanewcompany.Theirpreviouscompany

hadfailedverypublicly.Theircredibilityisatanal-timelow.They

haveahugevision:tochangethewaypeoplecommunicate

by

usinganewtechnologycaledavatars(remember,thiswasbefore

JamesCameron’sblockbustermovie).Theyarefolowinga

visionarynamedWilHarvey,whopaintsacompelingpicture:

peopleconnectingwiththeirfriends,hangingoutonline,using

avatarstogivethemacombinationofintimateconnectionandsafe

anonymity.Evenbeter,insteadofhavingtobuildaltheclothing,

furniture,andaccessoriestheseavatarswouldneedto

accessorize

theirdigitallives,thecustomerswouldbeenlistedtobuildthose

thingsandselthemtooneanother.

Theengineeringchalengebeforethemisimmense:creating

virtualworlds,user-

generatedcontent,anonlinecommerceengine,

micropayments,and—lastbutnotleast—thethree-dimensional

avatartechnologythatcanrunonanyone’sPC.

I’minthissecondstory,too.I’macofounderandchieftechnology

ocerofthiscompany,whichiscaledIMVU.Atthispointinour

careers,mycofoundersandIaredeterminedtomakenewmistakes.

Wedoeverythingwrong:insteadofspendingyearsperfectingour

technology,webuildaminimumviableproduct,an

earlyproduct

thatisterrible,fulofbugsandcrash-your-computer-yes-realy

stabilityproblems.Thenweshipittocustomerswaybeforeit’s

ready.Andwechargemoneyforit.Aftersecuringinitialcustomers,

wechangetheproductconstantly—muchtoofastbytraditional

standards—shippingnewversionsofourproductdozensoftimes

everysingleday.

Werealydidhavecustomersinthoseearlydays—truevisionary

earlyadopters—andweoftentalkedtothemandaskedfortheir

earlyadopters—andweoftentalkedtothemandaskedfortheir

feedback.Butweemphaticalydidnotdowhattheysaid.We

viewedtheirinputasonlyonesourceofinformation

aboutour

productandoveralvision.Infact,weweremuchmorelikelyto

runexperimentsonourcustomersthanweweretocatertotheir

whims.

Traditionalbusinessthinkingsaysthatthisapproach

shouldn’t

work,butitdoes,andyoudon’thavetotakemywordforit.As

you’lseethroughoutthisbook,theapproachwepioneeredat

IMVUhasbecomethebasisforanewmovementofentrepreneurs

aroundtheworld.Itbuildsonmanypreviousmanagementand

productdevelopmentideas,includingleanmanufacturing,design

thinking,customerdevelopment,andagiledevelopment.It

representsanewapproachtocreatingcontinuous

innovation.It’s

caledtheLeanStartup.

Despitethevolumeswritenonbusinessstrategy,thekey

atributesofbusinessleaders,andwaystoidentifythenextbig

thing,innovatorsstilstruggletobringtheirideastolife.Thiswas

thefrustrationthatledustotryaradicalnewapproachatIMVU,

onecharacterizedbyanextremelyfastcycletime,afocusonwhat

customerswant(withoutaskingthem),andascienticapproachto

makingdecisions.

ORIGINSOFTHELEANSTARTUP

Iamoneofthosepeoplewhogrewupprogrammingcomputers,

andsomyjourneytothinkingaboutentrepreneurshipand

managementhastakenacircuitouspath.Ihavealwaysworkedon

theproductdevelopmentsideofmyindustry;mypartnersand

bossesweremanagersormarketers,andmypeersworkedin

engineeringandoperations.Throughoutmycareer,Ikepthaving

theexperienceofworkingincrediblyhardonproducts

that

ultimatelyfailedinthemarketplace.

Atrst,largelybecauseofmybackground,Iviewedtheseas

technicalproblemsthatrequiredtechnicalsolutions:beter

architecture,abeter

engineeringprocess,beterdiscipline,focus,or

architecture,abeterengineeringprocess,beterdiscipline,focus,or

productvision.Thesesupposedxesledtostilmorefailure.SoI

readeverythingIcouldgetmyhandsonandwasblessedtohave

hadsomeofthetopmindsinSiliconValeyasmymentors.Bythe

timeIbecameacofounderofIMVU,Iwashungryfornewideas

abouthowtobuildacompany.

Iwasfortunatetohavecofounderswhowerewilingto

experimentwithnewapproaches.Theywerefedup—asIwas—by

thefailureoftraditionalthinking.Also,wewereluckytohave

SteveBlankasaninvestorandadviser.Backin2004,Stevehadjust

begunpreachinganewidea:thebusinessandmarketing

functions

ofastartupshouldbeconsideredasimportantasengineeringand

productdevelopmentandthereforedeserveanequalyrigorous

methodologytoguidethem.HecaledthatmethodologyCustomer

Development,anditoeredinsightandguidancetomydailywork

asanentrepreneur.

Meanwhile,IwasbuildingIMVU’sproductdevelopmentteam,

usingsomeoftheunorthodoxmethodsImentionedearlier.

Measuredagainstthe

traditionaltheoriesofproductdevelopmentI

hadbeentrainedoninmycareer,thesemethodsdidnotmake

sense,yetIcouldseersthandthattheywereworking.Istruggled

toexplainthepracticestonewemployees,investors,andthe

foundersofothercompanies.Welackedacommonlanguagefor

describingthemandconcreteprinciplesforunderstandingthem.

Ibegantosearchoutsideentrepreneurshipforideasthatcould

helpmemakesenseofmyexperience.Ibegantostudy

other

industries,especialymanufacturing,fromwhichmostmodern

theoriesofmanagementderive.Istudiedleanmanufacturing,a

processthatoriginatedinJapanwiththeToyotaProduction

System,acompletelynewwayofthinkingaboutthemanufacturing

ofphysicalgoods.Ifoundthatbyapplyingideasfromlean

manufacturingtomyownentrepreneurialchalenges—withafew

tweaksandchanges—Ihadthebeginningsofa

frameworkfor

makingsenseofthem.

ThislineofthoughtevolvedintotheLeanStartup:the

applicationofleanthinkingtotheprocessofinnovation.

IMVUbecameatremendoussuccess.IMVUcustomershave

IMVUbecameatremendoussuccess.IMVUcustomershave

createdmorethan60milionavatars.Itisaprotablecompany

withannualrevenuesofmorethan$50milionin2011,employing

morethanahundredpeopleinourcurrentocesin

Mountain

View,California.IMVU’svirtualgoodscatalog—whichseemedso

riskyyearsago—nowhasmorethan6milionitemsinit;more

than7,000areaddedeveryday,almostalcreatedbycustomers.

AsaresultofIMVU’ssuccess,Ibegantobeaskedforadviceby

otherstartupsandventurecapitalists.WhenIwoulddescribemy

experiencesatIMVU,Iwasoftenmetwithblankstaresorextreme

skepticism.Themostcommonreplywas“That

couldneverwork!”

Myexperiencesoewinthefaceofconventionalthinkingthat

mostpeople,evenintheinnovationhubofSiliconValey,could

notwraptheirmindsaroundit.

ThenIstartedtowrite,rston

ablogcaledStartupLessons

Learned,andspeak—atconferencesandtocompanies,startups,and

venturecapitalists—toanyonewhowouldlisten.Intheprocessof

beingcaledontodefendandexplainmyinsightsandwiththe

colaborationofotherwriters,thinkers,andentrepreneurs,Ihada

chancetoreneanddevelopthetheoryoftheLeanStartupbeyond

itsrudimentarybeginnings.Myhopealalongwastondwaysto

eliminatethetremendouswasteIsawalaroundme:

startupsthat

builtproductsnobodywanted,newproductspuledfromthe

shelves,countlessdreamsunrealized.

Eventualy,theLeanStartupideablossomedintoaglobal

movement.Entrepreneursbeganforminglocalin-

persongroupsto

discussandapplyLeanStartupideas.Therearenoworganized

communitiesofpracticeinmorethanahundredcitiesaroundthe

world.1Mytravelshavetakenmeacrosscountriesandcontinents.

EverywhereIhaveseenthesignsofanewentrepreneurial

renaissance.TheLeanStartupmovementismaking

entrepreneurshipaccessibletoawholenewgenerationoffounders

whoarehungryfornewideasabouthowtobuildsuccessful

companies.

Althoughmybackgroundisinhigh-techsoftware

entrepreneurship,themovementhasgrownwaybeyondthose

entrepreneurship,themovementhasgrownwaybeyondthose

roots.Thousandsof

entrepreneursareputingLeanStartup

principlestoworkineveryconceivableindustry.I’vehadthe

chancetoworkwithentrepreneursincompaniesofalsizes,in

dierentindustries,andeveningovernment.Thisjourneyhastaken

metoplacesIneverimaginedI’dsee,fromtheworld’smostelite

venturecapitalists,toFortune500boardrooms,tothePentagon.

ThemostnervousIhaveeverbeeninameetingwaswhenIwas

atemptingtoexplainLeanStartupprinciplestothechief

informationoceroftheU.S.Army,whoisathree-stargeneral

(fortherecord,hewasextremelyopentonewideas,evenfroma

civilianlikeme).

PretysoonIrealizedthatitwastimetofocusontheLean

Startupmovementfultime.Mymission:toimprovethesuccess

rateofnewinnovativeproductsworldwide.Theresultisthebook

youarereading.

THELEANSTARTUPMETHOD

Thisisabookfor

entrepreneursandthepeoplewhoholdthem

accountable.TheveprinciplesoftheLeanStartup,whichinform

althreepartsofthisbook,areasfolows:

1.Entrepreneursareeverywhere.Youdon’thavetoworkina

garagetobeinastartup.Theconceptofentrepreneurshipincludes

anyonewhoworkswithinmydenitionofastartup:ahuman

institutiondesignedtocreatenewproductsandservicesunder

conditionsofextremeuncertainty.Thatmeans

entrepreneursare

everywhereandtheLeanStartupapproachcanworkinanysize

company,evenaverylargeenterprise,inanysectororindustry.

2.Entrepreneurshipismanagement.Astartupisaninstitution,

notjustaproduct,andsoitrequiresanewkindofmanagement

specicalygearedtoitscontextofextremeuncertainty.Infact,asI

wilarguelater,Ibelieve“entrepreneur”shouldbeconsidereda

wilarguelater,Ibelieve“entrepreneur”shouldbe

considereda

jobtitleinalmoderncompaniesthatdependoninnovationfor

theirfuturegrowth.

3.Validatedlearning.Startupsexistnotjusttomakestu,make

money,orevenservecustomers.Theyexistto

learnhowtobuilda

sustainablebusiness.Thislearningcanbevalidatedscienticalyby

runningfrequentexperimentsthatalowentrepreneurstotesteach

elementoftheirvision.

4.Build-Measure-Learn.Thefundamentalactivityofa

startupis

toturnideasintoproducts,measurehowcustomersrespond,and

thenlearnwhethertopivotorpersevere.Alsuccessfulstartup

processesshouldbegearedtoacceleratethatfeedbackloop.

5.Innovationaccounting.To

improveentrepreneurialoutcomes

andholdinnovatorsaccountable,weneedtofocusontheboring

stu:howtomeasureprogress,howtosetupmilestones,andhow

toprioritizework.Thisrequiresanewkindofaccountingdesigned

forstartups—andthepeoplewhoholdthemaccountable.

WhyStartupsFail

Whyarestartupsfailingsobadlyeverywherewelook?

Therstproblemisthealureofagoodplan,asolidstrategy,

andthoroughmarketresearch.Inearliereras,

thesethingswere

indicatorsoflikelysuccess.Theoverwhelmingtemptationisto

applythemtostartupstoo,butthisdoesn’twork,becausestartups

operatewithtoomuchuncertainty.Startupsdonotyetknowwho

theircustomerisorwhattheirproductshouldbe.Astheworld

becomesmoreuncertain,itgetsharderandhardertopredictthe

future.Theoldmanagementmethodsarenotuptothetask.

Planningandforecastingareonlyaccuratewhenbasedon

along,

stableoperatinghistoryandarelativelystaticenvironment.Startups

stableoperatinghistoryandarelativelystaticenvironment.Startups

haveneither.

Thesecondproblemisthatafterseeingtraditional

management

failtosolvethisproblem,someentrepreneursandinvestorshave

thrownuptheirhandsandadoptedthe“JustDoIt”schoolof

startups.Thisschoolbelievesthatifmanagementistheproblem,

chaosistheanswer.Unfortunately,asIcanatestrsthand,this

doesn’tworkeither.

Itmayseemcounterintuitivetothinkthatsomethingas

disruptive,innovative,andchaoticasastartupcanbemanagedor,

tobeaccurate,mustbe

managed.Mostpeoplethinkofprocessand

managementasboringanddul,whereasstartupsaredynamicand

exciting.Butwhatisactualyexcitingistoseestartupssucceedand

changetheworld.Thepassion,energy,andvisionthatpeoplebring

tothesenewventuresareresourcestooprecioustowaste.Wecan—

andmust—dobeter.Thisbookisabouthow.

andmust—dobeter.Thisbookisabouthow.

HOWTHISBOOKISORGANIZED

Thisbookisdividedinto

threeparts:“Vision,”“Steer,”and

“Accelerate.”

“Vision”makesthecaseforanewdisciplineofentrepreneurial

management.Iidentifywhoisanentrepreneur,deneastartup,

andarticulateanewwayfor

startupstogaugeiftheyaremaking

progress,caledvalidatedlearning.Toachievethatlearning,we’l

seethatstartups—inagarageorinsideanenterprise—canuse

scienticexperimentationtodiscoverhowtobuildasustainable

business.

“Steer”divesintotheLeanStartupmethodindetail,showingone

majorturnthroughthecoreBuild-Measure-Learnfeedbackloop.

Beginningwithleap-of-faithassumptionsthatcryoutforrigorous

testing,you’llearnhowtobuildaminimumviableproducttotest

thoseassumptions,anewaccountingsystemforevaluatingwhether

you’remakingprogress,andamethodfordecidingwhetherto

pivot(changingcoursewithonefootanchoredtothe

ground)or

persevere.

In“Accelerate,”we’lexploretechniquesthatenableLean

StartupstospeedthroughtheBuild-Measure-Learnfeedbackloop

asquicklyaspossible,evenastheyscale.We’lexplorelean

manufacturingconceptsthatareapplicabletostartups,too,suchas

thepowerofsmalbatches.We’lalsodiscussorganizationaldesign,

howproductsgrow,andhowtoapplyLeanStartupprinciples

beyondtheproverbialgarage,eveninsidetheworld’s

largest

companies.

MANAGEMENT’SSECONDCENTURY

Asasociety,wehaveaprovensetoftechniquesformanagingbig

companiesandweknowthebestpracticesforbuildingphysical

products.Butwhenitcomestostartupsandinnovation,wearestil

shootinginthedark.Wearerelyingonvision,chasingthe“great

shootinginthedark.Wearerelyingonvision,chasingthe“great

men”whocanmakemagichappen,ortryingtoanalyze

ournew

productstodeath.Thesearenewproblems,bornofthesuccessof

managementinthetwentiethcentury.

Thisbookatemptstoputentrepreneurshipandinnovationona

rigorousfooting.Weareat

thedawnofmanagement’ssecond

century.Itisourchalengetodosomethinggreatwiththe

opportunitywehavebeengiven.TheLeanStartupmovementseeks

toensurethatthoseofuswholongtobuildthenextbigthingwil

havethetoolsweneedtochangetheworld.

PartOne

PartOne

VISION

1START

ENTREPRENEURIALMANAGEMENT

Buildingastartupisanexerciseininstitutionbuilding;thus,it

necessarilyinvolvesmanagement.Thisoftencomesasasurprise

toaspiringentrepreneurs,becausetheirassociationswiththese

twowordsaresodiametricalyopposed.Entrepreneursarerightly

waryofimplementingtraditionalmanagement

practicesearlyonin

astartup,afraidthattheywilinvitebureaucracyorstiflecreativity.

Entrepreneurshavebeentryingtotthesquarepegoftheir

uniqueproblemsintotheroundholeofgeneralmanagementfor

decades.Asaresult,manyentrepreneurstakea“justdoit”atitude,

avoidingalformsofmanagement,process,anddiscipline.

Unfortunately,thisapproachleadstochaosmoreoftenthanitdoes

tosuccess.Ishouldknow:myrststartupfailureswere

alofthis

kind.

Thetremendoussuccessofgeneralmanagementoverthelast

centuryhasprovidedunprecedentedmaterialabundance,butthose

managementprinciplesareilsuitedtohandlethechaos

and

uncertaintythatstartupsmustface.

Ibelievethatentrepreneurshiprequiresamanagerialdisciplineto

harnesstheentrepreneurialopportunitywehavebeengiven.

Therearemoreentrepreneurs

operatingtodaythanatany

previoustimeinhistory.Thishasbeenmadepossiblebydramatic

previoustimeinhistory.Thishasbeenmadepossiblebydramatic

changesintheglobaleconomy.Tocitebutoneexample,oneoften

hearscommentatorslamentthelossofmanufacturingjobsinthe

UnitedStatesovertheprevioustwodecades,butonerarelyhears

aboutacorrespondinglossofmanufacturingcapability.That’s

becausetotalmanufacturingoutputintheUnitedStatesis

increasing(by15percentinthelastdecade)evenasjobscontinue

tobelost(seethechartsbelow).Ineect,thehugeproductivity

increasesmadepossiblebymodernmanagementandtechnology

havecreatedmoreproductivecapacitythanrmsknowwhat

todo

with.1

Wearelivingthroughanunprecedentedworldwide

entrepreneurialrenaissance,butthisopportunityislacedwithperil.

Becausewelackacoherentmanagementparadigmfornew

innovativeventures,we’rethrowingourexcesscapacityaround

withwildabandon.Despitethislackofrigor,wearendingsome

waystomakemoney,butforeverysuccesstherearefartoomany

failures:productspuledfromshelvesmereweeks

afterbeing

launched,high-prolestartupslaudedinthepressandforgotena

fewmonthslater,andnewproductsthatwindupbeingusedby

nobody.Whatmakesthesefailuresparticularlypainfulisnotjust

theeconomicdamagedonetoindividualemployees,companies,

andinvestors;theyarealsoacolossalwasteofourcivilization’s

mostpreciousresource:thetime,passion,andskilofitspeople.

TheLeanStartupmovementisdedicatedtopreventing

these

failures.

THEROOTSOFTHELEANSTARTUP

TheLeanStartuptakesits

namefromtheleanmanufacturing

revolutionthatTaichiOhnoandShigeoShingoarecreditedwith

developingatToyota.Leanthinkingisradicalyalteringtheway

supplychainsandproductionsystemsarerun.Amongitstenetsare

drawingontheknowledgeandcreativityofindividualworkers,the

shrinkingofbatchsizes,just-in-timeproductionandinventory

control,andanaccelerationofcycletimes.Ittaughttheworldthe

dierencebetweenvalue-creatingactivitiesandwaste

andshowed

howtobuildqualityintoproductsfromtheinsideout.

TheLeanStartupadaptstheseideastothecontextof

entrepreneurship,proposingthatentrepreneursjudgetheirprogress

dierentlyfromthewayotherkindsofventuresdo.

Progressin

dierentlyfromthewayotherkindsofventuresdo.Progressin

manufacturingismeasuredbytheproductionofhigh-quality

physicalgoods.Aswe’lseeinChapter3,theLeanStartupusesa

dierentunitofprogress,caledvalidatedlearning.Withscientific

learningasouryardstick,wecandiscoverandeliminatethesources

ofwastethatareplaguingentrepreneurship.

Acomprehensivetheoryofentrepreneurshipshouldaddressal

thefunctionsofanearly-stageventure:visionandconcept,product

development,marketingandsales,scalingup,partnershipsand

distribution,andstructureandorganizationaldesign.Ithasto

provideamethodformeasuringprogressinthe

contextofextreme

uncertainty.Itcangiveentrepreneursclearguidanceonhowto

makethemanytrade-odecisionstheyface:whetherandwhento

investinprocess;formulating,planning,andcreatinginfrastructure;

whentogoitaloneandwhentopartner;whentorespondto

feedbackandwhentostickwithvision;andhowandwhento

investinscalingthebusiness.Mostofal,itmustalow

entrepreneurstomaketestablepredictions.

Forexample,considertherecommendationthatyoubuildcross-

functionalteamsandholdthemaccountabletowhatwecal

learningmilestonesinsteadoforganizingyourcompanyintostrict

functionaldepartments(marketing,sales,

informationtechnology,

humanresources,etc.)thatholdpeopleaccountableforperforming

welintheirspecializedareas(seeChapter7).Perhapsyouagree

withthisrecommendation,orperhapsyouareskeptical.Either

way,ifyoudecidetoimplementit,Ipredictthatyoupretyquickly

wilgetfeedbackfromyourteamsthatthenewprocessisreducing

theirproductivity.Theywilasktogobacktotheoldwayof

working,inwhichtheyhadtheopportunityto“staye

cient”by

workinginlargerbatchesandpassingworkbetweendepartments.

It’ssafetopredictthisresult,andnotjustbecauseIhaveseenit

manytimesinthecompaniesIworkwith.Itisastraightforward

predictionoftheLeanStartuptheoryitself.Whenpeopleareused

toevaluatingtheirproductivitylocaly,theyfeelthatagooddayis

oneinwhichtheydidtheirjobwelalday.WhenIworkedasa

programmer,thatmeanteightstraighthoursof

programming

withoutinterruption.Thatwasagoodday.Incontrast,ifIwas

withoutinterruption.Thatwasagoodday.Incontrast,ifIwas

interruptedwithquestions,process,or—heavenforbid—meetings,I

feltbad.WhatdidIrealyaccomplishthatday?Codeandproduct

featuresweretangibletome;Icouldseethem,understandthem,

andshowthemof.Learning,bycontrast,isfrustratinglyintangible.

TheLeanStartupaskspeopletostartmeasuringtheir

productivitydierently.Becausestartupsoftenaccidentalybuild

somethingnobodywants,itdoesn’tmatermuchiftheydoiton

timeandonbudget.Thegoalofastartupistogureouttheright

thingtobuild—thethingcustomerswantandwilpay

for—as

quicklyaspossible.Inotherwords,theLeanStartupisanewway

oflookingatthedevelopmentofinnovativenewproductsthat

emphasizesfastiterationandcustomerinsight,ahugevision,and

greatambition,alatthesametime.

HenryFordisoneofthemostsuccessfulandcelebrated

entrepreneursofaltime.Sincetheideaofmanagementhasbeen

boundupwiththehistoryoftheautomobilesinceitsrstdays,I

believeitistingtousetheautomobileasametaphorfora

startup.

Aninternalcombustionautomobileispoweredbytwoimportant

andverydierentfeedbackloops.Therstfeedbackloopisdeep

insidetheengine.BeforeHenryFordwasafamousCEO,hewasan

engineer.Hespenthisdaysandnightstinkeringinhisgaragewith

theprecisemechanicsofgetingtheenginecylinderstomove.Each

tinyexplosionwithinthecylinderprovidesthemotive

forcetoturn

thewheelsbutalsodrivestheignitionofthenextexplosion.Unless

thetimingofthisfeedbackloopismanagedprecisely,theengine

wilsputerandbreakdown.

StartupshaveasimilarenginethatIcaltheengineof

growth.

Themarketsandcustomersforstartupsarediverse:atoycompany,

aconsultingrm,andamanufacturingplantmaynotseemlike

theyhavemuchincommon,but,aswe’lsee,theyoperatewiththe

sameengineofgrowth.

Everynewversionofaproduct,everynewfeature,andevery

Everynewversionofaproduct,everynewfeature,andevery

newmarketingprogramisanatempttoimprovethisengineof

growth.LikeHenryFord’stinkeringinhisgarage,notalofthese

changesturnouttobeimprovements.Newproductdevelopment

happensintsandstarts.Muchofthetimeinastartup’slifeis

spenttuningtheenginebymakingimprovementsin

product,

marketing,oroperations.

Thesecondimportantfeedbackloopinanautomobileis

betweenthedriverandthesteeringwheel.Thisfeedbackisso

immediateandautomaticthatweoftendon’tthink

aboutit,butit

issteeringthatdierentiatesdrivingfrommostotherformsof

transportation.Ifyouhaveadailycommute,youprobablyknow

theroutesowelthatyourhandsseemtosteeryouthereontheir

ownaccord.Wecanpracticalydrivetherouteinoursleep.YetifI

askedyoutocloseyoureyesandwritedownexactlyhowtogetto

youroce—notthestreetdirectionsbuteveryactionyouneedto

take,everypushofhandonwheelandfootonpedals—

you’dnd

itimpossible.Thechoreographyofdrivingisincrediblycomplex

whenoneslowsdowntothinkaboutit.

Bycontrast,arocketshiprequiresjustthiskindofin-advance

calibration.Itmustbe

launchedwiththemostpreciseinstructions

onwhattodo:everythrust,everyringofabooster,andevery

changeindirection.Thetiniesterroratthepointoflaunchcould

yieldcatastrophicresultsthousandsofmileslater.

Unfortunately,toomanystartupbusinessplanslookmorelike

theyareplanningtolauncharocketshipthandriveacar.They

prescribethestepstotakeandtheresultstoexpectinexcruciating

detail,andasinplanningtolauncharocket,theyareset

upinsuch

awaythateventinyerrorsinassumptionscanleadtocatastrophic

outcomes.

OnecompanyIworkedwithhadthemisfortuneofforecasting

signicantcustomeradoption—inthemilions—foroneof

itsnew

products.Poweredbyasplashylaunch,thecompanysuccessfuly

executeditsplan.Unfortunately,customersdidnotocktothe

productingreatnumbers.Evenworse,thecompanyhadinvestedin

massiveinfrastructure,hiring,andsupporttohandletheinuxof

customersitexpected.Whenthecustomersfailedtomaterialize,the

customersitexpected.Whenthecustomersfailedtomaterialize,the

companyhadcommiteditselfsocompletelythatthey

couldnot

adaptintime.Theyhad“achievedfailure”—successfuly,faithfuly,

andrigorouslyexecutingaplanthatturnedouttohavebeenuterly

flawed.

TheLeanStartupmethod,incontrast,isdesignedtoteach

you

howtodriveastartup.Insteadofmakingcomplexplansthatare

basedonalotofassumptions,youcanmakeconstantadjustments

withasteeringwheelcaledtheBuild-Measure-Learnfeedback

loop.Throughthisprocessofsteering,wecanlearnwhenandifit’s

timetomakeasharpturncaledapivotorwhetherweshould

perseverealongourcurrentpath.Oncewehaveanenginethat’s

revvedup,theLeanStartupoersmethodstoscaleand

growthe

businesswithmaximumacceleration.

Throughouttheprocessofdriving,youalwayshaveaclearidea

ofwhereyou’regoing.Ifyou’recommutingtowork,youdon’tgive

upbecausethere’sadetourin

theroadoryoumadeawrongturn.

Youremainthoroughlyfocusedongetingtoyourdestination.

Startupsalsohaveatruenorth,adestinationinmind:creatinga

thrivingandworld-changingbusiness.Icalthatastartup’svision.

Toachievethatvision,startupsemployastrategy,whichincludesa

businessmodel,aproductroadmap,apointofviewaboutpartners

andcompetitors,andideasaboutwhothecustomerwilbe.The

productistheendresultofthisstrategy(seethecharton

thispage).

Productschangeconstantlythroughtheprocessofoptimization,

whatIcaltuningtheengine.

Lessfrequently,thestrategymayhave

tochange(caledapivot).However,theoverarchingvisionrarely

changes.Entrepreneursarecommitedtoseeingthestartupthrough

tothatdestination.Everysetbackisanopportunityforlearning

howtogetwheretheywanttogo(seethechartbelow).

Inreallife,astartupisaportfolioofactivities.Alotishappening

simultaneously:theengineisrunning,acquiringnewcustomersand

servingexistingones;wearetuning,tryingtoimproveour

product,

marketing,andoperations;andwearesteering,decidingifand

whentopivot.Thechalengeofentrepreneurshipistobalanceal

theseactivities.Eventhesmaleststartupfacesthechalengeof

supportingexistingcustomerswhiletryingtoinnovate.Eventhe

mostestablishedcompanyfacestheimperativetoinvestin

innovationlestitbecomeobsolete.Ascompaniesgrow,what

changesisthemixoftheseactivitiesinthecompany’s

portfolioof

work.

Entrepreneurshipismanagement.Andyet,imagineamodern

managerwhoistaskedwithbuildinganewproductinthecontext

ofanestablishedcompany.Imaginethatshegoesbackto

her

company’schiefnancialocer(CFO)ayearlaterandsays,“We

havefailedtomeetthegrowthtargetswepredicted.Infact,we

havealmostnonewcustomersandnonewrevenue.However,we

havelearnedanincredibleamountandareonthecuspofa

breakthroughnewlineofbusiness.Alweneedisanotheryear.”

Mostofthetime,thiswouldbethelastreportthisintrapreneur

wouldgiveheremployer.Thereasonisthatingeneral

management,afailuretodeliverresultsisduetoeitherafailureto

planadequatelyorafailuretoexecuteproperly.Bothare

signicantlapses,yetnewproductdevelopmentinourmodern

economyroutinelyrequiresexactlythiskindoffailureontheway

togreatness.IntheLeanStartupmovement,wehavecometo

realizethattheseinternalinnovatorsareactualyentrepreneurs,too,

andthatentrepreneurialmanagementcanhelpthemsucceed;thisis

thesubjectofthenextchapter.

2DEFINE

WHO,EXACTLY,ISANENTREPRENEUR?

AsItraveltheworldtalkingabouttheLeanStartup,I’m

consistentlysurprisedthatImeetpeopleintheaudiencewho

seemoutofplace.Inadditiontothemoretraditional

startup

entrepreneursImeet,thesepeoplearegeneralmanagers,mostly

workinginverylargecompanies,whoaretaskedwithcreatingnew

venturesorproductinnovations.Theyareadeptatorganizational

politics:theyknowhowtoformautonomousdivisionswith

separateprotandlossstatements(P&Ls)andcanshield

controversialteamsfromcorporatemeddling.Thebiggestsurprise

isthattheyarevisionaries.LikethestartupfoundersI

haveworked

withforyears,theycanseethefutureoftheirindustriesandare

preparedtotakeboldriskstoseekoutnewandinnovative

solutionstotheproblemstheircompaniesface.

Mark,forexample,isamanagerforanextremely

largecompany

whocametooneofmylectures.Heistheleaderofadivisionthat

recentlyhadbeencharteredtobringhiscompanyintothetwenty-

rstcenturybybuildinganewsuiteofproductsdesignedtotake

advantageoftheInternet.Whenhecametotalktomeafterward,I

startedtogivehimthestandardadviceabouthowtocreate

innovationteamsinsidebigcompanies,andhestoppedmein

midstream:“Yeah,I’vereadTheInnovator’sDilemma.1

I’vegotthat

altakencareof.”Hewasalong-termemployeeofthecompany

andasuccessfulmanagertoboot,somanaginginternalpoliticswas

andasuccessfulmanagertoboot,somanaginginternalpoliticswas

theleastofhisproblems.Ishouldhaveknown;hissuccesswasa

testamenttohisabilitytonavigatethecompany’scorporate

policies,personnel,andprocessestogetthingsdone.

Next,Itriedtogivehimsomeadviceaboutthefuture,aboutcool

newhighlyleveragedproductdevelopmenttechnologies.He

interruptedmeagain:“Right.IknowalabouttheInternet,andI

haveavisionforhowourcompanyneedstoadapttoitordie.”

Markhasaltheentrepreneurialprerequisites

nailed—proper

teamstructure,goodpersonnel,astrongvisionforthefuture,and

anappetiteforrisktaking—andsoitnalyoccurredtometoask

whyhewascomingtomeforadvice.Hesaid,“It’sasifwehaveal

oftherawmaterials:kindling,wood,paper,int,evensome

sparks.Butwhere’sthere?”Thetheoriesofmanagementthat

Markhadstudiedtreatinnovationlikea“blackbox”byfocusingon

thestructurescompaniesneedtoputinplacetoform

internal

startupteams.ButMarkfoundhimselfworkinginsidetheblack

box—andinneedofguidance.

WhatMarkwasmissingwasaprocessforconvertingtheraw

materialsofinnovationinto

real-worldbreakthroughsuccesses.

Onceateamissetup,whatshoulditdo?Whatprocessshouldit

use?Howshoulditbeheldaccountabletoperformance

milestones?ThesearequestionstheLeanStartupmethodologyis

designedtoanswer.

Mypoint?MarkisanentrepreneurjustlikeaSiliconValeyhigh-

techfounderwithagaragestartup.Heneedstheprinciplesofthe

LeanStartupjustasmuchasthefolksIthoughtofasclassic

entrepreneursdo.

Entrepreneurswhooperateinsideanestablishedorganization

sometimesarecaled“intrapreneurs”becauseofthespecial

circumstancesthatatendbuildingastartupwithinalarger

company.AsIhaveappliedLeanStartupideasinanever-widening

varietyofcompaniesandindustries,Ihavecometobelievethat

intrapreneurshavemuchmoreincommonwiththerestofthe

communityofentrepreneursthanmostpeoplebelieve.

Thus,when

Iusethetermentrepreneur,Iamreferringtothewholestartup

ecosystemregardlessofcompanysize,sector,orstageof

ecosystemregardlessofcompanysize,sector,orstageof

development.

Thisbookisforentrepreneursofalstripes:fromyoung

visionarieswithlitlebackingbutgreatideastoseasoned

visionarieswithinlargercompaniessuchasMark—andthepeople

whoholdthemaccountable.

IFI’MANENTREPRENEUR,WHAT’SASTARTUP?

TheLeanStartupisasetofpracticesforhelpingentrepreneurs

increasetheiroddsofbuildingasuccessfulstartup.Tosettherecord

straight,it’simportanttodefinewhatastartupis:

Astartupisahumaninstitutiondesignedtocreateanew

productorserviceunderconditionsofextremeuncertainty.

I’vecometorealizethatthemostimportantpartofthis

denitioniswhatitomits.Itsaysnothingaboutsizeofthe

company,theindustry,orthesectoroftheeconomy.Anyonewhois

creatinganewproductorbusinessunderconditionsofextreme

uncertaintyisanentrepreneurwhetherheorsheknowsitornot

andwhetherworkinginagovernmentagency,a

venture-backed

company,anonprot,oradecidedlyfor-protcompanywith

financialinvestors.

Let’stakealookateachofthepieces.Thewordinstitution

connotesbureaucracy,process,evenlethargy.How

canthatbepart

ofastartup?Yetsuccessfulstartupsarefulofactivitiesassociated

withbuildinganinstitution:hiringcreativeemployees,coordinating

theiractivities,andcreatingacompanyculturethatdeliversresults.

Weoftenlosesightofthefactthatastartupisnotjustabouta

product,atechnologicalbreakthrough,orevenabriliantidea.A

startupisgreaterthanthesumofitsparts;itisanacutelyhuman

enterprise.

Thefactthatastartup’sproductorserviceisanewinnovationis

alsoanessentialpartofthedenitionandatrickyparttoo.Iprefer

tousethebroadestdenitionofproduct,onethatencompassesany

tousethebroadestdenitionofproduct,onethat

encompassesany

sourceofvalueforthepeoplewhobecomecustomers.Anything

thosecustomersexperiencefromtheirinteractionwithacompany

shouldbeconsideredpartofthatcompany’sproduct.Thisistrueof

agrocerystore,ane-commercewebsite,aconsultingservice,anda

nonprotsocialserviceagency.Ineverycase,theorganizationis

dedicatedtouncoveringanewsourceofvalueforcustomersand

caresabouttheimpactofitsproductonthosecustomers.

It’salsoimportantthatthewordinnovationbeunderstood

broadly.Startupsusemanykindsofinnovation:novelscientic

discoveries,repurposinganexistingtechnologyforanewuse,

devisinganewbusinessmodelthatunlocksvaluethat

washidden,

orsimplybringingaproductorservicetoanewlocationora

previouslyunderservedsetofcustomers.Inalthesecases,

innovationisattheheartofthecompany’ssuccess.

Thereisonemoreimportantpartofthisdefinition:the

contextin

whichtheinnovationhappens.Mostbusinesses—largeandsmal

alike—areexcludedfromthiscontext.Startupsaredesignedto

confrontsituationsofextremeuncertainty.Toopenupanew

businessthatisanexactcloneofanexistingbusinessaltheway

downtothebusinessmodel,pricing,targetcustomer,andproduct

maybeanatractiveeconomicinvestment,butitisnotastartup

becauseitssuccessdependsonlyonexecution—somuch

sothatthis

successcanbemodeledwithhighaccuracy.(Thisiswhysomany

smalbusinessescanbenancedwithsimplebankloans;thelevel

ofriskanduncertaintyisunderstoodwelenoughthataloanocer

canassessitsprospects.)

Mosttoolsfromgeneralmanagementarenotdesignedtoourish

intheharshsoilofextremeuncertaintyinwhichstartupsthrive.

Thefutureisunpredictable,customersfaceagrowingarrayof

alternatives,andthepaceofchangeiseverincreasing.Yetmost

startups—ingaragesandenterprisesalike—stilaremanagedby

usingstandardforecasts,productmilestones,anddetailedbusiness

plans.

THESNAPTAXSTORY

In2009,astartupdecidedtotrysomethingrealyaudacious.They

wantedtoliberatetaxpayersfromexpensivetaxstoresby

automatingtheprocessofcolectinginformationtypicalyfoundon

W-2forms(theend-of-year

statementthatmostemployeesreceive

fromtheiremployerthatsummarizestheirtaxablewagesforthe

year).Thestartupquicklyranintodiculties.Eventhoughmany

consumershadaccesstoaprinter/scannerintheirhomeoroce,

fewknewhowtousethosedevices.Afternumerousconversations

withpotentialcustomers,theteamlitupontheideaofhaving

customerstakephotographsoftheformsdirectlyfromtheircel

phone.Intheprocessoftestingthisconcept,

customersasked

somethingunexpected:woulditbepossibletonishthewholetax

returnrightonthephoneitself?

Thatwasnotaneasytask.Traditionaltaxpreparationrequires

consumerstowadethrough

hundredsofquestions,manyforms,and

alotofpaperwork.Thisstartuptriedsomethingnovelbydeciding

toshipanearlyversionofitsproductthatcoulddomuchlessthan

acompletetaxpackage.Theinitialversionworkedonlyfor

consumerswithaverysimplereturntole,anditworkedonlyin

California.

Insteadofhavingconsumersloutacomplexform,they

alowedthecustomerstousethephone’scameratotakeapicture

oftheirW-2forms.From

thatsinglepicture,thecompany

developedthetechnologytocompileandlemostofthe1040EZ

taxreturn.Comparedwiththedrudgeryoftraditionaltaxling,the

newproduct—caledSnapTax—providesamagicalexperience.

Fromitsmodestbeginning,SnapTaxgrewintoasignicantstartup

successstory.Itsnationwidelaunchin2011showedthatcustomers

lovedit,tothetuneofmorethan350,000downloadsintherst

threeweeks.

Thisisthekindofamazinginnovationyou’dexpectfromanew

startup.

However,thenameofthiscompanymaysurpriseyou.SnapTax

wasdevelopedbyIntuit,America’slargestproducerofnance,tax,

andaccountingtoolsforindividualsandsmalbusinesses.With

andaccountingtoolsforindividualsandsmalbusinesses.With

morethan7,700employeesandannualrevenuesinthebilions,

Intuitisnotatypicalstartup.2

TheteamthatbuiltSnapTaxdoesn’tlookmuchlikethe

archetypalimageofentrepreneurseither.Theydon’tworkina

garageoreatramennoodles.Theircompanydoesn’tlackfor

resources.Theyarepaidafulsalaryandbenefits.Theycomeintoa

regularoficeeveryday.Yettheyareentrepreneurs.

Storieslikethisonearenotnearlyascommoninsidelarge

corporationsastheyshouldbe.Afteral,SnapTaxcompetesdirectly

withoneofIntuit’sagshipproducts:thefulyfeaturedTurboTax

desktopsoftware.Usualy,companieslikeIntuitfalintothetrap

describedinClaytonChristensten’sTheInnovator’sDilemma:they

areverygoodatcreatingincrementalimprovementstoexisting

productsandservingexistingcustomers,which

Christensencaled

sustaininginnovation,butstruggletocreatebreakthroughnew

products—disruptiveinnovation—thatcancreatenewsustainable

sourcesofgrowth.

OneremarkablepartoftheSnapTaxstoryiswhatthe

team

leaderssaidwhenIaskedthemtoaccountfortheirunlikelysuccess.

Didtheyhiresuperstarentrepreneursfromoutsidethecompany?

No,theyassembledateamfromwithinIntuit.Didtheyface

constantmeddlingfromseniormanagement,whichisthebaneof

innovationteamsinmanycompanies?No,theirexecutivesponsors

createdan“islandoffreedom”wheretheycouldexperimentas

necessary.Didtheyhaveahugeteam,alargebudget,

andlotsof

marketingdolars?Nope,theystartedwithateamoffive.

WhatalowedtheSnapTaxteamtoinnovatewasnottheirgenes,

destiny,orastrologicalsignsbutaprocessdeliberatelyfacilitatedby

Intuit’sseniormanagement.Innovationisabotoms-up,

decentralized,andunpredictablething,butthatdoesn’tmeanit

cannotbemanaged.Itcan,buttodosorequiresanew

managementdiscipline,onethatneedstobemasterednotjustby

practicingentrepreneursseekingtobuildthenextbigthingbutalso

bythepeoplewhosupportthem,nurturethem,andholdthem

accountable.Inotherwords,cultivatingentrepreneurshipisthe

accountable.Inotherwords,cultivatingentrepreneurship

isthe

responsibilityofseniormanagement.Today,acuting-edge

companysuchasIntuitcanpointtosuccessstorieslikeSnapTax

becauseithasrecognizedtheneedforanewmanagement

paradigm.Thisisa

realizationthatwasyearsinthemaking.3

ASEVEN-THOUSAND-PERSONLEANSTARTUP

In1983,Intuit’sfounder,thelegendaryentrepreneurScotCook,

hadtheradicalnotion(withcofounderTomProulx)thatpersonal

accountingshouldhappenbycomputer.Theirsuccesswasfarfrom

inevitable;theyfacednumerouscompetitors,anuncertainfuture,

andaninitialytinymarket.Adecadelater,thecompanywent

publicandsubsequentlyfendedowel-publicizedat

acksfrom

largerincumbents,includingthesoftwarebehemothMicrosoft.

PartlywiththehelpoffamedventurecapitalistJohnDoerr,Intuit

becameafulydiversiedenterprise,amemberoftheFortune

1000thatnowprovidesdozensofmarket-leadingproductsacross

itsmajordivisions.

Thisisthekindofentrepreneurialsuccesswe’reusedtohearing

about:aragtagteamofunderdogswhoeventualyachievefame,

acclaim,andsignificantriches.

Flash-forwardto2002.Cookwasfrustrated.Hehadjusttabulated

tenyearsofdataonalofIntuit’snewproductintroductionsand

hadconcludedthatthecompanywasgetingameaslyreturnonits

massiveinvestments.Simplyput,toomanyofitsnewproducts

werefailing.Bytraditionalstandards,Intuitisanextremelywel-

managedcompany,butasScotdugintotherootcausesofthose

failures,hecametoadicultconclusion:theprevailing

managementparadigmheandhiscompanyhadbeenpracticing

wasinadequatetotheproblemofcontinuousinnovationinthe

moderneconomy.

Byfal2009,CookhadbeenworkingtochangeIntuit’s

managementculturefor

severalyears.Hecameacrossmyearly

workontheLeanStartupandaskedmetogiveatalkatIntuit.In

SiliconValeythisisnotthekindofinvitationyouturndown.I

SiliconValeythisisnotthekindofinvitationyouturndown.I

admitIwascurious.IwasstilatthebeginningofmyLeanStartup

journeyanddidn’thavemuchappreciationforthechalengesfaced

byaFortune1000companylikehis.

MyconversationswithCookandIntuitchiefexecutiveocer

(CEO)BradSmithweremyinitiationintothethinkingofmodern

generalmanagers,whostrugglewithentrepreneurshipeverybitas

muchasdoventurecapitalistsandfoundersinagarage.Tocombat

thesechalenges,ScotandBradaregoingbackto

Intuit’sroots.

Theyareworkingtobuildentrepreneurshipandrisktakingintoal

theirdivisions.

Forexample,consideroneofIntuit’sagshipproducts.Because

TurboTaxdoesmostofitssalesaroundtaxseasoninthe

United

States,itusedtohaveanextremelyconservativeculture.Overthe

courseoftheyear,themarketingandproductteamswould

conceiveonemajorinitiativethatwouldberoledoutjustintime

fortaxseason.Nowtheytestovervehundreddierentchangesin

atwo-and-a-half-monthtaxseason.They’rerunninguptoseventy

dierenttestsperweek.Theteamcanmakeachangeliveonits

websiteonThursday,runitovertheweekend,readthe

resultson

Monday,andcometoconclusionsstartingTuesday;thenthey

rebuildnewtestsonThursdayandlaunchthenextsetonThursday

night.

AsScotputit,“Boy,theamountoflearningtheyget

isjust

immensenow.Andwhatitdoesisdevelopentrepreneurs,because

whenyouhaveonlyonetest,youdon’thaveentrepreneurs,you

havepoliticians,becauseyouhavetosel.Outofahundredgood

ideas,you’vegottoselyouridea.Soyoubuildupasocietyof

politiciansandsalespeople.Whenyouhavevehundredtests

you’rerunning,theneverybody’sideascanrun.Andthenyoucreate

entrepreneurswhorunandlearnandcanretestand

relearnas

opposedtoasocietyofpoliticians.Sowe’retryingtodrivethat

throughoutourorganization,usingexampleswhichhavenothingto

dowithhightech,likethewebsiteexample.Everybusinesstoday

hasawebsite.Youdon’thavetobehightechtousefast-cycle

testing.”

Thiskindofchangeishard.Afteral,thecompanyhasa

Thiskindofchangeishard.Afteral,thecompanyhasa

signicantnumberofexistingcustomerswhocontinueto

demand

exceptionalserviceandinvestorswhoexpectsteady,growing

returns.

Scotsays,

Itgoesagainstthegrainofwhatpeoplehavebeentaughtin

businessandwhatleadershavebeentaught.Theproblem

isn’twiththeteamsortheentrepreneurs.Theylovethe

chancetoquicklygettheirbabyoutintothemarket.They

lovethechancetohavethecustomervoteinsteadofthe

suitsvoting.Therealissueiswiththeleadersandthe

middlemanagers.Therearemanybusinessleaderswho

havebeensuccessfulbecauseofanalysis.Theythinkthey’re

analysts,andtheirjobistodogreatplanningandanalyzing

andhaveaplan.

Theamountoftimeacompanycancountonholdingonto

marketleadershiptoexploititsearlierinnovationsisshrinking,and

thiscreatesanimperativeforeventhemostentrenchedcompanies

toinvestininnovation.Infact,Ibelieveacompany’sonly

sustainablepathtolong-termeconomicgrowthistobuildan

“innovationfactory”thatusesLeanStartuptechniquestocreate

disruptiveinnovationsonacontinuousbasis.Inother

words,

establishedcompaniesneedtogureouthowtoaccomplishwhat

ScotCookdidin1983,butonanindustrialscaleandwithan

establishedcohortofmanagerssteepedintraditionalmanagement

culture.

Everthemaverick,Cookaskedmetoputtheseideastothetest,

andsoIgaveatalkthatwassimulcasttoalseventhousand–plus

IntuitemployeesduringwhichIexplainedthetheoryoftheLean

Startup,repeatingmydenition:anorganizationdesignedtocreate

newproductsandservicesunderconditionsofextremeuncertainty.

Whathappenednextisetchedinmymemory.CEOBradSmith

hadbeensitingnexttomeasIspoke.WhenIwasdone,he

gotup

andsaidbeforealofIntuit’semployees,“Folks,listenup.You

andsaidbeforealofIntuit’semployees,“Folks,listenup.You

heardEric’sdefinitionofastartup.Ithasthreeparts,andwehereat

Intuitmatchalthreepartsofthatdefinition.”

ScotandBradareleaderswhorealizethatsomethingnewis

neededinmanagementthinking.Intuitisproofthatthiskindof

thinkingcanworkinestablishedcompanies.Bradexplainedtome

howtheyholdthemselvesaccountablefortheirnewinnovation

eortsbymeasuringtwothings:thenumberofcustomersusing

productsthatdidn’texistthreeyearsagoandthepercentageof

revenuecomingfromoferingsthatdidnotexistthree

yearsago.

Undertheoldmodel,ittookanaverageof5.5yearsfora

successfulnewproducttostartgenerating$50milioninrevenue.

Bradexplainedtome,“We’vegenerated$50milioninoerings

thatdidnotexisttwelve

monthsagointhelastyear.Nowit’snot

oneparticularoering.It’sacombinationofawholebunchof

innovationhappening,butthat’sthekindofstuthat’screating

someenergyforus,thatwethinkwecantrulyshort-circuitthe

rampbykilingthingsthatdon’tmakesensefastanddoubling

downontheonesthatdo.”ForacompanyaslargeasIntuit,these

aremodestresultsandearlydays.Theyhavedecadesoflegacy

systemsandlegacythinkingtoovercome.However,their

leadership

inadoptingentrepreneurialmanagementisstartingtopayof.

Leadershiprequirescreatingconditionsthatenableemployeesto

dothekindsofexperimentationthatentrepreneurshiprequires.For

example,changesinTurboTaxenabledtheIntuitteamtodevelop

vehundredexperimentspertaxseason.Beforethat,marketers

withgreatideascouldn’thavedonethosetestsevenifthey’d

wantedto,becausetheydidn’thaveasysteminplace

through

whichtochangethewebsiterapidly.Intuitinvestedinsystemsthat

increasedthespeedatwhichtestscouldbebuilt,deployed,and

analyzed.

AsCooksays,“Developingtheseexperimentation

systemsisthe

responsibilityofseniormanagement;theyhavetobeputinbythe

leadership.It’smovingleadersfromplayingCaesarwiththeir

thumbsupanddownoneveryideato—instead—putinginthe

cultureandthesystemssothatteamscanmoveandinnovateatthe

speedoftheexperimentationsystem.”

3LEARN

Asanentrepreneur,nothingplaguedmemorethanthequestion

ofwhethermycompanywas

makingprogresstowardcreatinga

successfulbusiness.Asanengineerandlaterasamanager,Iwas

accustomedtomeasuringprogressbymakingsureourwork

proceededaccordingtoplan,washighquality,andcostaboutwhat

wehadprojected.

Aftermanyyearsasanentrepreneur,Istartedtoworryabout

measuringprogressinthisway.Whatifwefoundourselves

buildingsomethingthatnobodywanted?Inthatcasewhatdidit

materifwediditontimeandonbudget?WhenIwenthomeat

theendofaday’swork,theonlythingsIknewforsurewerethatI

hadkeptpeoplebusyandspentmoneythatday.Ihopedthatmy

team’seortstookusclosertoourgoal.Ifwewoundup

takinga

wrongturn,I’dhavetotakecomfortinthefactthatatleastwe’d

learnedsomethingimportant.

Unfortunately,“learning”istheoldestexcuseinthebookfora

failureofexecution.It’swhatmanagersfalbackonwhen

theyfail

toachievetheresultswepromised.Entrepreneurs,underpressure

tosucceed,arewildlycreativewhenitcomestodemonstrating

whatwehavelearned.Wecanaltelagoodstorywhenourjob,

career,orreputationdependsonit.

However,learningiscoldcomforttoemployeeswhoare

folowinganentrepreneurintotheunknown.Itiscoldcomfortto

theinvestorswhoalocatepreciousmoney,time,andenergyto

entrepreneurialteams.Itiscoldcomforttotheorganizations—large

entrepreneurialteams.Itiscoldcomforttotheorganizations—large

andsmal—thatdependonentrepreneurialinnovationtosurvive.

Youcan’ttakelearningtothebank;youcan’tspenditor

investit.

Youcannotgiveittocustomersandcannotreturnittolimited

partners.Isitanywonderthatlearninghasabadnamein

entrepreneurialandmanagerialcircles?

Yetifthefundamentalgoal

ofentrepreneurshipistoengagein

organizationbuildingunderconditionsofextremeuncertainty,its

mostvitalfunctionislearning.Wemustlearnthetruthaboutwhich

elementsofourstrategyareworkingtorealizeourvisionand

whicharejustcrazy.Wemustlearnwhatcustomersrealywant,not

whattheysaytheywantorwhatwethinktheyshouldwant.We

mustdiscoverwhetherweareonapaththatwilleadtogrowinga

sustainablebusiness.

IntheLeanStartupmodel,wearerehabilitatinglearningwitha

conceptIcalvalidatedlearning.Validatedlearningisnotafter-the-

factrationalizationoragoodstorydesignedtohidefailure.Itisa

rigorousmethodfordemonstratingprogresswhen

oneisembedded

inthesoilofextremeuncertaintyinwhichstartupsgrow.Validated

learningistheprocessofdemonstratingempiricalythatateamhas

discoveredvaluabletruthsaboutastartup’spresentandfuture

businessprospects.Itismoreconcrete,moreaccurate,andfaster

thanmarketforecastingorclassicalbusinessplanning.Itisthe

principalantidotetothelethalproblemofachievingfailure:

successfulyexecutingaplanthatleadsnowhere.

VALIDATEDLEARNINGATIMVU

Letmeilustratethiswithanexamplefrommycareer.Many

audienceshaveheardmerecountthestoryofIMVU’sfoundingand

themanymistakeswemadeindevelopingourrstproduct.I’l

nowelaborateononeofthosemistakestoilustratevalidated

learningclearly.

ThoseofusinvolvedinthefoundingofIMVUaspiredtobe

seriousstrategicthinkers.Eachofushadparticipatedinprevious

venturesthathadfailed,andwewereloathtorepeatthat

venturesthathadfailed,andwewereloathtorepeatthat

experience.Ourmainconcernsintheearlydaysdealtwiththe

folowingquestions:Whatshouldwebuildandforwhom?What

marketcouldweenteranddominate?Howcouldwebuilddurable

valuethatwouldnotbesubjecttoerosionbycompetition?1

BriliantStrategy

Wedecidedtoentertheinstantmessaging(IM)market.In2004,

thatmarkethadhundredsofmilionsofconsumersactively

participatingworldwide.However,themajorityofthecustomers

whowereusingIMproductswerenotpayingfortheprivilege.

Instead,largemediaandportalcompaniessuchas

AOL,Microsoft,

andYahoo!operatedtheirIMnetworksasalossleaderforother

serviceswhilemakingmodestamountsofmoneythrough

advertising.

IMisanexampleofamarketthatinvolvesstrongnetwork

efects.Likemostcommunicationnetworks,IMisthoughttofolow

Metcalfe’slaw:thevalueofanetworkasawholeisproportionalto

thesquareofthenumberofparticipants.Inotherwords,themore

peopleinthenetwork,themorevaluablethenetwork.

Thismakes

intuitivesense:thevaluetoeachparticipantisdrivenprimarilyby

howmanyotherpeopleheorshecancommunicatewith.Imagine

aworldinwhichyouowntheonlytelephone;itwouldhaveno

value.Onlywhenotherpeoplealsohaveatelephonedoesit

becomevaluable.

In2004,theIMmarketwaslockedupbyahandfulof

incumbents.Thetopthreenetworkscontroledmorethan80

percentoftheoveralusage

andwereintheprocessof

consolidatingtheirgainsinmarketshareattheexpenseofa

numberofsmalerplayers.2Thecommonwisdomwasthatitwas

moreorlessimpossibletobringanewIMnetworktomarket

withoutspendinganextraordinaryamountofmoneyonmarketing.

Thereasonforthatwisdomissimple.Becauseofthepowerof

networkeects,IMproductshavehighswitchingcosts.Toswitch

fromonenetworktoanother,customerswouldhaveto

convince

fromonenetworktoanother,customerswouldhavetoconvince

theirfriendsandcoleaguestoswitchwiththem.Thisextrawork

forcustomerscreatesabarriertoentryintheIMmarket:withal

consumerslockedintoanincumbent’sproduct,thereareno

customersleftwithwhomtoestablishabeachhead.

AtIMVUwesetledonastrategyofbuildingaproductthat

wouldcombinethelargemassappealoftraditionalIMwiththe

highrevenuepercustomerofthree-dimensional(3D)videogames

andvirtualworlds.Becauseofthenearimpossibilityofbringinga

newIMnetworktomarket,wedecidedtobuildanIMadd-on

productthatwouldinteroperatewiththeexisting

networks.Thus,

customerswouldbeabletoadopttheIMVUvirtualgoodsand

avatarcommunicationtechnologywithouthavingtoswitchIM

providers,learnanewuserinterface,and—mostimportant—bring

theirfriendswiththem.

Infact,wethoughtthislastpointwasessential.Fortheadd-on

producttobeuseful,customerswouldhavetouseitwiththeir

existingfriends.Everycommunicationwouldcomeembeddedwith

aninvitationtojoinIMVU.Ourproductwouldbeinherentlyviral,

spreadingthroughouttheexistingIMnetworkslikeanepidemic.To

achievethatviralgrowth,itwasimportantthatouradd-onproduct

supportasmanyoftheexistingIMnetworksas

possibleandwork

onalkindsofcomputers.

SixMonthstoLaunch

Withthisstrategyinplace,mycofoundersandIbeganaperiodof

intensework.Asthechieftechnologyocer,itwasmy

responsibility,amongother

things,towritethesoftwarethatwould

supportIMinteroperabilityacrossnetworks.MycofoundersandI

workedformonths,putingincrazyhoursstrugglingtogetourrst

productreleased.Wegaveourselvesaharddeadlineofsixmonths

—180days—tolaunchtheproductandatractourrstpaying

customers.Itwasagruelingschedule,butweweredeterminedto

launchontime.

Theadd-onproductwassolargeandcomplexandhadsomany

Theadd-onproductwassolargeandcomplexandhadsomany

movingpartsthatwehadtocutalotofcornerstogetitdoneon

time.Iwon’tmincewords:therstversionwasterrible.Wespent

endlesshoursarguingaboutwhichbugstoxandwhich

wecould

livewith,whichfeaturestocutandwhichtotrytocramin.Itwasa

wonderfulandterrifyingtime:wewerefulofhopeaboutthe

possibilitiesforsuccessandfuloffearabouttheconsequencesof

shippingabadproduct.

Personaly,Iwasworriedthatthelowqualityoftheproduct

wouldtarnishmyreputationasanengineer.PeoplewouldthinkI

didn’tknowhowtobuildaqualityproduct.Alofusfeared

tarnishingtheIMVUbrand;

afteral,wewerechargingpeople

moneyforaproductthatdidn’tworkverywel.Wealenvisioned

thedamningnewspaperheadlines:“IneptEntrepreneursBuild

DreadfulProduct.”

Aslaunchdayapproached,

ourfearsescalated.Inoursituation,

manyentrepreneurialteamsgiveintofearandpostponethelaunch

date.AlthoughIunderstandthisimpulse,Iamgladwepersevered,

sincedelaypreventsmanystartupsfromgetingthefeedbackthey

need.Ourpreviousfailuresmadeusmoreafraidofanother,even

worse,outcomethanshippingabadproduct:buildingsomething

thatnobodywants.Andso,teethclenchedandapologiesatthe

ready,wereleasedourproducttothepublic.

Launch

Andthen—nothinghappened!Itturnedoutthatourfearswere

unfounded,becausenobodyeventriedourproduct.AtrstIwas

relievedbecauseatleastnobodywasndingouthowbadthe

productwas,butsoonthatgavewaytoseriousfrustration.Afteral

thehourswehadspentarguingaboutwhichfeaturestoincludeand

whichbugstox,ourvaluepropositionwassofarothat

customersweren’tgetingfarenoughintotheexperiencetondout

howbadourdesignchoiceswere.Customerswouldn’teven

downloadourproduct.

Overtheensuingweeksandmonths,welaboredtomakethe

Overtheensuingweeksandmonths,welaboredtomakethe

productbeter.Webroughtinasteadyowofcustomersthrough

ouronlineregistrationanddownloadprocess.Wetreatedeach

day’scustomersasabrand-newreportcardtoletusknowhowwe

weredoing.Weeventualylearnedhowtochangethe

product’s

positioningsothatcustomersatleastwoulddownloadit.Wewere

makingimprovementstotheunderlyingproductcontinuously,

shippingbugxesandnewchangesdaily.However,despiteour

besteorts,wewereabletopersuadeonlyapatheticalysmal

numberofpeopletobuytheproduct.

Inretrospect,onegooddecisionwemadewastosetclear

revenuetargetsforthoseearlydays.Intherstmonthweintended

tomake$300intotalrevenue,andwedid—barely.Manyfriends

andfamilymemberswereasked(okay,begged).Eachmonthour

smalrevenuetargetsincreased,rstto$350andthento$400.As

theyrose,ourstrugglesincreased.Wesoonranoutof

friendsand

family;ourfrustrationescalated.Weweremakingtheproduct

betereveryday,yetourcustomers’behaviorremainedunchanged:

theystilwouldn’tuseit.

Ourfailuretomovethenumbersproddedusto

accelerateour

eortstobringcustomersintoouroceforin-personinterviews

andusabilitytests.Thequantitativetargetscreatedthemotivation

toengageinqualitativeinquiryandguidedusinthequestionswe

asked;thisisapaternwe’lseethroughoutthisbook.

IwishIcouldsaythatIwastheonetorealizeourmistakeand

suggestthesolution,butintruth,Iwasthelasttoadmitthe

problem.Inshort,ourentirestrategicanalysisofthemarketwas

uterlywrong.Weguredthisoutempiricaly,through

experimentation,ratherthanthroughfocusgroupsormarket

research.Customerscouldnotteluswhattheywanted;most,after

al,hadneverheardof3Davatars.Instead,theyrevealedthetruth

throughtheiractionorinactionaswestruggledtomakethe

productbeter.

TalkingtoCustomers

Outofdesperation,wedecidedtotalktosomepotentialcustomers.

Webroughtthemintoouroce,andsaid,“Trythisnew

product;

it’sIMVU.”Ifthepersonwasateenager,aheavyuserofIM,ora

techearlyadopter,heorshewouldengagewithus.Inconstrast,if

itwasamainstreamperson,theresponsewas,“Right.Soexactly

whatwouldyoulikemetodo?”We’dgetnowherewiththe

mainstreamgroup;theythoughtIMVUwastooweird.

Imagineaseventeen-year-oldgirlsitingdownwithustolookat

thisproduct.Shechoosesheravatarandsays,“Oh,thisis

realy

fun.”She’scustomizingtheavatar,decidinghowshe’sgoingtolook.

Thenwesay,“Alright,it’stimetodownloadtheinstantmessaging

add-on,”andsheresponds,“What’sthat?”

“Wel,it’sthisthingthat

interoperateswiththeinstantmessaging

client.”She’slookingatusandthinking,“I’veneverheardofthat,

myfriendshaveneverheardofthat,whydoyouwantmetodo

that?”Itrequiredalotofexplanation;aninstantmessagingadd-on

wasnotaproductcategorythatexistedinhermind.

Butsinceshewasintheroomwithus,wewereabletotalkher

intodoingit.Shedownloadstheproduct,andthenwesay,“Okay,

inviteoneofyourfriendstochat.”Andshesays,“Noway!”Wesay,

“Whynot?”Andshesays,“Wel,Idon’tknowifthisthingiscool

yet.Youwantmetoriskinvitingoneofmyfriends?Whatarethey

goingtothinkofme?Ifitsucks,they’regoingtothinkIsuck,

right?”Andwesay,“No,no,it’sgoingtobesomuchfun

onceyou

getthepersoninthere;it’sasocialproduct.”Shelooksatus,her

faceledwithdoubt;youcanseethatthisisadealbreaker.Of

course,thersttimeIhadthatexperience,Isaid,“It’salright,it’s

justthisoneperson,sendherawayandgetmeanewone.”Then

thesecondcustomercomesinandsaysthesamething.Thenthe

thirdcustomercomesin,andit’sthesamething.Youstarttosee

paterns,andnomaterhowstubbornyouare,there’s

obviously

somethingwrong.

Customerskeptsaying,“Iwanttouseitbymyself.Iwanttotryit

outrsttoseeifit’srealycoolbeforeIinviteafriend.”Ourteam

wasfromthevideogameindustry,soweunderstood

whatthat

meant:single-playermode.Sowebuiltasingle-playerversion.

meant:single-playermode.Sowebuiltasingle-playerversion.

We’dbringnewcustomersintoouroce.They’dcustomizethe

avataranddownloadtheproductlikebefore.Thentheywouldgo

intosingle-playermode,andwe’dsay,“Playwithyouravatarand

dressitup;checkoutthecoolmovesitcanmake.”Folowedby,

“Okay,youdidthatbyyourself;nowit’stimeto

inviteoneofyour

friends.”Youcanseewhat’scoming.They’dsay,“Noway!Thisisn’t

cool.”Andwe’dsay,“Wel,wetoldyouitwasn’tgoingtobecool!

Whatisthepointofasingle-playerexperienceforasocial

product?”See,wethoughtwe

shouldgetagoldstarjustfor

listeningtoourcustomers.Exceptourcustomersstildidn’tlikethe

product.Theywouldlookatusandsay,“Listen,oldman,youdon’t

understand.Whatisthedealwiththiscrazybusinessofinviting

friendsbeforeIknowifit’scool?”Itwasatotaldealbreaker.

Outoffurtherdesperation,weintroducedafeaturecaled

ChatNowthatalowsyoutopushabutonandberandomly

matchedwithsomebodyelseanywhereintheworld.The

only

thingyouhaveincommonisthatyoubothpushedthebutonat

thesametime.Alofasudden,inourcustomerservicetests,people

weresaying,“Oh,thisisfun!”

Sowe’dbringthemin,

they’duseChatNow,andmaybethey

wouldmeetsomebodytheythoughtwascool.They’dsay,“Hey,

thatguywasneat;Iwanttoaddhimtomybuddylist.Where’smy

buddylist?”Andwe’dsay,“Oh,no,youdon’twantanewbuddy

list;youwanttouseyourregularAOLbuddylist.”Remember,this

washowweplannedtoharnesstheinteroperabilitythatwould

leadtonetworkeectsandviralgrowth.Picturethecustomer

lookingatus,asking,“Whatdoyouwantmetodo

exactly?”And

we’dsay,“Wel,justgivethestrangeryourAIMscreennamesoyou

canputhimonyourbuddylist.”Youcouldseetheireyesgowide,

andthey’dsay,“Areyoukiddingme?AstrangeronmyAIMbuddy

list?”Towhichwe’drespond,“Yes;otherwiseyou’dhaveto

downloadawholenewIMclientwithanewbuddylist.”And

they’dsay,“DoyouhaveanyideahowmanyIMclientsIalready

run?”

“No.Oneortwo,maybe?”That’showmanyclientseachofusin

theoceused.Towhichtheteenagerwouldsay,“Duh!Irun

theoceused.Towhichtheteenagerwouldsay,“Duh!Irun

eight.”Wehadnoideahowmanyinstantmessaging

clientsthere

wereintheworld.

Wehadtheincorrectpreconceptionthatit’sachalengetolearn

newsoftwareandit’strickytomoveyourfriendsovertoanew

buddylist.Ourcustomersrevealedthatthiswas

nonsense.We

wantedtodrawdiagramsonthewhiteboardthatshowedwhyour

strategywasbriliant,butourcustomersdidn’tunderstandconcepts

likenetworkeectsandswitchingcosts.Ifwetriedtoexplainwhy

theyshouldbehavethewaywepredicted,they’djustshaketheir

headsatus,bewildered.

Wehadamentalmodelforhowpeopleusedsoftwarethatwas

yearsoutofdate,andsoeventualy,painfuly,afterdozensof

meetingslikethat,itstartedtodawnonusthattheIMadd-on

conceptwasfundamentalyflawed.3

OurcustomersdidnotwantanIMadd-on;theywantedastand-

aloneIMnetwork.Theydidnotconsiderhavingtolearnhowto

useanewIMprogramabarrier;onthecontrary,ourearlyadopters

usedmanydierentIMprogramssimultaneously.Ourcustomers

werenotintimidatedbytheideaofhavingtotaketheirfriends

withthemtoanewIMnetwork;itturnedoutthat

theyenjoyed

thatchalenge.Evenmoresurprising,ourassumptionthatcustomers

wouldwanttouseavatar-basedIMprimarilywiththeirexisting

friendswasalsowrong.Theywantedtomakenewfriends,an

activitythat3Davatarsareparticularlywelsuitedtofacilitating.

Bitbybit,customerstoreapartourseeminglybriliantinitial

strategy.

ThrowingMyWorkAway

Perhapsyoucansympathizewithoursituationandforgive

my

obstinacy.Afteral,itwasmyworkoverthepriormonthsthat

neededtobethrownaway.Ihadslavedoverthesoftwarethatwas

requiredtomakeourIMprograminteroperatewithother

networks,whichwasattheheartofouroriginalstrategy.Whenit

cametimetopivotandabandonthatoriginalstrategy,almostalof

cametimetopivotandabandonthatoriginalstrategy,almostalof

mywork—thousandsoflinesofcode—wasthrownout.I

felt

betrayed.Iwasadevoteeofthelatestinsoftwaredevelopment

methods(knowncolectivelyasagiledevelopment),which

promisedtohelpdrivewasteoutofproductdevelopment.

However,despitethat,Ihadcommitedthebiggestwaste

ofal:

buildingaproductthatourcustomersrefusedtouse.Thatwas

realydepressing.

Iwondered:inlightofthefactthatmyworkturnedouttobea

wasteoftimeandenergy,wouldthecompanyhave

beenjustas

weloifIhadspentthelastsixmonthsonabeachsipping

umbreladrinks?HadIrealybeenneeded?Wouldithavebeen

beterifIhadnotdoneanyworkatal?

Thereis,asImentionedat

thebeginningofthischapter,always

onelastrefugeforpeopleachingtojustifytheirownfailure.I

consoledmyselfthatifwehadn’tbuiltthisrstproduct—mistakes

andal—weneverwouldhavelearnedtheseimportantinsights

aboutcustomers.Weneverwouldhavelearnedthatourstrategy

wasawed.Thereistruthinthisexcuse:whatwelearnedduring

thosecriticalearlymonthssetIMVUonapaththatwouldleadto

oureventualbreakoutsuccess.

Foratime,this“learning”consolationmademefeelbeter,but

myreliefwasshort-lived.Here’sthequestionthatbotheredme

mostofal:ifthegoalofthosemonthswastolearntheseimportant

insightsaboutcustomers,whydidittakesolong?How

muchofour

eortcontributedtotheessentiallessonsweneededtolearn?

CouldwehavelearnedthoselessonsearlierifIhadn’tbeenso

focusedonmakingtheproduct“beter”byaddingfeaturesand

fixingbugs?

VALUEVS.WASTE

Inotherwords,whichofoureortsarevalue-creatingandwhich

arewasteful?Thisquestionisattheheartoftheleanmanufacturing

revolution;itistherstquestionanylean

manufacturingadherent

istrainedtoask.Learningtoseewasteandthensystematicaly

istrainedtoask.Learningtoseewasteandthensystematicaly

eliminateithasalowedleancompaniessuchasToyotato

dominateentireindustries.In

theworldofsoftware,theagile

developmentmethodologiesIhadpracticeduntilthattimehad

theiroriginsinleanthinking.Theyweredesignedtoeliminate

wastetoo.

Yetthosemethodshadled

medownaroadinwhichthemajority

ofmyteam’sefortswerewasted.Why?

Theanswercametomeslowlyoverthesubsequentyears.Lean

thinkingdenesvalueasprovidingbenettothecustomer;

anythingelseiswaste.Inamanufacturingbusiness,customersdon’t

carehowtheproductisassembled,onlythatitworkscorrectly.But

inastartup,whothecustomerisandwhatthecustomermightnd

valuableareunknown,partoftheveryuncertaintythatisan

essentialpartofthedenitionofastartup.Irealizedthatasa

startup,weneededanewdenitionofvalue.Therealprogresswe

hadmadeatIMVUwaswhatwehadlearnedoverthoserst

monthsaboutwhatcreatesvalueforcustomers.

Anythingwehaddoneduringthosemonthsthatdidnot

contributetoourlearningwasaformofwaste.Wouldithavebeen

possibletolearnthesamethingswithlesseort?Clearly,the

answerisyes.

Foronething,thinkofalthe

debateandprioritizationofeort

thatwentintofeaturesthatcustomerswouldneverdiscover.Ifwe

hadshippedsooner,wecouldhaveavoidedthatwaste.Also

consideralthewastecausedbyourincorrectstrategicassumptions.

IhadbuiltinteroperabilityformorethanadozendierentIM

clientsandnetworks.Wasthisrealynecessarytotestour

assumptions?Couldwehavegotenthesamefeedbackfromour

customerswithhalfasmanynetworks?Withonlythree?

Withonly

one?SincethecustomersofalIMnetworksfoundourproduct

equalyunatractive,theleveloflearningwouldhavebeenthe

same,butourefortwouldhavebeendramaticalyless.

Here’sthethoughtthatkept

meupnights:didwehaveto

supportanynetworksatal?Isitpossiblethatwecouldhave

discoveredhowawedourassumptionswerewithoutbuilding

anything?Forexample,whatifwesimplyhadoeredcustomers

anything?Forexample,whatifwesimplyhadoeredcustomers

theopportunitytodownloadtheproductfromussolelyonthe

basisofitsproposedfeaturesbeforebuildinganything?Remember,

almostnocustomerswerewilingtouseouroriginal

product,so

wewouldn’thavehadtodomuchapologizingwhenwefailedto

deliver.(Notethatthisisdierentfromaskingcustomerswhatthey

want.Mostofthetimecustomersdon’tknowwhattheywantin

advance.)Wecouldhaveconductedanexperiment,oering

customersthechancetotrysomethingandthenmeasuringtheir

behavior.

Suchthoughtexperimentswereextremelydisturbingtome

becausetheyunderminedmyjobdescription.Astheheadof

productdevelopment,Ithoughtmyjobwastoensurethetimely

deliveryofhigh-qualityproductsandfeatures.Butifmanyofthose

featureswereawasteoftime,whatshouldIbedoing

instead?How

couldweavoidthiswaste?

I’vecometobelievethatlearningistheessentialunitofprogress

forstartups.Theeortthatisnotabsolutelynecessaryforlearning

whatcustomerswantcanbeeliminated.Icalthis

validated

learningbecauseitisalwaysdemonstratedbypositive

improvementsinthestartup’scoremetrics.Aswe’veseen,it’seasy

tokidyourselfaboutwhatyouthinkcustomerswant.It’salsoeasy

tolearnthingsthatare

completelyirrelevant.Thus,validated

learningisbackedupbyempiricaldatacolectedfromreal

customers.

WHEREDOYOUFINDVALIDATION?

AsIcanatest,anybodywhofailsinastartupcanclaim

thatheor

shehaslearnedalotfromtheexperience.Theycantela

compelingstory.Infact,inthestoryofIMVUsofar,youmight

havenoticedsomethingmissing.Despitemyclaimsthatwelearned

alotinthoseearlymonths,

lessonsthatledtooureventualsuccess,

Ihaven’toeredanyevidencetobackthatup.Inhindsight,it’seasy

tomakesuchclaimsandsoundcredible(andyou’lseesome

evidencelaterinthebook),butimagineusinIMVU’searlymonths

evidencelaterinthebook),butimagineusinIMVU’searlymonths

tryingtoconvinceinvestors,employees,familymembers,andmost

ofalourselvesthatwehadnotsquanderedourtimeandresources.

Whatevidencedidwehave?

Certainlyourstoriesoffailurewereentertaining,andwehad

fascinatingtheoriesaboutwhatwehaddonewrongandwhatwe

neededtodotocreateamoresuccessfulproduct.However,the

proofdidnotcomeuntilweputthosetheoriesinto

practiceand

builtsubsequentversionsoftheproductthatshowedsuperior

resultswithactualcustomers.

ThenextfewmonthsarewherethetruestoryofIMVUbegins,

notwithourbriliantassumptionsandstrategies

andwhiteboard

gamesmanshipbutwiththehardworkofdiscoveringwhat

customersrealywantedandadjustingourproductandstrategyto

meetthosedesires.Weadoptedtheviewthatourjobwastonda

synthesisbetweenourvisionandwhatcustomerswouldaccept;it

wasn’ttocapitulatetowhatcustomersthoughttheywantedorto

telcustomerswhattheyoughttowant.

Aswecametounderstandourcustomersbeter,wewereableto

improveourproducts.Aswedidthat,thefundamentalmetricsof

ourbusinesschanged.Intheearlydays,despiteoureortsto

improvetheproduct,ourmetricswerestubbornlyat.Wetreated

eachday’scustomersasanewreportcard.We’dpayat

entionto

thepercentageofnewcustomerswhoexhibitedproductbehaviors

suchasdownloadingandbuyingourproduct.Eachday,roughlythe

samenumberofcustomerswouldbuytheproduct,andthatnumber

waspretyclosetozerodespitethemanyimprovements.

However,oncewepivotedawayfromtheoriginalstrategy,things

startedtochange.Alignedwithasuperiorstrategy,ourproduct

developmenteortsbecamemagicalymoreproductive—

not

becausewewereworkingharderbutbecausewewereworking

smarter,alignedwithourcustomers’realneeds.Positivechangesin

metricsbecamethequantitativevalidationthatourlearningwas

real.Thiswascriticalyimportantbecausewecouldshowour

stakeholders—employees,investors,andourselves—thatwewere

makinggenuineprogress,notdeludingourselves.Itisalsotheright

waytothinkaboutproductivityinastartup:not

intermsofhow

waytothinkaboutproductivityinastartup:notintermsofhow

muchstuwearebuildingbutintermsofhowmuchvalidated

learningwe’regetingforoureforts.4

Forexample,inoneearly

experiment,wechangedourentire

website,homepage,andproductregistrationowtoreplace

“avatarchat”with“3Dinstantmessaging.”Newcustomerswere

splitautomaticalybetweenthesetwoversionsofthesite;halfsaw

one,andhalfsawtheother.Wewereabletomeasurethe

dierenceinbehaviorbetweenthetwogroups.Notonlywerethe

peopleintheexperimentalgroupmorelikelytosignupforthe

product,theyweremorelikelytobecomelong-termpaying

customers.

Wehadplentyoffailedexperimentstoo.Duringoneperiodin

whichwebelievedthatcustomersweren’tusingtheproduct

becausetheydidn’tunderstanditsmanybenets,wewentsofaras

topaycustomerserviceagentstoactasvirtualtourguidesfornew

customers.Unfortunately,customerswhogotthatVIPtreatment

werenomorelikelytobecomeactiveorpayingcustomers.

EvenafterditchingtheIMadd-onstrategy,itstiltook

monthsto

understandwhyithadn’tworked.Afterourpivotandmanyfailed

experiments,wenalyguredoutthisinsight:customerswanted

touseIMVUtomakenewfriendsonline.Ourcustomersintuitively

graspedsomethingthatwewereslowtorealize.Altheexisting

socialproductsonlinewerecenteredoncustomers’real-life

identity.IMVU’savatartechnology,however,wasuniquelywel

suitedtohelppeoplegettoknoweachotheronline

without

compromisingsafetyoropeningthemselvesuptoidentitytheft.

Onceweformedthishypothesis,ourexperimentsbecamemuch

morelikelytoproducepositiveresults.Wheneverwewouldchange

theproducttomakeiteasierforpeopletondandkeepnew

friends,wediscoveredthatcustomersweremorelikelytoengage.

Thisistruestartupproductivity:systematicalyguringouttheright

thingstobuild.

Thesewerejustafewexperimentsamonghundredsthatweran

weekinandweekoutaswestartedtolearnwhichcustomers

wouldusetheproductandwhy.Eachbitofknowledgewe

wouldusetheproductandwhy.Eachbitofknowledge

we

gatheredsuggestednewexperimentstorun,whichmovedour

metricscloserandclosertoourgoal.

THEAUDACITYOFZERO

DespiteIMVU’searlysuccess,ourgrossnumberswerestilprety

smal.Unfortunately,becauseofthetraditionalwaybusinessesare

evaluated,thisisadangeroussituation.Theironyisthatitisoften

easiertoraisemoneyoracquireotherresourceswhenyouhave

zerorevenue,zerocustomers,andzerotractionthanwhen

youhave

asmalamount.Zeroinvitesimagination,butsmalnumbersinvite

questionsaboutwhetherlargenumberswilevermaterialize.

Everyoneknows(orthinksheorsheknows)storiesofproductsthat

achievedbreakthroughsuccessovernight.Aslongasnothinghas

beenreleasedandnodatahavebeencolected,itisstilpossibleto

imagineovernightsuccessinthefuture.Smalnumberspourcold

wateronthathope.

Thisphenomenoncreatesabrutalincentive:postponegetingany

datauntilyouarecertainofsuccess.Ofcourse,aswe’lsee,such

delayshavetheunfortunateeectofincreasingtheamountof

wastedwork,decreasingessentialfeedback,and

dramaticaly

increasingtheriskthatastartupwilbuildsomethingnobody

wants.

However,releasingaproductandhopingforthebestisnota

goodplaneither,becausethisincentiveisreal.Whenwe

launched

IMVU,wewereignorantofthisproblem.Ourearliestinvestorsand

advisersthoughtitwasquaintthatwehada$300-per-month

revenueplanatrst.Butafterseveralmonthswithourrevenue

hoveringaround$500permonth,somebegantolosefaith,asdid

someofouradvisers,employees,andevenspouses.Infact,atone

point,someinvestorswereseriouslyrecommendingthatwepul

theproductoutofthemarketandreturntostealthmode.

Fortunately,aswepivotedandexperimented,incorporatingwhat

welearnedintoourproductdevelopmentandmarketingeorts,

ournumbersstartedtoimprove.

ournumbersstartedtoimprove.

Butnotbymuch!Ontheonehand,wewereluckytoseea

growthpaternthatstartedtolooklikethefamoushockeystick

graph.Ontheotherhand,thegraphwentuponlytoafew

thousanddolarspermonth.Theseearlygraphs,although

promising,werenotby

themselvessucienttocombatthelossof

faithcausedbyourearlyfailure,andwelackedthelanguageof

validatedlearningtoprovideanalternativeconcepttoralyaround.

Wewerequitefortunatethatsomeofourearlyinvestors

understooditsimportanceandwerewilingtolookbeyondour

smalgrossnumberstoseetherealprogressweweremaking.

(You’lseetheexactsamegraphstheydidinChapter7.)

Thus,wecanmitigatethewastethathappensbecauseofthe

audacityofzerowithvalidatedlearning.Whatweneededto

demonstratewasthatourproductdevelopmenteortswereleading

ustowardmassivesuccesswithoutgivingintothetemptationto

falbackonvanitymetricsand“successtheater”—the

workwedo

tomakeourselveslooksuccessful.Wecouldhavetriedmarketing

gimmicks,boughtaSuperBowlad,ortriedamboyantpublic

relations(PR)asawayofjuicingourgrossnumbers.Thatwould

havegiveninvestorstheilusionoftraction,butonlyforashort

time.Eventualy,thefundamentalsofthebusinesswouldwinout

andthePRbumpwouldpass.Becausewewouldhavesquandered

preciousresourcesontheatricsinsteadofprogress,

wewouldhave

beeninrealtrouble.

Sixtymilionavatarslater,IMVUisstilgoingstrong.Itslegacyis

notjustagreatproduct,anamazingteam,andpromisingnancial

resultsbutawholenewwayofmeasuringtheprogressof

startups.

LESSONSBEYONDIMVU

IhavehadmanyopportunitiestoteachtheIMVUstoryasa

businesscaseeversinceStanford’sGraduateSchoolofBusiness

wroteanocialstudyaboutIMVU’searlyyears.5The

caseisnow

partoftheentrepreneurshipcurriculumatseveralbusinessschools,

includingHarvardBusinessSchool,whereIserveasan

includingHarvardBusinessSchool,whereIserveasan

entrepreneurinresidence.I’vealsotoldthesestoriesat

countless

workshops,lectures,andconferences.

EverytimeIteachtheIMVUstory,studentshavean

overwhelmingtemptationtofocusonthetacticsitilustrates:

launchingalow-qualityearlyprototype,charging

customersfrom

dayone,andusinglow-volumerevenuetargetsasawaytodrive

accountability.Theseareusefultechniques,buttheyarenotthe

moralofthestory.Therearetoomanyexceptions.Noteverykind

ofcustomerwilacceptalow-qualityprototype,forexample.Ifthe

studentsaremoreskeptical,theymayarguethatthetechniquesdo

notapplytotheirindustryorsituation,butworkonlybecause

IMVUisasoftwarecompany,aconsumer

Internetbusiness,ora

non-mission-criticalapplication.

Noneofthesetakeawaysisespecialyuseful.TheLeanStartupis

notacolectionofindividualtactics.Itisaprincipledapproachto

newproductdevelopment.

Theonlywaytomakesenseofits

recommendationsistounderstandtheunderlyingprinciplesthat

makethemwork.Aswe’lseeinlaterchapters,theLeanStartup

modelhasbeenappliedtoawidevarietyofbusinessesand

industries:manufacturing,cleantech,restaurants,andevenlaundry.

ThetacticsfromtheIMVUstorymayormaynotmakesensein

yourparticularbusiness.

Instead,thewayforwardistolearntoseeeverystartupinany

industryasagrandexperiment.Thequestionisnot“Canthis

productbebuilt?”Inthemoderneconomy,almostanyproductthat

canbeimaginedcanbebuilt.Themorepertinentquestionsare

“Shouldthisproductbebuilt?”and“Canwebuilda

sustainable

businessaroundthissetofproductsandservices?”Toanswerthose

questions,weneedamethodforsystematicalybreakingdowna

businessplanintoitscomponentpartsandtestingeachpart

empiricaly.

Inotherwords,weneedthescienticmethod.IntheLean

Startupmodel,everyproduct,everyfeature,everymarketing

campaign—everythingastartupdoes—isunderstoodtobean

experimentdesignedto

achievevalidatedlearning.This

experimentalapproachworksacrossindustriesandsectors,aswe’l

experimentalapproachworksacrossindustriesandsectors,aswe’l

seeinChapter4.

4EXPERIMENT

Icomeacrossmanystartupsthatarestrugglingtoanswerthe

folowingquestions:Whichcustomeropinionsshouldwelistento,

ifany?Howshouldweprioritizeacrossthemanyfeatureswe

couldbuild?Whichfeaturesareessentialtotheproduct’s

success

andwhichareancilary?Whatcanbechangedsafely,andwhat

mightangercustomers?Whatmightpleasetoday’scustomersatthe

expenseoftomorrow’s?Whatshouldweworkonnext?

Thesearesomeofthequestionsteamsstruggletoanswerifthey

havefolowedthe“let’sjustshipaproductandseewhathappens”

plan.Icalthisthe“justdoit”schoolofentrepreneurshipafter

Nike’sfamousslogan.1Unfortunately,iftheplanis

toseewhat

happens,ateamisguaranteedtosucceed—atseeingwhathappens

—butwon’tnecessarilygainvalidatedlearning.Thisisoneofthe

mostimportantlessonsofthescienticmethod:ifyoucannotfail,

youcannotlearn.

FROMALCHEMYTOSCIENCE

TheLeanStartupmethodologyreconceivesastartup’seortsas

experimentsthattestitsstrategytoseewhichpartsarebriliantand

whicharecrazy.Atrue

experimentfolowsthescienticmethod.It

beginswithaclearhypothesisthatmakespredictionsaboutwhatis

supposedtohappen.Itthenteststhosepredictionsempiricaly.Just

asscienticexperimentationisinformedbytheory,startup

experimentationisguidedbythestartup’svision.Thegoalofevery

experimentationisguidedbythestartup’svision.Thegoalofevery

startupexperimentistodiscoverhowtobuildasustainable

businessaroundthatvision.

ThinkBig,StartSmal

Zapposistheworld’slargestonlineshoestore,withannualgross

salesinexcessof$1bilion.Itisknownasoneofthemost

successful,customer-friendlye-commercebusinessesintheworld,

butitdidnotstartthatway.

FounderNickSwinmurnwasfrustratedbecausetherewasno

centralonlinesitewithagreatselectionofshoes.Heenvisioneda

newandsuperiorretailexperience.Swinmurncouldhavewaiteda

longtime,insistingontestinghiscompletevisioncompletewith

warehouses,distributionpartners,andthepromiseofsignicant

sales.Manyearlye-commercepioneersdidjustthat,including

infamousdot-comfailuressuchasWebvanand

Pets.com.

Instead,hestartedbyrunninganexperiment.Hishypothesiswas

thatcustomerswerereadyandwilingtobuyshoesonline.Totest

it,hebeganbyaskinglocalshoestoresifhecouldtakepicturesof

theirinventory.Inexchangeforpermissiontotakethepictures,he

wouldpostthepicturesonlineandcomebacktobuytheshoesat

fulpriceifacustomerboughtthemonline.

Zapposbeganwithatiny,simpleproduct.Itwasdesignedto

answeronequestionaboveal:istherealreadysucientdemand

forasuperioronlineshoppingexperienceforshoes?However,a

wel-designedstartupexperimentliketheoneZapposbeganwith

doesmorethantestasingleaspectofabusinessplan.In

thecourse

oftestingthisrstassumption,manyotherassumptionsweretested

aswel.Toseltheshoes,Zapposhadtointeractwithcustomers:

takingpayment,handlingreturns,anddealingwithcustomer

support.Thisisdecidedlydierentfrommarketresearch.IfZappos

hadreliedonexistingmarketresearchorconductedasurvey,it

couldhaveaskedwhatcustomersthoughttheywanted.Bybuilding

aproductinstead,albeitasimpleone,thecompany

learnedmuch

more:

1.Ithadmoreaccuratedataaboutcustomerdemandbecauseit

wasobservingrealcustomerbehavior,notaskinghypothetical

questions.

2.Itputitselfinapositiontointeractwithrealcustomersand

learnabouttheirneeds.Forexample,thebusinessplanmight

calfordiscountedpricing,buthowarecustomerperceptions

oftheproductafectedbythediscountingstrategy?

3.Italoweditselftobesurprisedwhencustomersbehavedin

unexpectedways,revealinginformationZapposmightnothave

knowntoaskabout.Forexample,whatifcustomersreturned

theshoes?

Zappos’initialexperimentprovidedaclear,quantiable

outcome:eitherasucientnumberofcustomerswouldbuythe

shoesortheywouldnot.Italsoputthecompanyinapositionto

observe,interactwith,andlearnfromrealcustomersandpartners.

Thisqualitativelearningisanecessarycompaniontoquantitative

testing.Althoughtheearlyeortsweredecidedlysmal-scale,that

didnotpreventthehugeZapposvisionfrombeingrealized.Infact,

in2009Zapposwasacquiredbythee-commercegiant

Amazon.comforareported$1.2bilion.2

ForLong-TermChange,ExperimentImmediately

CarolineBarlerinisadirectorintheglobalsocialinnovation

divisionatHewlet-Packard(HP),amultinationalcompanywith

morethanthreehundredthousandemployeesandmorethan$100

bilioninannualsales.Caroline,wholeadsglobalcommunity

involvement,isasocialentrepreneurworkingtogetmoreofHP’s

employeestotakeadvantageofthecompany’spolicyon

volunteering.

Corporateguidelinesencourageeveryemployeetospendupto

fourhoursamonthofcompanytimevolunteeringinhisorher

community;thatvolunteerworkcouldtaketheformofany

philanthropiceort:paintingfences,buildinghouses,orevenusing

philanthropiceort:paintingfences,buildinghouses,orevenusing

probonoorwork-basedskilsoutsidethecompany.Encouraging

thelatertypeofvolunteeringwasCaroline’spriority.

Becauseofits

talentandvalues,HP’scombinedworkforcehasthepotentialto

haveamonumentalpositiveimpact.Adesignercouldhelpa

nonprotwithanewwebsitedesign.Ateamofengineerscould

wireaschoolforInternetaccess.

Caroline’sprojectisjustbeginning,andmostemployeesdonot

knowthatthisvolunteeringpolicyexists,andonlyatinyfraction

takeadvantageofit.Mostofthevolunteeringhasbeenofthelow-

impactvariety,involvingmanuallabor,evenwhenthevolunteers

werehighlytrainedexperts.Barlerin’svisionistotakethehundreds

ofthousandsofemployeesinthecompanyandtransformtheminto

aforceforsocialgood.

Thisisthekindofcorporateinitiativeundertakeneverydayat

companiesaroundtheworld.Itdoesn’tlooklikeastartupbythe

conventionaldenitionorwhatweseeinthemovies.Onthe

surfaceitseemstobesuitedtotraditionalmanagement

and

planning.However,IhopethediscussioninChapter2has

promptedyoutobealitlesuspicious.Here’showwemight

analyzethisprojectusingtheLeanStartupframework.

Caroline’sprojectfaces

extremeuncertainty:therehadneverbeen

avolunteercampaignofthismagnitudeatHPbefore.How

condentshouldshebethatsheknowstherealreasonspeople

aren’tvolunteering?Mostimportant,howmuchdoessherealy

knowabouthowtochangethebehaviorofhundredsofthousand

peopleinmorethan170countries?Barlerin’sgoalistoinspireher

coleaguestomaketheworldabeterplace.Lookedatthatway,

herplanseemsfulofuntestedassumptions—anda

lotofvision.

Inaccordancewithtraditionalmanagementpractices,Barlerinis

spendingtimeplanning,getingbuy-infromvariousdepartments

andothermanagers,andpreparingaroadmapofinitiativesforthe

rsteighteenmonthsofherproject.Shealsohasastrong

accountabilityframeworkwithmetricsfortheimpactherproject

shouldhaveonthecompanyoverthenextfouryears.Likemany

entrepreneurs,shehasabusinessplanthatlaysoutherintentions

nicely.Yetdespitealthatwork,sheis—sofar—creatingone-o

nicely.Yetdespitealthatwork,sheis—sofar—creatingone-o

winsandnoclosertoknowingifhervisionwilbeabletoscale.

Oneassumption,forexample,mightbethatthe

company’slong-

standingvaluesincludedacommitmenttoimprovingthe

communitybutthatrecenteconomictroublehadresultedinan

increasedcompanywidestrategicfocusonshort-termprotability.

Perhapslongtimeemployeeswouldfeeladesiretorearmtheir

valuesofgivingbacktothecommunitybyvolunteering.Asecond

assumptioncouldbethattheywouldnditmoresatisfyingand

thereforemoresustainabletousetheiractualworkplace

skilsina

volunteercapacity,whichwouldhaveagreaterimpactonbehalfof

theorganizationstowhichtheydonatedtheirtime.Alsolurking

withinCaroline’splansaremanypracticalassumptionsabout

employees’wilingnesstotakethetimetovolunteer,theirlevelof

commitmentanddesire,andthewaytobestreachthemwithher

message.

TheLeanStartupmodeloersawaytotestthesehypotheses

rigorously,immediately,andthoroughly.Strategicplanningtakes

monthstocomplete;theseexperimentscouldbeginimmediately.

Bystartingsmal,Carolinecouldpreventatremendousamountof

wastedowntheroadwithoutcompromisingheroveral

vision.

Here’swhatitmightlooklikeifCarolineweretotreatherproject

asanexperiment.

BreakItDown

Therststepwouldbetobreakdownthegrandvisionintoits

componentparts.Thetwomostimportantassumptions

entrepreneursmakearewhatIcalthevaluehypothesisandthe

growthhypothesis.

Thevaluehypothesistestswhetheraproductorservicerealy

deliversvaluetocustomers

oncetheyareusingit.What’sagood

indicatorthatemployeesnddonatingtheirtimevaluable?We

couldsurveythemtogettheiropinion,butthatwouldnotbevery

accuratebecausemostpeoplehaveahardtimeassessingtheir

feelingsobjectively.

feelingsobjectively.

Experimentsprovideamoreaccurategauge.Whatcouldwesee

inrealtimethatwouldserveasaproxyforthevalueparticipants

weregainingfromvolunteering?Wecouldnd

opportunitiesfora

smalnumberofemployeestovolunteerandthenlookatthe

retentionrateofthoseemployees.Howmanyofthemsignupto

volunteeragain?Whenanemployeevoluntarilyinveststheirtime

andatentioninthisprogram,

thatisastrongindicatorthatthey

finditvaluable.

Forthegrowthhypothesis,whichtestshownewcustomerswil

discoveraproductorservice,wecandoasimilaranalysis.Oncethe

programisupandrunning,

howwilitspreadamongthe

employees,frominitialearlyadopterstomassadoptionthroughout

thecompany?Alikelywaythisprogramcouldexpandisthrough

viralgrowth.Ifthatistrue,themostimportantthingtomeasureis

behavior:wouldtheearlyparticipantsactivelyspreadthewordto

otheremployees?

Inthiscase,asimpleexperimentwouldinvolvetakingavery

smalnumber—adozen,perhaps—ofexistinglong-termemployees

andprovidinganexceptionalvolunteeropportunityforthem.

BecauseCaroline’shypothesiswasthatemployeeswouldbe

motivatedbytheirdesiretoliveuptoHP’shistoricalcommitment

tocommunityservice,theexperimentwouldtarget

employeeswho

feltthegreatestsenseofdisconnectbetweentheirdailyroutineand

thecompany’sexpressedvalues.Thepointisnottondthe

averagecustomerbuttondearlyadopters:thecustomerswhofeel

theneedfortheproductmostacutely.Thosecustomerstendtobe

moreforgivingofmistakesandareespecialyeagertogive

feedback.

Next,usingatechniqueIcaltheconciergeminimumviable

product(describedindetailinChapter6),Carolinecouldmake

surethefirstfewparticipantshadanexperiencethatwasasgoodas

shecouldmakeit,completelyalignedwithhervision.Unlikeina

focusgroup,hergoalwouldbetomeasurewhatthe

customers

actualydid.Forexample,howmanyoftherstvolunteersactualy

completetheirvolunteerassignments?Howmanyvolunteera

secondtime?Howmanyarewilingtorecruitacoleagueto

secondtime?Howmanyarewilingtorecruitacoleagueto

participateinasubsequentvolunteeractivity?

Additionalexperimentscanexpandonthisearlyfeedbackand

learning.Forexample,ifthegrowthmodelrequiresthatacertain

percentageofparticipantssharetheirexperienceswithcoleagues

andencouragetheirparticipation,thedegreetowhichthattakes

placecanbetestedevenwithaverysmalsampleofpeople.Iften

peoplecompletetherstexperiment,howmanydowe

expectto

volunteeragain?Iftheyareaskedtorecruitacoleague,howmany

doweexpectwildoso?Rememberthatthesearesupposedtobe

thekindsofearlyadopterswiththemosttogainfromtheprogram.

Putanotherway,whatifaltenearlyadoptersdeclineto

volunteeragain?Thatwouldbeahighlysignicant—andvery

negative—result.Ifthenumbersfromsuchearlyexperimentsdon’t

lookpromising,thereisclearlyaproblemwiththestrategy.That

doesn’tmeanit’stimetogiveup;onthecontrary,itmeansit’stime

togetsomeimmediatequalitativefeedbackabouthowtoimprove

theprogram.Here’swherethiskindofexperimentationhasan

advantageovertraditionalmarketresearch.Wedon’t

haveto

commissionasurveyorndnewpeopletointerview.Wealready

haveacohortofpeopletotalktoaswelasknowledgeabouttheir

actualbehavior:theparticipantsintheinitialexperiment.

Thisentireexperimentcouldbeconductedinamaterofweeks,

lessthanone-tenththetimeofthetraditionalstrategicplanning

process.Also,itcanhappeninparalelwithstrategicplanning

whiletheplanisstilbeingformulated.Evenwhen

experiments

produceanegativeresult,thosefailuresproveinstructiveandcan

inuencethestrategy.Forexample,whatifnovolunteerscanbe

foundwhoareexperiencingtheconictofvalueswithinthe

organizationthatwassuchanimportantassumptioninthebusiness

plan?Ifso,congratulations:it’stimetopivot(aconceptthatis

exploredinmoredetailinChapter8).3

ANEXPERIMENTISAPRODUCT

IntheLeanStartupmodel,anexperimentismorethanjusta

IntheLeanStartupmodel,anexperimentismorethanjusta

theoreticalinquiry;itisalsoarstproduct.Ifthisoranyother

experimentissuccessful,italowsthemanagertoget

startedwith

hisorhercampaign:enlistingearlyadopters,addingemployeesto

eachfurtherexperimentoriteration,andeventualystartingto

buildaproduct.Bythetimethatproductisreadytobedistributed

widely,itwilalreadyhaveestablishedcustomers.Itwilhave

solvedrealproblemsandoerdetailedspecicationsforwhat

needstobebuilt.Unlikeatraditionalstrategicplanningormarket

researchprocess,thisspecicationwilberootedin

feedbackon

whatisworkingtodayratherthaninanticipationofwhatmight

worktomorrow.

Toseethisinaction,consideranexamplefromKodak.Kodak’s

historyisboundupwithcamerasandlm,buttodayit

also

operatesasubstantialonlinebusinesscaledKodakGalery.Mark

CookisKodakGalery’svicepresidentofproducts,andheis

workingtochangeKodakGalery’scultureofdevelopmentto

embraceexperimentation.

Markexplained,“Traditionaly,theproductmanagersays,‘Ijust

wantthis.’Inresponse,theengineersays,‘I’mgoingtobuildit.’

Instead,Itrytopushmyteamtofirstanswerfourquestions:

1.Doconsumersrecognizethattheyhavetheproblemyouare

tryingtosolve?

2.Iftherewasasolution,wouldtheybuyit?

3.Wouldtheybuyitfromus?

4.Canwebuildasolutionforthatproblem?”

Thecommontendencyofproductdevelopmentistoskipstraight

tothefourthquestionandbuildasolutionbeforeconrmingthat

customershavetheproblem.Forexample,KodakGaleryoered

weddingcardswithgildedtextandgraphicsonitssite.

Those

designswerepopularwithcustomerswhoweregetingmarried,

andsotheteamredesignedthecardstobeusedatotherspecial

occasions,suchasforholidays.Themarketresearchanddesign

processindicatedthatcustomerswouldlikethenewcards,andthat

processindicatedthatcustomerswouldlikethenewcards,andthat

findingjustifiedthesignificantefortthatwentintocreatingthem.

Daysbeforethelaunch,theteamrealizedthecardswere

too

diculttounderstandfromtheirdepictiononthewebsite;people

couldn’tseehowbeautifultheywere.Theywerealsohardto

produce.Cookrealizedthattheyhaddonetheworkbackward.He

explained,“Untilwecouldgureouthowtoselandmakethe

product,itwasn’tworthspendinganyengineeringtimeon.”

Learningfromthatexperience,Cooktookadierentapproach

whenheledhisteamthroughthedevelopmentofanewset

of

featuresforaproductthatmakesiteasiertosharephotostakenat

anevent.Theybelievedthatanonline“eventalbum”would

provideawayforpeoplewhoatendedawedding,aconference,or

anothergatheringtosharephotoswithotheratendees.Unlike

otheronlinephotosharingservices,KodakGalery’seventalbum

wouldhavestrongprivacycontrols,assuringthatthephotoswould

besharedonlywithpeoplewhoatendedthesameevent.

Inabreakwiththepast,Cookledthegroupthroughaprocessof

identifyingrisksandassumptionsbeforebuildinganythingandthen

testingthoseassumptionsexperimentaly.

Thereweretwomainhypothesesunderlyingtheproposedevent

album:

1.Theteamassumedthatcustomerswouldwanttocreatethe

albumsinthefirstplace.

2.Itassumedthateventparticipantswoulduploadphotosto

eventalbumscreatedbyfriendsorcoleagues.

TheKodakGaleryteambuiltasimpleprototypeoftheevent

album.Itlackedmanyfeatures—somany,infact,thattheteamwas

reluctanttoshowittocustomers.However,evenatthatearlystage,

alowingcustomerstousetheprototypehelpedtheteam

refute

theirhypotheses.First,creatinganalbumwasnotaseasyasthe

teamhadpredicted;noneoftheearlycustomerswereabletocreate

one.Further,customerscomplainedthattheearlyproductversion

lackedessentialfeatures.

Thosenegativeresultsdemoralizedtheteam.Theusability

Thosenegativeresultsdemoralizedtheteam.Theusability

problemsfrustratedthem,asdidcustomercomplainsaboutmissing

features,manyofwhichmatchedtheoriginalroadmap.Cook

explainedthateventhoughtheproductwasmissingfeatures,the

projectwasnotafailure.Theinitialproduct—awsandal—

conrmedthatusersdidhavethedesiretocreateevent

albums,

whichwasextremelyvaluableinformation.Wherecustomers

complainedaboutmissingfeatures,thissuggestedthattheteamwas

ontherighttrack.Theteamnowhadearlyevidencethatthose

featureswereinfactimportant.Whataboutfeaturesthatwereon

theroadmapbutthatcustomersdidn’tcomplainabout?Maybe

thosefeaturesweren’tasimportantastheyinitialyseemed.

Throughabetalaunchtheteamcontinuedtolearnand

iterate.

Whiletheearlyuserswereenthusiasticandthenumberswere

promising,theteammadeamajordiscovery.Throughtheuseof

onlinesurveyingtoolKISSinsights,theteamlearnedthatmany

customerswantedtobeabletoarrangetheorderofpicturesbefore

theywouldinviteotherstocontribute.Knowingtheyweren’tready

tolaunch,Cookheldohisdivision’sgeneralmanagerby

explaininghowiteratingandexperimentingbefore

beginningthe

marketingcampaignwouldyieldfarbeterresults.Inaworld

wheremarketinglaunchdateswereoftensetmonthsinadvance,

waitinguntiltheteamhadrealysolvedtheproblemwasabreak

fromthepast.

ThisprocessrepresentedadramaticchangeforKodakGalery;

employeeswereusedtobeingmeasuredontheirprogressat

completingtasks.AsCooksays,“Successisnotdeliveringafeature;

successislearninghowtosolvethecustomer’sproblem.”4

THEVILLAGELAUNDRYSERVICE

InIndia,duetothecostofawashingmachine,lessthanseven

percentofthepopulationhaveoneintheirhomes.Mostpeople

eitherhandwashtheirclothingathomeorpayaDhobitodoitfor

them.Dhobistaketheclothestothenearestriver,washtheminthe

riverwater,bangthemagainstrockstogetthemclean,andhang

riverwater,bangthemagainstrockstogetthem

clean,andhang

themtodry,whichtakestwotosevendays.Theresult?Clothesare

returnedinabouttendaysandareprobablynotthatclean.

AkshayMehrahadbeenworkingatProcter&GambleSingapore

foreightyearswhenhesensedanopportunity.Asthebrand

manageroftheTideandPantenebrandsforIndiaandASEAN

countries,hethoughthecouldmakelaundryservicesavailableto

peoplewhopreviouslycouldnotaordthem.Returningto

India,

AkshayjoinedtheVilageLaundryServices(VLS),createdby

InnosightVentures.VLSbeganaseriesofexperimentstotestits

businessassumptions.

Fortheirrstexperiment,VLSmountedaconsumer-grade

laundrymachineonthebackofapickuptruckparkedonastreet

cornerinBangalore.Theexperimentcostlessthan$8,000andhad

thesimplegoalofprovingthatpeoplewouldhandovertheir

laundryandpaytohaveitcleaned.Theentrepreneurs

didnotclean

thelaundryonthetruck,whichwasmoreformarketingandshow,

buttookito-sitetobecleanedandbroughtitbacktotheir

customersbytheendoftheday.

TheVLSteamcontinuedthe

experimentforaweek,parkingthe

truckondierentstreetcorners,diggingdeepertodiscoveralthey

couldabouttheirpotentialcustomers.Theywantedtoknowhow

theycouldencouragepeopletocometothetruck.Didcleaning

speedmater?Wascleanlinessaconcern?Whatwerepeopleasking

forwhentheylefttheirlaundrywiththem?Theydiscoveredthat

customerswerehappytogivethemtheirlaundrytoclean.

However,thosecustomersweresuspiciousofthewashingmachine

mountedonthebackofthetruck,concernedthatVLSwouldtake

theirlaundryandrun.Toaddressthatconcern,VLScreateda

slightlymoresubstantialmobilecartthatlookedmorelikeakiosk.

VLSalsoexperimentedwithparkingthecartsinfrontofa

local

minimarketchain.FurtheriterationshelpedVLSgureoutwhich

servicespeopleweremostinterestedinandwhatpricetheywere

wilingtopay.Theydiscoveredthatcustomersoftenwantedtheir

clothesironedandwerewilingtopaydoublethepricetogettheir

laundrybackinfourhoursratherthantwenty-fourhours.

Asaresultofthoseearlyexperiments,VLScreatedanend

Asaresultofthoseearlyexperiments,VLScreatedan

end

productthatwasathree-footbyfour-footmobilekioskthat

includedanenergy-ecient,consumer-gradewashingmachine,a

dryer,andanextra-longextensioncord.ThekioskusedWestern

detergentsandwassupplieddailywithfreshcleanwaterdelivered

byVLS.

Sincethen,theVilageLaundryServicehasgrownsubstantialy,

withfourteenlocationsoperationalinBangalore,Mysore,and

Mumbai.AsCEOAkshayMehrasharedwithme,“Wehaveserviced

116,000kgs.in2010(vs.30,600kg.in2009).Andalmost60

percentofthebusinessiscomingfromrepeatcustomers.Wehave

servicedmorethan10,000customersinthepastyear

aloneacross

altheoutlets.”5

ALEANSTARTUPINGOVERNMENT?

OnJuly21,2010,PresidentObamasignedtheDodd–FrankWal

StreetReformandConsumerProtectionActintolaw.Oneofits

landmarkprovisionscreatedanewfederalagency,theConsumer

FederalProtectionBureau(CFPB).Thisagencyistaskedwith

protectingAmericancitizensfrompredatorylendingbynancial

servicescompaniessuchascreditcardcompanies,

studentlenders,

andpaydayloanoces.Theplancalsforittoaccomplishthisby

setingupacalcenterwheretrainedcaseworkerswileldcals

directlyfromthepublic.

Lefttoitsowndevices,anewgovernmentagencywould

probablyhirealargestawithalargebudgettodevelopaplan

thatisexpensiveandtime-consuming.However,theCFPBis

consideringdoingthingsdiferently.Despiteits$500milionbudget

andhigh-profileorigins,theCPFBisrealyastartup.

PresidentObamataskedhischieftechnologyocer,Aneesh

Chopra,withcolectingideasforhowtosetupthenewstartup

agency,andthatishowIcametobeinvolved.OnoneofChopra’s

visitstoSiliconValey,heinvitedanumberof

entrepreneursto

makesuggestionsforwaystocultivateastartupmentalityinthe

newagency.Inparticular,hisfocuswasonleveragingtechnology

newagency.Inparticular,hisfocuswasonleveragingtechnology

andinnovationtomaketheagencymoreecient,cost-eective,

andthorough.

Mysuggestionwasdrawnstraightfromtheprinciplesofthis

chapter:treattheCFPBasanexperiment,identifytheelementsof

theplanthatareassumptionsratherthanfacts,andgureoutways

totestthem.Usingtheseinsights,wecouldbuildaminimumviable

productandhavetheagencyupandrunning—onamicroscale—

longbeforetheoficialplanwassetinmotion.

Thenumberoneassumptionunderlyingthecurrentplanisthat

onceAmericansknowtheycancaltheCFPBforhelpwith

nancialfraudandabuse,therewilbeasignicantvolumeof

citizenswhodothat.Thissoundsreasonable,asitis

basedon

marketresearchabouttheamountoffraudthataectsAmericans

eachyear.However,despitealthatresearch,itisstilan

assumption.Iftheactualcalvolumediersmarkedlyfromthatin

theplan,itwilrequiresigni

cantrevision.WhatifAmericanswho

aresubjectedtonancialabusedon’tviewthemselvesasvictims

andthereforedon’tseekhelp?Whatiftheyhaveverydierent

notionsofwhatproblemsareimportant?Whatiftheycalthe

agencyseekinghelpforproblemsthatareoutsideitspurview?

Oncetheagencyisupandrunningwitha$500milionbudget

andacorrespondinglylargesta,alteringtheplanwilbe

expensiveandtime-consuming,butwhywaittogetfeedback?To

startexperimentingimmediately,theagencycouldstartwiththe

creationofasimplehotlinenumber,usingoneofthenewbreedof

low-costandfastsetupplatformssuchasTwilio.Withafewhours’

work,theycouldaddsimplevoiceprompts,oeringcalers

amenu

ofnancialproblemstochoosefrom.Intherstversion,the

promptscouldbedrawnstraightfromtheexistingresearch.Instead

ofacaseworkerontheline,eachpromptcouldoerthecaler

usefulinformationabouthowtosolveherorhisproblem.

Insteadofmarketingthishotlinetothewholecountry,theagency

couldruntheexperimentinamuchmorelimitedway:startwitha

smalgeographicarea,perhapsassmalasafewcityblocks,and

insteadofpayingforexpensivetelevisionorradioadvertisingtolet

peopleknowabouttheservice,usehighlytargetedadvertising.

peopleknowabouttheservice,usehighlytargetedadvertising.

Flyersonbilboards,newspaperadvertisementsto

thoseblocks,or

specialytargetedonlineadswouldbeagoodstart.Sincethetarget

areaissosmal,theycouldaordtopayapremiumtocreatea

highlevelofawarenessinthetargetzone.Thetotalcostwould

remainquitesmal.

Asacomprehensivesolutiontotheproblemofnancialabuse,

thisminimumviableproductisnotverygoodcomparedwithwhat

a$500milionagencycouldaccomplish.Butitisalsonotvery

expensive.Thisproductcouldbebuiltinamaterofdaysorweeks,

andthewholeexperimentprobablywouldcostonlyafew

thousanddolars.

Whatwewouldlearnfromthisexperimentwouldbeinvaluable.

Onthebasisoftheselectionsofthoserstcalers,theagencycould

immediatelystarttogetasenseofwhatkindsofproblems

Americansbelievetheyhave,notjustwhatthey“should”have.The

agencycouldbegintotestmarketingmessages:What

motivates

peopletocal?Itcouldstarttoextrapolatereal-worldtrends:What

percentageofpeopleinthetargetareaactualycal?The

extrapolationwouldnotbeperfect,butitwouldestablisha

baselinebehaviorthatwould

befarmoreaccuratethanmarket

research.

Mostimportant,thisproductwouldserveasaseedthatcould

germinateintoamuchmoreelaborateservice.Withthisbeginning,

theagencycouldengageina

continuousprocessofimprovement,

slowlybutsurelyaddingmoreandbetersolutions.Eventualy,it

wouldstathehotlinewithcaseworkers,perhapsatrstaddressing

onlyonecategoryofproblems,togivethecaseworkersthebest

chanceofsuccess.Bythetimetheocialplanwasreadyfor

implementation,thisearlyservicecouldserveasareal-world

template.

TheCFPBisjustgetingstarted,butalreadytheyareshowing

signsoffolowinganexperimentalapproach.Forexample,instead

ofdoingageographicalylimitedrolout,theyaresegmentingtheir

rstproductsbyusecase.Theyhaveestablishedapreliminary

orderofnancialproductstoprovideconsumerservices

for,with

creditcardscomingrst.Astheirrstexperimentunfolds,theywil

creditcardscomingrst.Astheirrstexperimentunfolds,theywil

havetheopportunitytocloselymonitoraloftheothercomplaints

andconsumerfeedbacktheyreceive.Thisdatawilinuencethe

depth,breadth,andsequenceoffutureoferings.

AsDavidForrest,theCFPB’schieftechnologyocer,toldme,

“OurgoalistogiveAmericancitizensaneasywaytotelusabout

theproblemstheyseeoutthereintheconsumernancial

marketplace.Wehaveanopportunitytocloselymonitorwhatthe

publicistelingusandreacttonewinformation.Marketschange

althetimeandourjobistochangewiththem.”6

Theentrepreneursandmanagersproledinthisbookaresmart,

capable,andextremelyresults-oriented.Inmanycases,theyarein

themidstofbuildinganorganizationinawayconsistentwiththe

bestpracticesofcurrentmanagementthinking.They

facethesame

chalengesinboththepublicandprivatesectors,regardlessof

industry.Aswe’veseen,eventheseasonedmanagersandexecutives

attheworld’sbest-runcompaniesstruggletoconsistentlydevelop

andlaunchinnovativenewproducts.

Theirchalengeistoovercometheprevailingmanagement

thinkingthatputsitsfaithinwel-researchedplans.Remember,

planningisatoolthatonlyworksinthepresenceofalongand

stableoperatinghistory.Andyet,doanyofusfeelthattheworld

aroundusisgetingmoreandmorestableeveryday?Changing

suchamind-setishardbutcriticaltostartupsuccess.Myhopeis

thatthisbookwilhelpmanagersandentrepreneurs

makethis

change.

PartTwo

PartTwo

STEER

HowVisionLeadstoSteering

Atitsheart,astartupisacatalystthattransformsideasinto

products.Ascustomersinteractwiththoseproducts,

theygenerate

feedbackanddata.Thefeedbackisbothqualitative(suchaswhat

theylikeanddon’tlike)andquantitative(suchashowmany

peopleuseitandnditvaluable).AswesawinPartOne,the

productsastartupbuildsarerealyexperiments;thelearningabout

howtobuildasustainablebusinessistheoutcomeofthose

experiments.Forstartups,thatinformationismuchmoreimportant

thandolars,awards,ormentionsinthepress,

becauseitcan

influenceandreshapethenextsetofideas.

Wecanvisualizethisthree-stepprocesswiththissimplediagram:

ThisBuild-Measure-LearnfeedbackloopisatthecoreoftheLean

Startupmodel.InPartTwo,wewilexamineitingreatdetail.

Manypeoplehaveprofessionaltrainingthatemphasizesone

elementofthisfeedbackloop.Forengineers,it’s

learningtobuild

thingsasecientlyaspossible.Somemanagersareexpertsat

strategizingandlearningatthewhiteboard.Plentyofentrepreneurs

focustheirenergiesontheindividualnouns:havingthebest

productideaorthebest-designedinitialproductorobsessingover

dataandmetrics.Thetruthisthatnoneoftheseactivitiesbyitselfis

ofparamountimportance.Instead,weneedtofocusourenergies

onminimizingthetotaltimethroughthisfeedbackloop.

Thisisthe

essenceofsteeringastartupandisthesubjectofPartTwo.Wewil

walkthroughacompleteturnoftheBuild-Measure-Learnfeedback

loop,discussingeachofthecomponentsindetail.

ThepurposeofPartOnewas

toexploretheimportanceof

learningasthemeasureofprogressforastartup.AsIhopeis

learningasthemeasureofprogressforastartup.AsIhopeis

evidentbynow,byfocusingourenergiesonvalidatedlearning,we

canavoidmuchofthewastethatplaguesstartupstoday.Asinlean

manufacturing,learningwhereandwhentoinvestenergyresultsin

savingtimeandmoney.

Toapplythescienticmethodtoastartup,weneedtoidentify

whichhypothesestotest.Icaltheriskiestelementsofastartup’s

plan,thepartsonwhicheverythingdepends,leap-of-faith

assumptions.Thetwomostimportantassumptionsarethevalue

hypothesisandthegrowthhypothesis.Thesegiveriseto

tuning

variablesthatcontrolastartup’sengineofgrowth.Eachiterationof

astartupisanatempttorevthisenginetoseeifitwilturn.Once

itisrunning,theprocessrepeats,shiftingintohigherandhigher

gears.

Onceclearontheseleap-of-faithassumptions,therststepisto

entertheBuildphaseasquicklyaspossiblewithaminimumviable

product(MVP).TheMVPisthatversionoftheproductthatenables

afulturnoftheBuild-Measure-Learnloopwithaminimum

amountofeortandtheleastamountofdevelopmenttime.The

minimumviableproductlacksmanyfeaturesthatmayprove

essentiallateron.However,insomeways,creatinga

MVPrequires

extrawork:wemustbeabletomeasureitsimpact.Forexample,it

isinadequatetobuildaprototypethatisevaluatedsolelyfor

internalqualitybyengineersanddesigners.Wealsoneedtogetit

infrontofpotentialcustomerstogaugetheirreactions.Wemay

evenneedtotryselingthemtheprototype,aswe’lsoonsee.

WhenweentertheMeasurephase,thebiggestchalengewilbe

determiningwhethertheproductdevelopmenteorts

areleading

torealprogress.Remember,ifwe’rebuildingsomethingthat

nobodywants,itdoesn’tmuchmaterifwe’redoingitontimeand

onbudget.ThemethodIrecommendiscaledinnovation

accounting,aquantitativeapproachthatalowsustoseewhether

ourengine-tuningeortsarebearingfruit.Italsoalowsustocreate

learningmilestones,whichareanalternativetotraditionalbusiness

andproductmilestones.Learningmilestonesare

usefulfor

entrepreneursasawayofassessingtheirprogressaccuratelyand

objectively;theyarealsoinvaluabletomanagersandinvestorswho

objectively;theyarealsoinvaluabletomanagersandinvestorswho

mustholdentrepreneursaccountable.However,notalmetricsare

createdequal,andinChapter7I’lclarifythedangerofvanity

metricsincontrasttothenuts-and-boltsusefulnessofactionable

metrics,whichhelptoanalyzecustomerbehaviorin

waysthat

supportinnovationaccounting.

Finaly,andmostimportant,there’sthepivot.Uponcompleting

theBuild-Measure-Learnloop,weconfrontthemostdicult

questionanyentrepreneur

faces:whethertopivottheoriginal

strategyorpersevere.Ifwe’vediscoveredthatoneofour

hypothesesisfalse,itistimetomakeamajorchangetoanew

strategichypothesis.

TheLeanStartupmethod

buildscapital-ecientcompanies

becauseitalowsstartupstorecognizethatit’stimetopivotsooner,

creatinglesswasteoftimeandmoney.Althoughwewritethe

feedbackloopasBuild-Measure-Learnbecausetheactivitieshappen

inthatorder,ourplanningrealyworksinthereverseorder:we

gureoutwhatweneedtolearn,useinnovationaccountingto

gureoutwhatweneedtomeasuretoknowifwearegaining

validatedlearning,andthengureoutwhatproductwe

needto

buildtorunthatexperimentandgetthatmeasurement.Alofthe

techniquesinPartTwoaredesignedtominimizethetotaltime

throughtheBuild-Measure-Learnfeedbackloop.

5LEAP

In2004,threecolegesophomoresarrivedinSiliconValeywith

theiredglingcolegesocialnetwork.Itwasliveonahandfulof

colegecampuses.Itwasnotthemarket-leadingsocialnetworkor

eventherstcolegesocialnetwork;othercompanies

hadlaunched

soonerandwithmorefeatures.With150,000registeredusers,it

madeverylitlerevenue,yetthatsummertheyraisedtheirrst

$500,000inventurecapital.Lessthanayearlater,theyraisedan

additional$12.7milion.

Ofcourse,bynowyou’veguessedthatthesethreecolege

sophomoreswereMarkZuckerberg,DustinMoskovitz,andChris

HughesofFacebook.Theirstoryisnowworldfamous.Manythings

aboutitareremarkable,butI’dliketofocusononlyone:how

Facebookwasabletoraisesomuchmoneywhenitsactualusage

wassosmal.1

Byalaccounts,whatimpressedinvestorsthemostweretwofacts

aboutFacebook’searlygrowth.Thefirstfactwastherawamountof

timeFacebook’sactiveusersspentonthesite.Morethanhalfofthe

userscamebacktothesiteeverysingleday.2Thisisanexampleof

howacompanycanvalidateitsvaluehypothesis—that

customers

ndtheproductvaluable.Thesecondimpressivethingabout

Facebook’searlytractionwastherateatwhichithadtakenoverits

rstfewcolegecampuses.Therateofgrowthwasstaggering:

FacebooklaunchedonFebruary4,2004,andbytheendofthat

monthalmostthree-quartersofHarvard’sundergraduateswere

usingit,withoutadolarofmarketingoradvertisinghavingbeen

usingit,withoutadolarofmarketingoradvertising

havingbeen

spent.Inotherwords,Facebookalsohadvalidateditsgrowth

hypothesis.Thesetwohypothesesrepresenttwoofthemost

importantleap-of-faithquestionsanynewstartupfaces.3

Atthetime,IheardmanypeoplecriticizeFacebook’searly

investors,claimingthatFacebookhad“nobusinessmodel”andonly

modestrevenuesrelativetothevaluationoeredbyitsinvestors.

TheysawinFacebookareturntotheexcessesofthe

dot-comera,

whencompanieswithlitlerevenueraisedmassiveamountsofcash

topursueastrategyof“atractingeyebals”and“getingbigfast.”

Manydot-com-erastartupsplannedtomakemoneylaterbyseling

theeyebalstheyhadboughttootheradvertisers.Intruth,those

dot-comfailureswerelitlemorethanmiddlemen,eectively

payingmoneytoacquirecustomers’atentionandthenplanningto

reselittoothers.Facebookwasdierent,becauseit

employeda

dierentengineofgrowth.Itpaidnothingforcustomeracquisition,

anditshighengagementmeantthatitwasaccumulatingmassive

amountsofcustomeratentioneveryday.Therewasneverany

questionthatatentionwouldbevaluabletoadvertisers;theonly

questionwashowmuchtheywouldpay.

ManyentrepreneursareatemptingtobuildthenextFacebook,

yetwhentheytrytoapplythelessonsofFacebookandother

famousstartupsuccessstories,theyquicklygetconfused.Isthe

lessonofFacebookthatstartupsshouldnotchargecustomers

moneyintheearlydays?Orisitthatstartupsshouldneverspend

moneyonmarketing?Thesequestionscannotbeanswered

inthe

abstract;thereareanalmostinfinitenumberofcounterexamplesfor

anytechnique.Instead,aswesawinPartOne,startupsneedto

conductexperimentsthathelpdeterminewhattechniqueswil

workintheiruniquecircumstances.Forstartups,theroleofstrategy

istohelpfigureouttherightquestionstoask.

STRATEGYISBASEDONASSUMPTIONS

Everybusinessplanbeginswithasetofassumptions.Itlaysouta

strategythattakesthoseassumptionsasagivenandproceedsto

strategythattakesthoseassumptionsasagivenandproceedsto

showhowtoachievethecompany’svision.Becausethe

assumptionshaven’tbeenprovedtobetrue(theyare

assumptions,

afteral)andinfactareoftenerroneous,thegoalofastartup’s

earlyefortsshouldbetotestthemasquicklyaspossible.

Whattraditionalbusinessstrategyexcelsatishelpingmanagers

identifyclearlywhat

assumptionsarebeingmadeinaparticular

business.Therstchalengeforanentrepreneuristobuildan

organizationthatcantesttheseassumptionssystematicaly.The

secondchalenge,asinalentrepreneurialsituations,istoperform

thatrigoroustestingwithoutlosingsightofthecompany’soveral

vision.

Manyassumptionsinatypicalbusinessplanareunexceptional.

Thesearewel-establishedfactsdrawnfrompastindustry

experienceorstraightforwarddeductions.InFacebook’scase,itwas

clearthatadvertiserswouldpayforcustomers’atention.Hidden

amongthesemundanedetailsareahandfulofassumptionsthat

requiremorecouragetostate—inthepresenttense—with

astraight

face:weassumethatcustomershaveasignicantdesiretousea

productlikeours,orweassumethatsupermarketswilcarryour

product.Actingasiftheseassumptionsaretrueisaclassic

entrepreneursuperpower.Theyarecaledleapsoffaithprecisely

becausethesuccessoftheentireventurerestsonthem.Iftheyare

true,tremendousopportunityawaits.Iftheyarefalse,thestartup

riskstotalfailure.

Mostleapsoffaithtaketheformofanargumentbyanalogy.For

example,onebusinessplanIrememberarguedasfolows:“Justas

thedevelopmentofprogressiveimageloadingalowedthe

widespreaduseoftheWorldWideWeboverdial-up,so

tooour

progressiverenderingtechnologywilalowourproducttorunon

low-endpersonalcomputers.”Youprobablyhavenoideawhat

progressiveimageloadingorrenderingis,anditdoesn’tmuch

mater.Butyouknowtheargument(perhapsyou’veevenusedit):

PrevioustechnologyXwasusedtowinmarketYbecauseof

atributeZ.WehaveanewtechnologyX2thatwilenable

ustowinmarketY2becausewetoohaveatributeZ.

Theproblemwithanalogieslikethisisthattheyobscurethetrue

leapoffaith.Thatistheirgoal:tomakethebusinessseemless

risky.Theyareusedtopersuadeinvestors,employees,orpartners

tosignon.Mostentrepreneurswouldcringe

toseetheirleapof

faithwritenthisway:

Largenumbersofpeoplealreadywantedaccesstothe

WorldWideWeb.Theyknewwhatitwas,theycouldaord

it,buttheycouldnotgetaccesstoitbecausethetimeit

tooktoloadimageswastoolong.Whenprogressiveimage

loadingwasintroduced,italowedpeopletogetontothe

WorldWideWebandteltheirfriendsaboutit.Thus,

companyXwonmarketY.

Similarly,thereisalreadyalargenumberofpotential

customerswhowantaccesstoourproductrightnow.They

knowtheywantit,theycanaordit,buttheycannotaccess

itbecausetherenderingistooslow.Whenwedebutour

productwithprogressiverenderingtechnology,theywil

ocktooursoftwareandteltheirfriends,andwewilwin

marketY2.

Thereareseveralthingstonoticeinthisrevisedstatement.First,

it’simportanttoidentifythefactsclearly.Isitrealytruethat

progressiveimageloading

causedtheadoptionoftheWorldWide

Web,orwasthisjustonefactoramongmany?Moreimportant,isit

realytruethattherearelargenumbersofpotentialcustomersout

therewhowantoursolutionrightnow?Theearlieranalogywas

designedtoconvincestakeholdersthatareasonablerststepisto

buildthenewstartup’stechnologyandseeifcustomerswiluseit.

Therestatedapproachshouldmakeclearthatwhatisneededisto

dosomeempiricaltestingrst:let’smakesurethatthere

realyare

hungrycustomersoutthereeagertoembraceournewtechnology.

AnalogsandAntilogs

Thereisnothingintrinsicalywrongwithbasingstrategyon

comparisonstoothercompaniesandindustries.In

fact,that

approachcanhelpyoudiscoverassumptionsthatarenotrealy

leapsoffaith.Forexample,theventurecapitalistRandyKomisar,

whosebookGetingtoPlanBdiscussedtheconceptofleapsof

faithingreatdetail,usesaframeworkof“analogs”and“antilogs”to

plotstrategy.

Heexplainstheanalog-antilogconceptbyusingtheiPodasan

example.“Ifyouwerelookingforanalogs,youwouldhavetolook

attheWalkman,”hesays.“ItsolvedacriticalquestionthatSteve

Jobsneverhadtoaskhimself:Wilpeoplelistentomusicina

publicplaceusingearphones?Wethinkofthatasanonsense

questiontoday,butitisfundamental.WhenSony

askedthe

question,theydidnothavetheanswer.SteveJobshad[theanswer]

intheanalog[version]”Sony’sWalkmanwastheanalog.Jobsthen

hadtofacethefactthatalthoughpeoplewerewilingtodownload

music,theywerenotwilingtopayforit.“Napsterwasanantilog.

Thatantiloghadtoleadhimtoaddresshisbusinessinaparticular

way,”Komisarsays.“Outoftheseanalogsandantilogscomea

seriesofunique,unansweredquestions.Thoseareleapsof

faiththat

I,asanentrepreneur,amtakingifIgothroughwiththisbusiness

venture.Theyaregoingtomakeorbreakmybusiness.IntheiPod

business,oneofthoseleapsoffaithwasthatpeoplewouldpayfor

music.”Ofcoursethatleapoffaithturnedouttobecorrect.4

Beyond“TheRightPlaceattheRightTime”

Thereareanynumberoffamousentrepreneurswhomademilions

becausetheyseemedtobeintherightplaceattherighttime.

However,foreverysuccessfulentrepreneurwhowasintheright

placeintherighttime,therearemanymorewhowerethere,too,

inthatrightplaceattherighttimebutstilmanagedtofail.Henry

Fordwasjoinedbynearlyvehundredotherentrepreneurs

inthe

earlytwentiethcentury.Imaginebeinganautomobileentrepreneur,

trainedinstate-of-the-artengineering,onthegroundoorofoneof

trainedinstate-of-the-artengineering,onthegroundoorofoneof

thebiggestmarketopportunitiesinhistory.Yetthevastmajority

managedtomakenomoneyatal.5Wesawthesamephenomenon

withFacebook,whichfacedearlycompetitionfromothercolege-

basedsocialnetworkswhoseheadstartprovedirrelevant.

Whatdierentiatesthesuccessstoriesfromthefailuresisthatthe

successfulentrepreneurshadtheforesight,theability,andthetools

todiscoverwhichpartsoftheirplanswereworkingbriliantlyand

whichweremisguided,andadapttheirstrategies

accordingly.

ValueandGrowth

AswesawintheFacebookstory,twoleapsoffaithstandaboveal

others:thevaluecreationhypothesisandthegrowthhypothesis.

Therststepinunderstandinganewproductorserviceisto

gure

outifitisfundamentalyvalue-creatingorvalue-destroying.Iuse

thelanguageofeconomicsinreferringtovalueratherthanprot,

becauseentrepreneursincludepeoplewhostartnot-for-protsocial

ventures,thoseinpublicsectorstartups,andinternalchangeagents

whodonotjudgetheirsuccessbyprotalone.Evenmore

confusing,therearemanyorganizationsthatarewildlyprofitablein

theshorttermbutultimatelyvalue-destroying,suchasthe

organizersofPonzischemes,andfraudulentormisguided

companies(e.g.,EnronandLehmanBrothers).

Asimilarthingistrueforgrowth.Aswithvalue,it’sessentialthat

entrepreneursunderstandthereasonsbehindastartup’sgrowth.

Therearemanyvalue-destroyingkindsofgrowththatshouldbe

avoided.Anexamplewouldbeabusinessthatgrowsthrough

continuousfund-raisingfrominvestorsandlotsofpaidadvertising

butdoesnotdevelopavalue-creatingproduct.

SuchbusinessesareengagedinwhatIcalsuccesstheater,using

theappearanceofgrowthtomakeitseemthattheyaresuccessful.

Oneofthegoalsofinnovationaccounting,whichisdiscussedin

depthinChapter7,istohelpdierentiatethesefalse

startupsfrom

trueinnovators.Traditionalaccountingjudgesnewventuresbythe

samestandardsitusesforestablishedcompanies,butthese

samestandardsitusesforestablishedcompanies,butthese

indicationsarenotreliablepredictorsofastartup’sfuture

prospects.ConsidercompaniessuchasAmazon.comthatrackedup

hugelossesontheirwaytobreakthroughsuccess.

Likeitstraditionalcounterpart,innovationaccountingrequires

thatastartuphaveandmaintainaquantitativenancialmodelthat

canbeusedtoevaluateprogressrigorously.However,inastartup’s

earliestdays,thereisnotenoughdatatomakeaninformedguess

aboutwhatthismodelmightlooklike.Astartup’searliest

strategic

plansarelikelytobehunch-orintuition-guided,andthatisagood

thing.Totranslatethoseinstinctsintodata,entrepreneursmust,in

SteveBlank’sfamousphrase,“getoutofthebuilding”andstart

learning.

GENCHIGEMBUTSU

Theimportanceofbasingstrategicdecisionsonrsthand

understandingofcustomersisoneofthecoreprinciplesthat

underliestheToyotaProductionSystem.AtToyota,thisgoesbythe

Japanesetermgenchigembutsu,whichisoneofthemost

importantphrasesintheleanmanufacturingvocabulary.InEnglish,

itisusualytranslatedasadirectiveto“goandseeforyourself”so

thatbusinessdecisionscanbebasedondeeprsthand

knowledge.

JereyLiker,whohasextensivelydocumentedthe“ToyotaWay,”

explainsitthisway:

InmyToyotainterviews,whenIaskedwhatdistinguishes

theToyotaWayfromothermanagementapproaches,the

mostcommonrstresponsewasgenchigembutsu

—whetherIwasinmanufacturing,productdevelopment,

sales,distribution,orpublicaairs.Youcannotbesureyou

realyunderstandanypartofanybusinessproblemunless

yougoandseeforyourself

rsthand.Itisunacceptableto

takeanythingforgrantedortorelyonthereportsof

others.6

Todemonstrate,takealookatthedevelopmentofToyota’s

Siennaminivanforthe2004modelyear.AtToyota,themanager

responsibleforthedesignanddevelopmentofanewmodelis

caledthechiefengineer,across-functionalleaderwhooverseesthe

entireprocessfromconcepttoproduction.The2004Siennawas

assignedtoYujiYokoya,whohadverylitle

experienceinNorth

America,whichwastheSienna’sprimarymarket.Togureout

howtoimprovetheminivan,heproposedanaudacious

entrepreneurialundertaking:aroadtripspanningalftyU.S.

states,althirteenprovinces

andterritoriesofCanada,andalparts

ofMexico.Inal,heloggedmorethan53,000milesofdriving.In

smaltownsandlargecities,Yokoyawouldrentacurrent-model

Sienna,drivingitinadditiontotalkingtoandobservingreal

customers.Fromthosersthandobservations,Yokoyawasableto

starttestinghiscriticalassumptionsaboutwhatNorthAmerican

consumerswantedinaminivan.

Itiscommontothinkofselingtoconsumersaseasierthan

selingtoenterprises,becausecustomerslackthecomplexityof

multipledepartmentsanddierentpeopleplayingdierentroles

inthepurchasingprocess.Yokoyadiscoveredthiswasuntrueforhis

customers:“Theparentsandgrandparentsmayownthe

minivan.

Butit’sthekidswhoruleit.It’sthekidswhooccupythereartwo-

thirdsofthevehicle.Andit’sthekidswhoarethemostcritical—

andthemostappreciativeoftheirenvironment.IfIlearned

anythinginmytravels,itwasthenewSiennawouldneedkid

appeal.”7Identifyingtheseassumptionshelpedguidethecar’s

development.Forexample,Yokoyaspentanunusualamountofthe

Sienna’sdevelopmentbudgetoninternalcomfortfeatures,

which

arecriticaltoalong-distancefamilyroadtrip(suchtripsaremuch

morecommoninAmericathaninJapan).

Theresultswereimpressive,boostingtheSienna’smarketshare

dramaticaly.The2004

model’ssaleswere60percenthigherthan

thosein2003.Ofcourse,aproductliketheSiennaisaclassic

sustaininginnovation,thekindthattheworld’sbest-managed

establishedcompanies,suchasToyota,excelat.Entrepreneursface

establishedcompanies,suchasToyota,excelat.Entrepreneursface

adierentsetofchalengesbecausetheyoperatewithmuchhigher

uncertainty.Whileacompanyworkingonasustaininginnovation

knowsenoughaboutwhoandwheretheircustomersareto

use

genchigembutsutodiscoverwhatcustomerswant,startups’early

contactwithpotentialcustomersmerelyrevealswhatassumptions

requirethemosturgenttesting.

GETOUTOFTHE

BUILDING

Numberstelacompelingstory,butIalwaysremindentrepreneurs

thatmetricsarepeople,too.Nomaterhowmanyintermediaries

liebetweenacompanyanditscustomers,attheendoftheday,

customersarebreathing,thinking,buyingindividuals.Their

behaviorismeasurableandchangeable.Evenwhenoneisselingto

largeinstitutions,asinabusiness-to-businessmodel,ithelpsto

rememberthatthosebusinessesaremadeupof

individuals.Al

successfulsalesmodelsdependonbreakingdownthemonolithic

viewoforganizationsintothedisparatepeoplethatmakethemup.

AsSteveBlankhasbeenteachingentrepreneursforyears,the

factsthatweneedtogatheraboutcustomers,markets,suppliers,

andchannelsexistonly“outsidethebuilding.”Startupsneed

extensivecontactwithpotentialcustomerstounderstandthem,so

getoutofyourchairandgettoknowthem.

Therststepinthisprocessistoconrmthatyourleap-of-faith

questionsarebasedinreality,thatthecustomerhasasignicant

problemworthsolving.8WhenScotCookconceivedIntuitin1982,

hehadavision—atthattimequiteradical—thatsomeday

consumerswouldusepersonalcomputerstopaybilsandkeep

trackofexpenses.WhenCooklefthisconsultingjobtotakethe

entrepreneurialplunge,hedidn’tstartwithstacksofmarket

researchorin-depthanalysisatthewhiteboard.Instead,he

picked

uptwophonebooks:oneforPaloAlto,California,wherehewas

livingatthetime,andtheotherforWinnetka,Ilinois.

Calingpeopleatrandom,heinquiredifhecouldaskthemafew

questionsaboutthewaythey

managedtheirnances.Thoseearly

questionsaboutthewaytheymanagedtheirnances.Thoseearly

conversationsweredesignedtoanswerthisleap-of-faithquestion:

dopeoplenditfrustratingtopaybilsbyhand?Itturnedoutthat

theydid,andthisearlyvalidationgaveCooktheconrmationhe

neededtogetstartedonasolution.9

Thoseearlyconversationsdidnotdelveintotheproductfeatures

ofaproposedsolution;thatatemptwouldhavebeenfoolish.The

averageconsumersatthattimewerenotconversantenoughwith

personalcomputerstohaveanopinionaboutwhetherthey’dwant

tousetheminanewway.Thoseearlyconversationswerewith

mainstreamcustomers,notearlyadopters.Stil,the

conversations

yieldedafundamentalinsight:ifIntuitcouldndawaytosolve

thisproblem,therecouldbealargemainstreamaudienceonwhich

itcouldbuildasignificantbusiness.

DesignandtheCustomer

Archetype

Thegoalofsuchearlycontactwithcustomersisnottogain

definitiveanswers.Instead,itistoclarifyatabasic,coarselevelthat

weunderstandourpotentialcustomerandwhatproblemsthey

have.Withthatunderstanding,wecancraftacustomerarchetype,a

briefdocumentthatseekstohumanizetheproposedtarget

customer.Thisarchetypeisanessentialguideforproduct

developmentandensuresthatthedailyprioritizationdecisionsthat

everyproductteammustmakearealignedwiththecustomerto

whomthecompanyaimstoappeal.

Therearemanytechniquesforbuildinganaccuratecustomer

archetypethathavebeendevelopedoverlongyearsofpracticein

thedesigncommunity.Traditionalapproachessuchasinteraction

designordesignthinkingareenormouslyhelpful.Tome,ithas

alwaysseemedironicthatmanyoftheseapproachesarehighly

experimentalanditerative,usingtechniquessuchas

rapid

prototypingandin-personcustomerobservationstoguide

designers’work.Yetbecauseofthewaydesignagencies

traditionalyhavebeencompensated,althisworkculminatesina

monolithicdeliverabletothe

client.Alofasudden,therapid

monolithicdeliverabletotheclient.Alofasudden,therapid

learningandexperimentationstops;theassumptionisthatthe

designershavelearnedalthereistoknow.Forstartups,thisisan

unworkablemodel.Noamountofdesigncananticipatethemany

complexitiesofbringingaproducttolifeintherealworld.

Infact,anewbreedofdesignersisdevelopingbrand-new

techniquesunderthebannerofLeanUserExperience

(LeanUX).

Theyrecognizethatthecustomerarchetypeisahypothesis,nota

fact.Thecustomerproleshouldbeconsideredprovisionaluntil

thestrategyhasshownviavalidatedlearningthatwecanservethis

typeofcustomerinasustainableway.10

ANALYSISPARALYSIS

Therearetwoever-presentdangerswhenentrepreneursconduct

marketresearchandtalktocustomers.Folowersofthejust-do-it

schoolofentrepreneurship

areimpatienttogetstartedanddon’t

wanttospendtimeanalyzingtheirstrategy.They’dratherstart

buildingimmediately,oftenafterjustafewcursorycustomer

conversations.Unfortunately,becausecustomersdon’trealyknow

whattheywant,it’seasyfortheseentrepreneurstodelude

themselvesthattheyareontherightpath.

Otherentrepreneurscanfalvictimtoanalysisparalysis,endlessly

reningtheirplans.Inthiscase,talkingtocustomers,reading

researchreports,andwhiteboardstrategizingarealequaly

unhelpful.Theproblemwithmostentrepreneurs’plansisgeneraly

notthattheydon’tfolowsoundstrategicprinciplesbutthatthe

factsuponwhichtheyarebasedarewrong.

Unfortunately,mostof

theseerrorscannotbedetectedatthewhiteboardbecausethey

dependonthesubtleinteractionsbetweenproductsandcustomers.

Iftoomuchanalysisisdangerousbutnonecanleadtofailure,

howdoentrepreneursknowwhentostopanalyzingandstart

building?Theanswerisaconceptcaledtheminimumviable

product,thesubjectofChapter6.

6TEST

Grouponisoneofthefastest-

growingcompaniesofaltime.Its

namecomesfrom“groupcoupons,”aningeniousideathathas

spawnedanentireindustryofsocialcommerceimitators.

However,itdidn’tstartoutsuccessful.Whencustomerstook

Grouponuponitsrstdeal,awhoppingtwentypeoplebought

two-for-onepizzainarestaurantontherstoorofthecompany’s

Chicagoofices—hardlyaworld-changingevent.

Infact,Grouponwasn’toriginalymeanttobeaboutcommerce

atal.Thefounder,AndrewMason,intendedhiscompanyto

becomea“colectiveactivismplatform”caledThePoint.Itsgoal

wastobringpeopletogethertosolveproblemstheycouldn’tsolve

ontheirown,suchasfund-raisingforacauseorboycot

inga

certainretailer.ThePoint’searlyresultsweredisappointing,

however,andattheendof2008thefoundersdecidedtotry

somethingnew.Althoughtheystilhadgrandambitions,theywere

determinedtokeepthenewproductsimple.Theybuiltaminimum

viableproduct.Doesthissoundlikeabilion-dolarcompanyto

you?Masontelsthestory:

WetookaWordPressBlogandweskinnedittosay

Grouponandtheneveryday

wewoulddoanewpost.It

wastotalygheto.WewouldselT-shirtsontherst

versionofGroupon.We’dsayinthewrite-up,“ThisT-shirt

wilcomeinthecolorred,sizelarge.Ifyouwantadiferent

colororsize,e-mailthatto

us.”Wedidn’thaveaformto

colororsize,e-mailthattous.”Wedidn’thaveaformto

addthatstuf.Itwasjustsocobbledtogether.

Itwasenoughtoprovetheconceptandshowthatitwas

somethingthatpeoplerealyliked.Theactualcoupon

generationthatweweredoingwasalFileMaker.We

wouldrunascriptthatwoulde-mailthecouponPDFto

people.Itgottothepointwherewe’dsel500sushi

couponsinaday,andwe’dsend500PDFstopeoplewith

AppleMailatthesametime.RealyuntilJulyoftherst

yearitwasjustascramblingtograbthetigerbythetail.It

wastryingtocatchupandreasonablypiecetogethera

product.1

HandmadePDFs,apizzacoupon,andasimpleblogwereenough

tolaunchGrouponintorecord-breakingsuccess;itis

onpaceto

becomethefastestcompanyinhistorytoachieve$1bilioninsales.

Itisrevolutionizingthewaylocalbusinessesndnewcustomers,

oeringspecialdealstoconsumersinmorethan375cities

worldwide.2

Aminimumviableproduct(MVP)helpsentrepreneursstartthe

processoflearningasquicklyaspossible.3Itisnotnecessarilythe

smalestproductimaginable,though;itissimplythefastestwayto

getthroughtheBuild-Measure-Learnfeedbackloopwiththe

minimumamountofefort.

Contrarytotraditionalproductdevelopment,whichusualy

involvesalong,thoughtfulincubationperiodandstrivesfor

productperfection,thegoaloftheMVPistobegintheprocessof

learning,notendit.Unlikeaprototypeorconcepttest,anMVPis

designednotjusttoanswerproductdesignortechnicalquestions.

Itsgoalistotestfundamentalbusinesshypotheses.

WHYFIRSTPRODUCTSAREN’TMEANTTOBEPERFECT

AtIMVU,whenwewereraisingmoneyfromventureinvestors,we

AtIMVU,whenwewereraisingmoneyfromventureinvestors,we

wereembarrassed.Firstofal,ourproductwasstilbuggy

andlow-

quality.Second,althoughwewereproudofourbusinessresults,

theyweren’texactlyearth-shatering.Thegoodnewswasthatwe

wereonahockey-stick-shapedgrowthcurve.Thebadnewswas

thatthehockeystickwentuptoonlyabout$8,000permonthof

revenue.Thesenumbersweresolowthatwe’doftenhaveinvestors

askus,“Whataretheunitsonthesecharts?Arethosenumbersin

thousands?”We’dhavetoreply,“No,sir,thosearein

ones.”

However,thoseearlyresultswereextremelysignicantin

predictingIMVU’sfuturepath.Asyou’lseeinChapter7,wewere

abletovalidatetwoofourleap-of-faithassumptions:IMVUwas

providingvaluefor

customers,andwehadaworkingengineof

growth.Thegrossnumbersweresmalbecausewewereselingthe

producttovisionaryearlycustomerscaledearlyadopters.Before

newproductscanbesoldsuccessfulytothemassmarket,theyhave

tobesoldtoearlyadopters.Thesepeopleareaspecialbreedof

customer.Theyaccept—infactprefer—an80percentsolution;you

don’tneedaperfectsolutiontocapturetheirinterest.4

EarlytechnologyadopterslineduparoundtheblockforApple’s

originaliPhoneeventhoughitlackedbasicfeaturessuchascopy

andpaste,3GInternetspeed,andsupportforcorporatee-mail.

Google’soriginalsearchenginecouldanswerqueriesabout

specializedtopicssuchasStanfordUniversityandthe

Linux

operatingsystem,butitwouldbeyearsbeforeitcould“organize

theworld’sinformation.”However,thisdidnotstopearlyadopters

fromsingingitspraises.

Earlyadoptersusetheirimaginationtolinwhata

productis

missing.Theypreferthatstateofaairs,becausewhattheycare

aboutabovealisbeingthersttouseoradoptanewproductor

technology.Inconsumerproducts,it’softenthethrilofbeingthe

rstoneontheblocktoshowoanewbasketbalshoe,music

player,orcoolphone.Inenterpriseproducts,it’softenabout

gainingacompetitiveadvantagebytakingariskwithsomething

newthatcompetitorsdon’thaveyet.Earlyadoptersare

suspicious

ofsomethingthatistoopolished:ifit’sreadyforeveryonetoadopt,

ofsomethingthatistoopolished:ifit’sreadyforeveryonetoadopt,

howmuchadvantagecanonegetbybeingearly?Asaresult,

additionalfeaturesorpolishbeyondwhatearlyadoptersdemandis

aformofwastedresourcesandtime.

Thisisahardtruthformanyentrepreneurstoaccept.Afteral,

thevisionentrepreneurskeepintheirheadsisofahigh-quality

mainstreamproductthatwilchangetheworld,notoneusedbya

smalnicheofpeoplewhoarewilingtogiveitashotbeforeit’s

ready.Thatworld-changingproductispolished,slick,andreadyfor

primetime.Itwinsawardsattradeshowsand,mostofal,

is

somethingyoucanproudlyshowMomandDad.Anearly,buggy,

incompleteproductfeelslikeanunacceptablecompromise.How

manyofuswereraisedwiththeexpectationthatwewouldputour

bestworkforward?Asonemanagerputittomerecently,“Iknow

forme,theMVPfeelsalitledangerous—inagoodway—sinceI

havealwaysbeensuchaperfectionist.”

Minimumviableproductsrangeincomplexityfromextremely

simplesmoketests(litlemorethananadvertisement)toactual

earlyprototypescompletewithproblemsandmissingfeatures.

DecidingexactlyhowcomplexanMVPneedstobecannotbedone

formulaicaly.Itrequiresjudgment.Luckily,this

judgmentisnot

diculttodevelop:mostentrepreneursandproductdevelopment

peopledramaticalyoverestimatehowmanyfeaturesareneededin

anMVP.Whenindoubt,simplify.

Forexample,considera

servicesoldwithaone-monthfreetrial.

Beforeacustomercanusetheservice,heorshehastosignupfor

thetrial.Oneobviousassumption,then,ofthebusinessmodelis

thatcustomerswilsignupforafreetrialoncetheyhaveacertain

amountofinformationabouttheservice.Acriticalquestionto

consideriswhethercustomerswilinfactsignupforthefreetrial

givenacertainnumberofpromisedfeatures(thevaluehypothesis).

Somewhereinthebusinessmodel,probablyburiedina

single

celinaspreadsheet,itspeciesthe“percentageofcustomerswho

seethefreetrialoerwhothensignup.”Maybeinourprojections

wesaythatthisnumbershouldbe10percent.Ifyouthinkaboutit,

thisisaleap-of-faithquestion.Itrealyshouldberepresentedin

giantletersinaboldredfont:WEASSUME10PERCENTOFCUSTOMERSWILLSIGNUP.

giantletersinaboldredfont:WEASSUME10PERCENTOFCUSTOMERSWILLSIGNUP.

Mostentrepreneursapproachaquestionlikethisbybuildingthe

productandthencheckingtoseehowcustomersreacttoit.I

considerthistobeexactlybackwardbecauseitcanleadtoalotof

waste.First,ifitturnsoutthatwe’rebuilding

somethingnobody

wants,thewholeexercisewilbeanavoidableexpenseoftimeand

money.Ifcustomerswon’tsignupforthefreetrial,they’lneverget

toexperiencetheamazingfeaturesthatawaitthem.Eveniftheydo

signup,therearemanyotheropportunitiesforwaste.Forexample,

howmanyfeaturesdowerealyneedtoincludetoappealtoearly

adopters?Everyextrafeatureisaformofwaste,andifwedelaythe

testfortheseextrafeatures,itcomeswithatremendous

potential

costintermsoflearningandcycletime.

ThelessonoftheMVPisthatanyadditionalworkbeyondwhat

wasrequiredtostartlearningiswaste,nomaterhowimportantit

mighthaveseemedatthe

time.

Todemonstrate,I’lshareseveralMVPtechniquesfromactual

LeanStartups.Ineachcase,you’lwitnessentrepreneursavoiding

thetemptationtooverbuildandoverpromise.

THEVIDEOMINIMUM

VIABLEPRODUCT

DrewHoustonistheCEOofDropbox,aSiliconValeycompany

thatmakesanextremelyeasy-to-usele-sharingtool.Instalits

application,andaDropboxfolderappearsonyourcomputer

desktop.Anythingyoudragintothatfolderisuploaded

automaticalytotheDropboxserviceandtheninstantlyreplicated

acrossalyourcomputersanddevices.

Thefoundingteamwasmadeupofengineers,astheproduct

demandedsignicanttechnicalexpertisetobuild.Itrequired,for

example,integrationwithavarietyofcomputerplatformsand

operatingsystems:Windows,Macintosh,iPhone,Android,andso

on.Eachoftheseimplementationshappensata

deeplevelofthe

systemandrequiresspecializedknow-howtomaketheuser

experienceexceptional.Infact,oneofDropbox’sbiggest

competitiveadvantagesisthattheproductworksinsuchaseamless

competitiveadvantagesisthattheproductworksinsuchaseamless

waythatthecompetitionstrugglestoemulateit.

Thesearenotthekindofpeopleonewouldthinkofas

marketinggeniuses.Infact,noneofthemhadeverworkedina

marketingjob.Theyhadprominentventurecapitalbackersand

couldhavebeenexpectedtoapplythestandardengineering

thinkingtobuildingthebusiness:builditandtheywilcome.But

Dropboxdidsomethingdiferent.

Inparalelwiththeirproductdevelopmenteorts,thefounders

wantedfeedbackfromcustomersaboutwhatrealymateredto

them.Inparticular,Dropboxneededtotestitsleap-of-faith

question:ifwecanprovideasuperiorcustomer

experience,wil

peoplegiveourproductatry?Theybelieved—rightly,asitturned

out—thatlesynchronizationwasaproblemthatmostpeople

didn’tknowtheyhad.Onceyouexperiencethesolution,youcan’t

imaginehowyoueverlivedwithoutit.

Thisisnotthekindofentrepreneurialquestionyoucanaskor

expectananswertoinafocusgroup.Customersoftendon’tknow

whattheywant,andtheyoftenhadahardtimeunderstanding

Dropboxwhentheconceptwasexplained.Houstonlearnedthisthe

hardwaywhenhetriedtoraiseventurecapital.Inmeetingafter

meeting,investorswouldexplainthatthis“marketspace”was

crowdedwithexistingproducts,noneofthemhad

madeverymuch

money,andtheproblemwasn’taveryimportantone.Drewwould

ask:“Haveyoupersonalytriedthoseotherproducts?”Whenthey

wouldsayyes,he’dask:“Didtheyworkseamlesslyforyou?”The

answerwasalmostalwaysno.Yetinmeetingaftermeeting,the

venturecapitalistscouldnotimagineaworldinlinewithDrew’s

vision.Drew,incontrast,believedthatifthesoftware“justworked

likemagic,”customerswouldflocktoit.

Thechalengewasthatitwasimpossibletodemonstratethe

workingsoftwareinaprototypeform.Theproductrequiredthat

theyovercomesignicanttechnicalhurdles;italsohadanonline

servicecomponentthatrequiredhighreliabilityand

availability.To

avoidtheriskofwakingupafteryearsofdevelopmentwitha

productnobodywanted,Drewdidsomethingunexpectedlyeasy:he

madeavideo.

madeavideo.

Thevideoisbanal,asimplethree-minutedemonstrationofthe

technologyasitismeanttowork,butitwastargetedata

communityoftechnologyearlyadopters.Drewnarratesthevideo

personaly,andashe’snarrating,thevieweriswatchinghisscreen.

Ashedescribesthekindsofleshe’dliketosynchronize,the

viewercanwatchhismousemanipulatehiscomputer.Ofcourse,if

you’repayingatention,youstarttonoticethatthefileshe’smoving

aroundarefulofin-jokesandhumorousreferencesthat

were

appreciatedbythiscommunityofearlyadopters.Drewrecounted,

“Itdrovehundredsofthousandsofpeopletothewebsite.Ourbeta

waitinglistwentfrom5,000peopleto75,000peopleliteraly

overnight.Ittotalyblewusaway.”Today,Dropboxisoneof

SiliconValey’shotestcompanies,rumoredtobeworthmorethan

$1bilion.5

Inthiscase,thevideowastheminimumviableproduct.The

MVPvalidatedDrew’sleap-of-faithassumptionthatcustomers

wantedtheproducthewasdevelopingnotbecausetheysaidsoina

focusgrouporbecauseofahopefulanalogytoanotherbusiness,

butbecausetheyactualysignedup.

THECONCIERGEMINIMUMVIABLEPRODUCT

ConsideranotherkindofMVPtechnique:theconciergeMVP.To

understandhowthistechniqueworks,meetManuelRosso,theCEO

ofanAustin,Texas–basedstartupcaledFoodonthe

Table.Food

ontheTablecreatesweeklymealplansandgroceryliststhatare

basedonfoodyouandyourfamilyenjoy,thenhooksintoyour

localgrocerystorestofindthebestdealsontheingredients.

Afteryousignupforthesite,youwalkthroughalitlesetupin

whichyouidentifyyourmaingrocerystoreandcheckothefoods

yourfamilylikes.Later,youcanpickanothernearbystoreifyou

wanttocompareprices.Next,you’representedwitha

listofitems

thatarebasedonyourpreferencesandasked:“Whatareyouinthe

moodforthisweek?”Makeyourchoices,selectthenumberof

mealsyou’rereadytoplan,andchoosewhatyoucareaboutmost

mealsyou’rereadytoplan,andchoosewhatyoucareaboutmost

intermsoftime,money,health,orvariety.Atthispoint,thesite

searchesthroughrecipesthatmatchyourneeds,pricesoutthecost

ofthemealforyou,andletsyouprintoutyourshopping

list.6

Clearly,thisisanelaborateservice.Behindthescenes,ateamof

professionalchefsdeviserecipesthattakeadvantageofitemsthat

areonsaleatlocalgrocerystoresaroundthecountry.Thoserecipes

arematchedviacomputeralgorithmtoeachfamily’suniqueneeds

andpreferences.Trytovisualizetheworkinvolved:databasesof

almosteverygrocerystoreinthecountrymustbemaintained,

includingwhat’sonsaleateachonethisweek.Those

groceries

havetobematchedtoappropriaterecipesandthenappropriately

customized,tagged,andsorted.Ifarecipecalsforbroccolirabe,is

thatthesameingredientasthebroccolionsaleatthelocalmarket?

Afterreadingthatdescription,youmightbesurprisedtolearn

thatFoodontheTable(FotT)beganlifewithasinglecustomer.

Insteadofsupportingthousandsofgrocerystoresaroundthe

countryasitdoestoday,FotTsupportedjustone.Howdid

the

companychoosewhichstoretosupport?Thefoundersdidn’t—until

theyhadtheirrstcustomer.Similarly,theybeganlifewithno

recipeswhatsoever—untiltheirrstcustomerwasreadytobegin

hermealplanning.Infact,thecompanyserveditsrstcustomer

withoutbuildinganysoftware,withoutsigninganybusiness

developmentpartnerships,andwithouthiringanychefs.

Manuel,alongwithVPofproductSteveSanderson,wenttolocal

supermarketsandmoms’groupsinhishometownofAustin.Partof

theirmissionwasthetypicalobservationofcustomersthatisapart

ofdesignthinkingandotherideationtechniques.However,Manuel

andhisteamwerealsoonthehuntforsomethingelse:their

rst

customer.

Astheymetpotentialcustomersinthosesetings,theywould

interviewthemthewayanygoodmarketresearcherwould,butat

theendofeachinterviewtheywouldatempttomakea

sale.

They’ddescribethebenetsofFotT,nameaweeklysubscription

fee,andinvitethecustomertosignup.Mosttimestheywere

rejected.Afteral,mostpeoplearenotearlyadoptersandwilnot

rejected.Afteral,mostpeoplearenotearlyadoptersandwilnot

signupforanewservicesightunseen.Buteventualysomeonedid.

Thatoneearlyadoptergottheconciergetreatment.Insteadof

interactingwiththeFotTproductviaimpersonal

software,shegota

personalvisiteachweekfromtheCEOofthecompany.Heandthe

VPofproductwouldreviewwhatwasonsaleatherpreferred

grocerystoreandcarefulyselectrecipesonthebasisofher

preferences,goingsofarastolearnherfavoriterecipesforitems

sheregularlycookedforherfamily.Eachweektheywouldhand

her—inperson—apreparedpacketcontainingashoppinglistand

relevantrecipes,solicitherfeedback,andmakechanges

as

necessary.Mostimportant,eachweektheywouldcolectacheck

for$9.95.

Talkaboutinecient!Measuredaccordingtotraditionalcriteria,

thisisaterriblesystem,entirelynonscalableanda

completewaste

oftime.TheCEOandVPofproduct,insteadofbuildingtheir

business,areengagedinthedrudgeryofsolvingjustonecustomer’s

problem.Insteadofmarketingthemselvestomilions,theysold

themselvestoone.Worstofal,theireortsdidn’tappeartobe

leadingtoanythingtangible.Theyhadnoproduct,nomeaningful

revenue,nodatabasesofrecipes,notevenalastingorganization.

However,viewedthroughthelensoftheLeanStartup,they

were

makingmonumentalprogress.Eachweektheywerelearningmore

andmoreaboutwhatwasrequiredtomaketheirproductasuccess.

Afterafewweekstheywerereadyforanothercustomer.Each

customertheybroughtonmadeiteasiertogetthenextone,

becauseFotTcouldfocusonthesamegrocerystore,getingto

knowitsproductsandthekindsofpeoplewhoshoppedtherewel.

Eachnewcustomergottheconciergetreatment:personal

in-home

visits,theworks.Butafterafewmorecustomers,theoverheadof

servingthemone-on-onestartedtoincrease.

Onlyatthepointwherethefoundersweretoobusytobringon

additionalcustomersdid

Manuelandhisteamstarttoinvestin

automationintheformofproductdevelopment.Eachiterationof

theirminimumviableproductalowedthemtosavealitlemore

timeandserveafewmorecustomers:deliveringtherecipesand

shoppinglistviae-mailinsteadofviaanin-homevisit,startingto

shoppinglistviae-mailinsteadofviaanin-homevisit,startingto

parselistsofwhatwasonsaleautomaticalyviasoftwareinsteadof

byhand,eveneventualytakingcreditcardpayments

onlineinstead

ofahandwritencheck.

Beforelong,theyhadbuiltasubstantialserviceoering,rstin

theAustinareaandeventualynationwide.Butalongtheway,their

productdevelopmentteamwasalwaysfocusedon

scaling

somethingthatwasworkingratherthantryingtoinventsomething

thatmightworkinthefuture.Asaresult,theirdevelopmenteorts

involvedfarlesswastethanistypicalforaventureofthiskind.

Itisimportanttocontrastthiswiththecaseofasmalbusiness,

inwhichitisroutinetoseetheCEO,founder,president,andowner

servingcustomersdirectly,oneatatime.InaconciergeMVP,this

personalizedserviceisnottheproductbutalearning

activity

designedtotesttheleap-of-faithassumptionsinthecompany’s

growthmodel.Infact,acommonoutcomeofaconciergeMVPisto

invalidatethecompany’sproposedgrowthmodel,makingitclear

thatadierentapproachisneeded.Thiscanhappenevenifthe

initialMVPisprotableforthecompany.Withoutaformalgrowth

model,manycompaniesgetcaughtinthetrapofbeingsatised

withasmalprotablebusinesswhenapivot

(changeincourseor

strategy)mightleadtomoresignicantgrowth.Theonlywayto

knowistohavetestedthegrowthmodelsystematicalywithreal

customers.

PAYNOATTENTIONTOTHEEIGHTPEOPLE

BEHINDTHE

CURTAIN

MeetMaxVentilaandDamonHorowitz,technologistswitha

visiontobuildanewtypeofsearchsoftwaredesignedtoanswer

thekindsofquestionsthatbefuddlestate-of-the-art

companiessuch

asGoogle.Googlebefuddled?Thinkaboutit.Googleanditspeers

excelatansweringfactualquestions:Whatisthetalestmountainin

theworld?Whowasthetwenty-thirdpresidentoftheUnited

States?Butformoresubjectivequestions,Googlestruggles.Ask,

“What’sagoodplacetogooutforadrinkafterthebalgameinmy

“What’sagoodplacetogooutforadrinkafterthebalgameinmy

city?”andthetechnologyflails.What’sinteresting

aboutthisclassof

queriesisthattheyarerelativelyeasyforapersontoanswer.

Imaginebeingatacocktailpartysurroundedbyfriends.Howlikely

wouldyoubetogetahigh-qualityanswertoyoursubjective

question?Youalmostcertainlywouldgetone.Unlikefactual

queries,becausethesesubjectivequestionshavenosingleright

answer,today’stechnologystrugglestoanswerthem.Suchquestions

dependonthepersonansweringthem,hisorher

personal

experience,taste,andassessmentofwhatyou’relookingfor.

Tosolvethisproblem,MaxandDamoncreatedaproductcaled

Aardvark.Withtheirdeeptechnicalknowledgeandindustry

experience,itwouldhavebeenreasonabletoexpectthemtodive

inandstartprogramming.Instead,theytooksixmonthstogure

outwhattheyshouldbebuilding.Buttheydidn’tspendthatyearat

thewhiteboardstrategizingorengageinalengthymarket

research

project.

Instead,theybuiltaseriesoffunctioningproducts,eachdesigned

totestawayofsolvingthisproblemfortheircustomers.Each

productwasthenoeredtobetatesters,whosebehavior

wasused

tovalidateorrefuteeachspecichypothesis(seeexamplesin

sidebar).

ThefolowinglistofprojectsareexamplesfromAardvark’s

ideationperiod.7

Rekkit.Aservicetocolectyourratingsfromacrosstheweb

andgivebeterrecommendationstoyou.

Ninjapa.Awaythatyoucouldopenaccountsinvarious

applicationsthroughasinglewebsiteandmanageyourdata

acrossmultiplesites.

TheWebb.Acentralnumberthatyoucouldcalandtalktoa

personwhocoulddoanythingforyouthatyoucoulddo

online.

WebMacros.Awaytorecordsequencesofstepson

websitesso

thatyoucouldrepeatcommonactions,evenacrosssites,and

share“recipes”forhowyouaccomplishedonlinetasks.

InternetButonCompany.Awaytopackagestepstakenona

websiteandsmartform-l

functionality.Peoplecouldencode

butonsandsharebutonsàlasocialbookmarking.

MaxandDamonhadavisionthatcomputerscouldbeusedto

createavirtualpersonalassistanttowhichtheircustomerscould

askquestions.Becausetheassistantwasdesignedforsubjective

questions,theanswersrequiredhumanjudgment.Thus,theearly

Aardvarkexperimentstriedmanyvariationsonthistheme,building

aseriesofprototypesforwayscustomerscould

interactwiththe

virtualassistantandgettheirquestionsanswered.Altheearly

prototypesfailedtoengagethecustomers.

AsMaxdescribesit,“Weself-fundedthecompanyandreleased

verycheapprototypestotest.

WhatbecameAardvarkwasthesixth

prototype.Eachprototypewasatwo-tofour-weekeort.Weused

humanstoreplicatethebackendasmuchaspossible.Weinvited

onehundredtotwohundredfriendstotrytheprototypesand

measuredhowmanyofthemcameback.Theresultswere

unambiguouslynegativeuntilAardvark.”

Becauseoftheshorttimeline,noneoftheprototypesinvolved

advancedtechnology.Instead,theywereMVPsdesignedtotesta

moreimportantquestion:whatwouldberequiredtogetcustomers

toengagewiththeproductandteltheirfriendsaboutit?

“OncewechoseAardvark,”Ventilasays,“wecontinuedtorun

“OncewechoseAardvark,”Ventilasays,“wecontinuedtorun

withhumansreplicatingpiecesofthebackendforninemonths.We

hiredeightpeopletomanagequeries,classifyconversations,etc.

WeactualyraisedourseedandseriesAroundsbeforethesystem

wasautomated—theassumptionwasthatthelines

betweenhumans

andarticialinteligencewouldcross,andweatleastprovedthat

wewerebuildingstufpeoplewouldrespondto.

“Aswerenedtheproduct,wewouldbringinsixtotwelve

peopleweeklytoreactto

mockups,prototypes,orsimulationsthat

wewereworkingon.Itwasamixofexistingusersandpeoplewho

neversawtheproductbefore.Wehadourengineersjoinformany

ofthesesessions,bothsothattheycouldmakemodicationsinreal

time,butalsosowecouldalexperiencethepainofausernot

knowingwhattodo.”8

TheAardvarkproducttheysetledonworkedviainstant

messaging(IM).CustomerscouldsendAardvarkaquestionviaIM,

andAardvarkwouldgetthem

ananswerthatwasdrawnfromthe

customer’ssocialnetwork:thesystemwouldseekoutthe

customer’sfriendsandfriendsoffriendsandposethequestionto

them.Onceitgotasuitableanswer,itwouldreportbacktothe

initialcustomer.

Ofcourse,aproductlikethatrequiresaveryimportant

algorithm:givenaquestionaboutacertaintopic,whoisthebest

personinthecustomer’ssocialnetworktoanswerthatquestion?

Forexample,aquestion

aboutrestaurantsinSanFrancisco

shouldn’tberoutedtosomeoneinSeatle.Morechalengingstil,a

questionaboutcomputerprogrammingprobablyshouldn’tbe

routedtoanartstudent.

Throughouttheirtesting

process,MaxandDamonencountered

manydiculttechnologicalproblemslikethese.Eachtime,they

emphaticalyrefusedtosolvethematthatearlystage.Instead,they

usedWizardofOztestingtofakeit.InaWizardofOztest,

customersbelievetheyareinteractingwiththeactualproduct,but

behindthesceneshumanbeingsaredoingthework.Likethe

conciergeMVP,thisapproachisincrediblyinecient.Imaginea

servicethatalowedcustomerstoaskquestionsof

human

servicethatalowedcustomerstoaskquestionsofhuman

researchers—forfree—andexpectareal-timeresponse.Sucha

service(atscale)wouldlosemoney,butitiseasytobuildona

microscale.Atthatscale,italowedMaxandDamontoanswer

theseal-importantquestions:Ifwecansolvethetoughtechnical

problemsbehindthisarticialinteligenceproduct,wilpeopleuse

it?Wiltheiruseleadtothecreationofaproductthathas

real

value?

ItwasthissystemthatalowedMaxandDamontopivotoverand

overagain,rejectingconceptsthatseemedpromisingbutthat

wouldnothavebeenviable.Whentheywerereadyto

startscaling,

theyhadaready-maderoadmapofwhattobuild.Theresult:

Aardvarkwasacquiredforareported$50milion—byGoogle.9

THEROLEOFQUALITYANDDESIGNINANMVP

Oneofthemostvexing

aspectsoftheminimumviableproductis

thechalengeitposestotraditionalnotionsofquality.Thebest

professionalsandcraftspersonsalikeaspiretobuildquality

products;itisapointofpride.

Modernproductionprocessesrelyonhighqualityasawayto

boosteciency.TheyoperateusingW.EdwardsDeming’sfamous

dictumthatthecustomeristhemostimportantpartofthe

productionprocess.Thismeansthatwemustfocusour

energies

exclusivelyonproducingoutcomesthatthecustomerperceivesas

valuable.Alowingsloppyworkintoourprocessinevitablyleadsto

excessivevariation.Variationinprocessyieldsproductsofvarying

qualityintheeyesofthecustomerthatatbestrequirereworkand

atworstleadtoalostcustomer.Mostmodernbusinessand

engineeringphilosophiesfocusonproducinghigh-quality

experiencesforcustomersasaprimaryprinciple;itisthe

foundationofSixSigma,leanmanufacturing,designthinking,

extremeprogramming,andthesoftwarecraftsmanshipmovement.

Thesediscussionsofqualitypresupposethatthecompanyalready

knowswhatatributesoftheproductthecustomerwil

perceiveas

worthwhile.Inastartup,thisisariskyassumptiontomake.Often

worthwhile.Inastartup,thisisariskyassumptiontomake.Often

wearenotevensurewhothecustomeris.Thus,forstartups,I

believeinthefolowingqualityprinciple:

Ifwedonotknowwhothecustomeris,wedonotknow

whatqualityis.

Evena“low-quality”MVPcanactinserviceofbuildingagreat

high-qualityproduct.Yes,MVPssometimesare

perceivedaslow-

qualitybycustomers.Ifso,weshouldusethisasanopportunityto

learnwhatatributescustomerscareabout.Thisisinnitelybeter

thanmerespeculationorwhiteboardstrategizing,becauseit

providesasolidempiricalfoundationonwhichtobuildfuture

products.

Sometimes,however,customersreactquitedierently.Many

famousproductswerereleasedina“low-quality”state,and

customerslovedthem.ImagineifCraigNewmark,intheearlydays

ofCraigslist,hadrefusedtopublishhishumblee-mailnewsleter

becauseitlackedsucienthighdesign.Whatifthefoundersof

Grouponhadfelt“twopizzasforthepriceofone”was

beneath

them?

Ihavehadmanysimilarexperiences.IntheearlydaysofIMVU,

ouravatarswerelockedinoneplace,unabletomovearoundthe

screen.Thereason?WewerebuildinganMVPandhadnot

yet

tackledthediculttaskofcreatingthetechnologythatwould

alowavatarstowalkaroundthevirtualenvironmentstheyinhabit.

Inthevideogameindustry,thestandardisthat3Davatarsshould

moveuidlyastheywalk,avoidobstaclesintheirpath,andtake

aninteligentroutetowardtheirdestination.Famousbest-seling

gamessuchasElectronicArts’TheSimsworkonthisprinciple.We

didn’twanttoshipalow-qualityversionofthis

feature,sowe

optedinsteadtoshipwithstationaryavatars.

Feedbackfromthecustomerswasveryconsistent:theywanted

theabilitytomovetheiravatarsaroundtheenvironment.Wetook

thisasbadnewsbecauseit

meantwewouldhavetospend

considerableamountsoftimeandmoneyonahigh-qualitysolution

similartoTheSims.Butbeforewecommitedourselvestothat

similartoTheSims.Butbeforewecommitedourselvestothat

path,wedecidedtotryanotherMVP.Weusedasimplehack,

whichfeltalmostlikecheating.Wechangedtheproductsothat

customerscouldclickwheretheywantedtheiravatartogo,andthe

avatarwouldteleportthereinstantly.Nowalking,no

obstacle

avoidance.Theavatardisappearedandthenreappearedaninstant

laterinthenewplace.Wecouldn’tevenaordfancyteleportation

graphicsorsoundeects.Wefeltlameshippingthisfeature,butit

wasalwecouldaford.

Youcanimagineoursurprisewhenwestartedtogetpositive

customerfeedback.Weneveraskedaboutthemovementfeature

directly(weweretooembarrassed).Butwhenaskedtonamethe

topthingsaboutIMVUtheylikedbest,customersconsistentlylisted

avatar“teleportation”amongthetopthree(unbelievably,they

oftenspecicalydescribeditas“moreadvancedthanTheSims”).

Thisinexpensivecompromiseoutperformed

manyfeaturesofthe

productweweremostproudof,featuresthathadtakenmuchmore

timeandmoneytoproduce.

Customersdon’tcarehowmuchtimesomethingtakestobuild.

Theycareonlyifitservestheirneeds.Ourcustomers

preferredthe

quickteleportationfeaturebecauseitalowedthemtogetwhere

theywantedtogoasfastaspossible.Inretrospect,thismakes

sense.Wouldn’twealliketogetwhereverwe’regoinginan

instant?Nolines,nohoursonaplaneorsitingonthetarmac,no

connections,nocabsorsubways.Beammeup,Scoty.Our

expensive“real-world”approachwasbeatenhandilybyacool

fantasy-worldfeaturethatcostmuchlessbutthatour

customers

preferred.

Sowhichversionoftheproductislow-quality,again?

MVPsrequirethecouragetoputone’sassumptionstothetest.If

customersreactthewayweexpect,wecantakethatas

conrmationthatourassumptionsarecorrect.Ifwereleasea

poorlydesignedproductandcustomers(evenearlyadopters)

cannotgureouthowtouseit,thatwilconrmourneedtoinvest

insuperiordesign.Butwemustalwaysask:whatifthey

don’tcare

aboutdesigninthesamewaywedo?

Thus,theLeanStartupmethodisnotopposedtobuildinghigh-

Thus,theLeanStartupmethodisnotopposedtobuildinghigh-

qualityproducts,butonlyin

serviceofthegoalofwinningover

customers.Wemustbewilingtosetasideourtraditional

professionalstandardstostarttheprocessofvalidatedlearningas

soonaspossible.Butonceagain,thisdoesnotmeanoperatingina

sloppyorundisciplinedway.(Thisisanimportantcaveat.Thereis

acategoryofqualityproblemsthathavetheneteectofslowing

downtheBuild-Measure-Learnfeedbackloop.Defectsmakeitmore

diculttoevolvetheproduct.Theyactualyinterferewith

our

abilitytolearnandsoaredangeroustotolerateinanyproduction

process.Wewilconsidermethodsforguringoutwhentomake

investmentsinpreventingthesekindsofproblemsinPartThree.)

Asyouconsiderbuildingyourownminimumviableproduct,let

thissimplerulesuce:removeanyfeature,process,oreortthat

doesnotcontributedirectlytothelearningyouseek.

SPEEDBUMPSINBUILDINGANMVP

BuildinganMVPisnotwithoutrisks,bothrealandimagined.Both

canderailastartupeortunlesstheyareunderstoodaheadoftime.

Themostcommonspeedbumpsarelegalissues,fearsabout

competitors,brandingrisks,andtheimpactonmorale.

Forstartupsthatrelyonpatentprotection,therearespecial

chalengeswithreleasinganearlyproduct.Insomejurisdictions,

thewindowforlingapatentbeginswhentheproductisreleased

tothegeneralpublic,anddependingonthewaythe

MVPis

structured,releasingitmaystartthisclock.Evenifyourstartupis

notinoneofthosejurisdictions,youmaywantinternationalpatent

protectionandmaywinduphavingtoabidebythesemore

stringentrequirements.(Inmyopinion,issueslikethisareoneof

themanywaysinwhichcurrentpatentlawinhibitsinnovationand

shouldberemediedasamaterofpublicpolicy.)

Inmanyindustries,patentsareusedprimarilyfordefensive

purposes,asadeterrenttoholdcompetitorsatbay.Insuchcases,

thepatentrisksofanMVPareminorcomparedwiththelearning

benets.However,inindustriesinwhichanewscientic

benets.However,inindustriesinwhichanew

scientic

breakthroughisattheheartofacompany’scompetitiveadvantage,

theserisksneedtobebalancedmorecarefuly.Inalcases,

entrepreneursshouldseeklegalcounseltoensurethatthey

understandtherisksfuly.

Legalrisksmaybedaunting,butyoumaybesurprisedtolearn

thatthemostcommonobjectionIhaveheardovertheyearsto

buildinganMVPisfearofcompetitors—especialylargeestablished

companies—stealingastartup’sideas.Ifonlyitweresoeasyto

haveagoodideastolen!Partofthespecialchalengeofbeinga

startupisthenearimpossibilityofhavingyouridea,company,or

productbenoticedbyanyone,letalonea

competitor.Infact,Ihave

oftengivenentrepreneursfearfulofthisissuethefolowing

assignment:takeoneofyourideas(oneofyourlesserinsights,

perhaps),ndthenameoftherelevantproductmanageratan

establishedcompanywhohasresponsibilityforthatarea,andtryto

getthatcompanytostealyouridea.Calthemup,writethema

memo,sendthemapressrelease—goahead,tryit.Thetruthisthat

mostmanagersinmostcompaniesarealready

overwhelmedwith

goodideas.Theirchalengeliesinprioritizationandexecution,and

itisthosechalengesthatgiveastartuphopeofsurviving.10

Ifacompetitorcanoutexecuteastartuponcetheideaisknown,

thestartupisdoomedanyway.Thereasontobuildanewteamto

pursueanideaisthatyoubelieveyoucanacceleratethroughthe

Build-Measure-Learnfeedbackloopfasterthananyoneelsecan.If

that’strue,itmakesnodierencewhatthecompetition

knows.If

it’snottrue,astartuphasmuchbiggerproblems,andsecrecywon’t

xthem.Soonerorlater,asuccessfulstartupwilfacecompetition

fromfastfolowers.Aheadstartisrarelylargeenoughtomater,

andtimespentinstealthmode—awayfromcustomers—isunlikely

toprovideaheadstart.Theonlywaytowinistolearnfasterthan

anyoneelse.

Manystartupsplantoinvestinbuildingagreatbrand,andan

MVPcanseemlikeadangerousbrandingrisk.Similarly,

entrepreneursinexistingorganizationsoftenareconstrainedbythe

fearofdamagingtheparentcompany’sestablishedbrand.Ineither

fearofdamagingtheparentcompany’sestablishedbrand.

Ineither

ofthesecases,thereisaneasysolution:launchtheMVPundera

dierentbrandname.Inaddition,along-termreputationisonlyat

riskwhencompaniesengageinvocallaunchactivitiessuchasPR

andbuildinghype.Whenaproductfailstoliveuptothose

pronouncements,reallong-termdamagecanhappentoacorporate

brand.Butstartupshavetheadvantageofbeingobscure,havinga

patheticalysmalnumberofcustomers,andnothaving

much

exposure.Ratherthanlamentingthem,usetheseadvantagesto

experimentundertheradarandthendoapublicmarketinglaunch

oncetheproducthasproveditselfwithrealcustomers.11

Finaly,ithelpstoprepare

forthefactthatMVPsoftenresultin

badnews.Unliketraditionalconcepttestsorprototypes,theyare

designedtospeaktothefulrangeofbusinessquestions,notjust

designortechnicalones,andtheyoftenprovideaneededdoseof

reality.Infact,piercingtherealitydistortioneldisquite

uncomfortable.Visionariesareespecialyafraidofafalsenegative:

thatcustomerswilrejectaawedMVPthatistoosmalortoo

limited.Itispreciselythisatitudethatoneseeswhencompanies

launchfulyformedproductswithoutpriortesting.Theysimply

couldn’tbeartotesttheminanythinglessthantheirfulsplendor.

Yetthereiswisdominthevisionary’sfear.Teamssteepedin

traditionalproductdevelopmentmethodsare

trainedtomake

go/kildecisionsonaregularbasis.Thatistheessenceofthe

waterfalorstage-gatedevelopmentmodel.IfanMVPfails,teams

areliabletogiveuphopeandabandontheprojectaltogether.But

thisisasolvableproblem.

FROMTHEMVPTOINNOVATIONACCOUNTING

Thesolutiontothisdilemmaisacommitmenttoiteration.You

havetocommittoalocked-inagreement—aheadoftime—thatno

materwhatcomesoftestingtheMVP,youwilnotgiveuphope.

Successfulentrepreneursdonotgiveupattherstsignoftrouble,

nordotheyperseveretheplanerightintotheground.Instead,they

possessauniquecombinationofperseveranceandexibility.

The

possessauniquecombinationofperseveranceandexibility.The

MVPisjusttherststeponajourneyoflearning.Downthatroad

—aftermanyiterations—youmaylearnthatsomeelementofyour

productorstrategyisawedanddecideitistimetomakea

change,whichIcalapivot,toadierentmethodforachieving

yourvision.

Startupsareespecialyatriskwhenoutsidestakeholdersand

investors(especialycorporateCFOsforinternalprojects)havea

crisisofcondence.Whentheprojectwasauthorizedorthe

investmentmade,theentrepreneurpromisedthatthenewproduct

wouldbeworld-changing.Customersweresupposedtoocktoit

inrecordnumbers.Whyaresofewactualydoingso?

Intraditionalmanagement,amanagerwhopromisestodeliver

somethingandfailstodosoisintrouble.Thereareonlytwo

possibleexplanations:afailureofexecutionorafailuretoplan

appropriately.Bothareequalyinexcusable.Entrepreneurial

managersfaceadicultproblem:becausetheplansand

projectionswemakearefulofuncertainty,howcanweclaim

successwhenweinevitablyfailtodeliverwhatwe

promised?Put

anotherway,howdoestheCFOorVCknowthatwe’refailing

becausewelearnedsomethingcriticalandnotbecausewewere

goofingoformisguided?

Thesolutiontothisproblemresidesattheheartofthe

Lean

Startupmodel.Wealneedadisciplined,systematicapproachto

guringoutifwe’remakingprogressanddiscoveringifwe’re

actualyachievingvalidatedlearning.Icalthissysteminnovation

accounting,analternativetotraditionalaccountingdesigned

specificalyforstartups.ItisthesubjectofChapter7.

7MEASURE

Atthebeginning,astartupislitlemorethanamodelonapiece

ofpaper.Thenancialsinthe

businessplanincludeprojections

ofhowmanycustomersthecompanyexpectstoatract,how

muchitwilspend,andhowmuchrevenueandprotthatwil

leadto.It’sanidealthat’susualyfarfromwherethestartupisin

itsearlydays.

Astartup’sjobisto(1)rigorouslymeasurewhereitisrightnow,

confrontingthehardtruthsthatassessmentreveals,andthen(2)

deviseexperimentstolearnhowtomovetherealnumberscloserto

theidealreflectedinthebusinessplan.

Mostproducts—eventheonesthatfail—donothavezero

traction.Mostproductshavesomecustomers,somegrowth,and

somepositiveresults.Oneofthemostdangerousoutcomesfora

startupistobumblealonginthelandofthelivingdead.Employees

andentrepreneurstendtobeoptimisticbynature.Wewanttokeep

believinginourideasevenwhenthewritingisonthewal.Thisis

whythemythofperseveranceissodangerous.

Wealknowstories

ofepicentrepreneurswhomanagedtopuloutavictorywhen

thingsseemedincrediblybleak.Unfortunately,wedon’thearstories

aboutthecountlessnamelessotherswhoperseveredtoolong,

leadingtheircompaniestofailure.

WHYSOMETHINGASSEEMINGLYDULLASACCOUNTINGWILL

CHANGEYOURLIFE

Peopleareaccustomedtothinkingofaccountingasdryandboring,

anecessaryevilused

primarilytopreparenancialreportsand

surviveaudits,butthatisbecauseaccountingissomethingthathas

becometakenforgranted.Historicaly,undertheleadershipof

peoplesuchasAlfredSloanatGeneralMotors,accountingbecame

anessentialpartofthemethodofexertingcentralizedcontrolover

far-ungdivisions.AccountingalowedGMtosetclearmilestones

foreachofitsdivisionsandthenholdeachmanageraccountablefor

hisorherdivision’ssuccessinreachingthosegoals.Al

modern

corporationsusesomevariationofthatapproach.Accountingisthe

keytotheirsuccess.

Unfortunately,standardaccountingisnothelpfulinevaluating

entrepreneurs.Startupsaretoounpredictablefor

forecastsand

milestonestobeaccurate.

Irecentlymetwithaphenomenalstartupteam.Theyarewel

nanced,havesignicantcustomertraction,andaregrowing

rapidly.Theirproductisaleaderinanemerging

categoryof

enterprisesoftwarethatusesconsumermarketingtechniquestosel

intolargecompanies.Forexample,theyrelyonemployee-to-

employeeviraladoptionratherthanatraditionalsalesprocess,

whichmighttargetthechiefinformationocerortheheadof

informationtechnology(IT).Asaresult,theyhavetheopportunity

tousecuting-edgeexperimentaltechniquesastheyconstantly

revisetheirproduct.Duringthemeeting,Iaskedtheteam

asimple

questionthatImakeahabitofaskingstartupswheneverwemeet:

areyoumakingyourproductbeter?Theyalwayssayyes.ThenI

ask:howdoyouknow?Iinvariablygetthisanswer:wel,wearein

engineeringandwemadeanumberofchangeslastmonth,andour

customersseemtolikethem,andouroveralnumbersarehigher

thismonth.Wemustbeontherighttrack.

Thisisthekindofstorytelingthattakesplaceatmoststartup

boardmeetings.Mostmilestonesarebuiltthesameway:hita

certainproductmilestone,maybetalktoafewcustomers,andseeif

thenumbersgoup.Unfortunately,thisisnotagoodindicatorof

whetherastartupismakingprogress.Howdoweknow

thatthe

changeswe’vemadearerelatedtotheresultswe’reseeing?More

changeswe’vemadearerelatedtotheresultswe’reseeing?More

important,howdoweknowthatwearedrawingtherightlessons

fromthosechanges?

Toanswerthesekindsofquestions,startupshaveastrongneed

foranewkindofaccountinggearedspecicalytodisruptive

innovation.That’swhatinnovationaccountingis.

AnAccountability

FrameworkThatWorksAcrossIndustries

Innovationaccountingenablesstartupstoproveobjectivelythat

theyarelearninghowtogrowasustainablebusiness.Innovation

accountingbeginsbyturningtheleap-of-faithassumptionsdiscussed

inChapter5intoaquantitativenancialmodel.Everybusiness

planhassomekindofmodelassociatedwithit,evenifit’swriten

onthebackofanapkin.Thatmodelprovidesassumptionsabout

whatthebusinesswillooklikeatasuccessfulpointin

thefuture.

Forexample,thebusinessplanforanestablishedmanufacturing

companywouldshowitgrowinginproportiontoitssalesvolume.

Astheprotsfromthesalesofgoodsarereinvestedinmarketing

andpromotions,thecompanygainsnewcustomers.Therateof

growthdependsprimarilyonthreethings:theprotabilityofeach

customer,thecostofacquiringnewcustomers,andtherepeat

purchaserateofexistingcustomers.Thehigherthese

valuesare,the

fasterthecompanywilgrowandthemoreprotableitwilbe.

Thesearethedriversofthecompany’sgrowthmodel.

Bycontrast,amarketplacecompanythatmatchesbuyersand

selerssuchaseBaywilhave

adierentgrowthmodel.Itssuccess

dependsprimarilyonthenetworkeectsthatmakeitthepremier

destinationforbothbuyersandselerstotransactbusiness.Selers

wantthemarketplacewiththehighestnumberofpotential

customers.Buyerswantthemarketplacewiththemostcompetition

amongselers,whichleadstothegreatestavailabilityofproducts

andthelowestprices.(Ineconomics,thissometimesiscaled

supply-sideincreasingreturnsanddemand-side

increasingreturns.)

Forthiskindofstartup,theimportantthingtomeasureisthatthe

networkeectsareworking,asevidencedbythehighretentionrate

networkeectsareworking,asevidencedbythehighretentionrate

ofnewbuyersandselers.Ifpeoplestickwiththeproductwith

verylitleatrition,themarketplacewilgrownomaterhowthe

companyacquiresnewcustomers.Thegrowthcurvewillooklike

acompoundinginteresttable,withtherateofgrowth

dependingon

the“interestrate”ofnewcustomerscomingtotheproduct.

Thoughthesetwobusinesseshaveverydierentdriversof

growth,wecanstiluseacommonframeworktoholdtheirleaders

accountable.Thisframework

supportsaccountabilityevenwhenthe

modelchanges.

HOWINNOVATIONACCOUNTINGWORKS—THREELEARNING

MILESTONES

Innovationaccountingworksinthreesteps:rst,useaminimum

viableproducttoestablishrealdataonwherethecompanyisright

now.Withoutaclear-eyedpictureofyourcurrentstatus—nomater

howfarfromthegoalyoumaybe—youcannotbegintotrackyour

progress.

Second,startupsmustatempttotunetheenginefromthe

baselinetowardtheideal.Thismaytakemanyatempts.Afterthe

startuphasmadealthemicrochangesandproductoptimizationsit

cantomoveitsbaselinetowardtheideal,the

companyreachesa

decisionpoint.Thatisthethirdstep:pivotorpersevere.

Ifthecompanyismakinggoodprogresstowardtheideal,that

meansit’slearningappropriatelyandusingthatlearningefectively,

inwhichcaseitmakessense

tocontinue.Ifnot,themanagement

teameventualymustconcludethatitscurrentproductstrategyis

awedandneedsaseriouschange.Whenacompanypivots,it

startstheprocessaloveragain,reestablishinganewbaselineand

thentuningtheenginefromthere.Thesignofasuccessfulpivotis

thattheseengine-tuningactivitiesaremoreproductiveafterthe

pivotthanbefore.

EstablishtheBaseline

Forexample,astartupmightcreateacompleteprototype

ofits

productandoertoselittorealcustomersthroughitsmain

marketingchannel.ThissingleMVPwouldtestmostofthestartup’s

assumptionsandestablishbaselinemetricsforeachassumption

simultaneously.Alternatively,astartupmightprefertobuild

separateMVPsthatareaimedatgetingfeedbackonone

assumptionatatime.Beforebuildingtheprototype,thecompany

mightperformasmoketestwithitsmarketingmaterials.

Thisisan

olddirectmarketingtechniqueinwhichcustomersaregiventhe

opportunitytopreorderaproductthathasnotyetbeenbuilt.A

smoketestmeasuresonlyonething:whethercustomersare

interestedintryingaproduct.Byitself,thisisinsucientto

validateanentiregrowthmodel.Nonetheless,itcanbeveryuseful

togetfeedbackonthisassumptionbeforecommitingmoremoney

andotherresourcestotheproduct.

TheseMVPsprovidethefirstexampleofalearningmilestone.An

MVPalowsastartuptolinrealbaselinedatainitsgrowth

model—conversionrates,sign-upandtrialrates,customerlifetime

value,andsoon—andthisisvaluableasthefoundation

forlearning

aboutcustomersandtheirreactionstoaproductevenifthat

foundationbeginswithextremelybadnews.

Whenoneischoosingamongthemanyassumptionsinabusiness

plan,itmakessensetotest

theriskiestassumptionsfirst.Ifyoucan’t

ndawaytomitigatetheseriskstowardtheidealthatisrequired

forasustainablebusiness,thereisnopointintestingtheothers.For

example,amediabusinessthatisselingadvertisinghastwobasic

assumptionsthattaketheformofquestions:Canitcapturethe

atentionofadenedcustomersegmentonanongoingbasis?and

canitselthatatentiontoadvertisers?Inabusinessinwhichthe

advertisingratesforaparticularcustomersegment

arewelknown,

thefarriskierassumptionistheabilitytocaptureatention.

Therefore,therstexperimentsshouldinvolvecontentproduction

ratherthanadvertisingsales.Perhapsthecompanywilproducea

pilotepisodeorissuetoseehowcustomersengage.

TuningtheEngine

Oncethebaselinehasbeenestablished,thestartupcanwork

towardthesecondlearningmilestone:tuningtheengine.Every

productdevelopment,

marketing,orotherinitiativethatastartup

undertakesshouldbetargetedatimprovingoneofthedriversofits

growthmodel.Forexample,acompanymightspendtime

improvingthedesignofitsproducttomakeiteasierfornew

customerstouse.Thispresupposesthattheactivationrateofnew

customersisadriverofgrowthandthatitsbaselineislowerthan

thecompanywouldlike.Todemonstratevalidatedlearning,the

designchangesmustimprovetheactivationrateofnew

customers.

Iftheydonot,thenewdesignshouldbejudgedafailure.Thisisan

importantrule:agooddesignisonethatchangescustomer

behaviorforthebeter.

Comparetwostartups.Therstcompanysetsoutwithaclear

baselinemetric,ahypothesisaboutwhatwilimprovethatmetric,

andasetofexperimentsdesignedtotestthathypothesis.The

secondteamsitsarounddebatingwhatwouldimprovetheproduct,

implementsseveralofthosechangesatonce,and

celebratesifthere

isanypositiveincreaseinanyofthenumbers.Whichstartupis

morelikelytobedoingeectiveworkandachievinglasting

results?

PivotorPersevere

Overtime,ateamthatislearningitswaytowardasustainable

businesswilseethenumbersinitsmodelrisefromthehorrible

baselineestablishedbytheMVPandconvergetosomethinglikethe

idealoneestablishedinthebusinessplan.Astartupthat

failstodo

sowilseethatidealrecedeeverfartherintothedistance.When

thisisdoneright,eventhemostpowerfulrealitydistortioneld

won’tbeabletocoverupthissimplefact:ifwe’renotmovingthe

driversofourbusinessmodel,we’renotmakingprogress.That

becomesasuresignthatit’stimetopivot.

INNOVATIONACCOUNTINGATIMVU

Here’swhatinnovationaccountinglookedlikeforusintheearly

daysofIMVU.Ourminimumviableproducthadmanydefectsand,

whenwerstreleasedit,extremelylowsales.Wenaturaly

assumedthatthelackofsaleswasrelatedtothelowqualityofthe

product,soweekafterweekweworkedonimprovingthe

quality

oftheproduct,trustingthatoureortswereworthwhile.Attheend

ofeachmonth,wewouldhaveaboardmeetingatwhichwewould

presenttheresults.Thenightbeforetheboardmeeting,we’drun

ourstandardanalytics,measuringconversionrates,customercounts,

andrevenuetoshowwhatagoodjobwehaddone.Forseveral

meetingsinarow,thiscausedalast-minutepanicbecausethe

qualityimprovementswerenotyieldinganychangein

customer

behavior.Thisledtosomefrustratingboardmeetingsatwhichwe

couldshowgreatproduct“progress”butnotmuchinthewayof

businessresults.Afterawhile,ratherthanleaveittothelast

minute,webegantotrackourmetricsmorefrequently,tightening

thefeedbackloopwithproductdevelopment.Thiswasevenmore

depressing.Weekin,weekout,ourproductchangeswerehaving

noefect.

ImprovingaProductonFiveDolarsaDay

Wetrackedthe“funnelmetrics”behaviorsthatwerecriticaltoour

engineofgrowth:customerregistration,thedownloadofour

application,trial,repeatusage,andpurchase.Tohaveenoughdata

tolearn,weneededjustenoughcustomersusingourproducttoget

realnumbersforeachbehavior.Wealocatedabudgetofve

dolarsperday:enoughtobuyclicksonthethen-newGoogle

AdWordssystem.Inthosedays,theminimumyoucould

bidfora

clickwas5cents,buttherewasnooveralminimumtoyour

spending.Thus,wecouldaordtoopenanaccountandgetstarted

eventhoughwehadverylitlemoney.1

eventhoughwehadverylit

lemoney.

Fivedolarsboughtusahundredclicks—everyday.Froma

marketingpointofviewthiswasnotverysignicant,butfor

learningitwaspriceless.Everysingledaywewereabletomeasure

ourproduct’sperformancewithabrandnewsetofcustomers.Also,

eachtimewerevisedtheproduct,wegotabrandnewreportcard

onhowweweredoingtheverynextday.

Forexample,onedaywewoulddebutanewmarketingmessage

aimedatrst-timecustomers.Thenextdaywemightchangethe

waynewcustomerswereinitiatedintotheproduct.Otherdays,we

wouldaddnewfeatures,xbugs,roloutanewvisualdesign,or

tryanewlayoutforourwebsite.Everytime,wetold

ourselveswe

weremakingtheproductbeter,butthatsubjectivecondencewas

puttotheacidtestofrealnumbers.

Dayinanddayoutwewereperformingrandomtrials.Eachday

wasanewexperiment.Each

day’scustomerswereindependentof

thoseofthedaybefore.Mostimportant,eventhoughourgross

numbersweregrowing,itbecameclearthatourfunnelmetrics

werenotchanging.

Hereisagraphfromoneof

IMVU’searlyboardmeetings:

Thisgraphrepresentsapproximatelysevenmonthsofwork.Over

thatperiod,weweremakingconstantimprovementstotheIMVU

product,releasingnewfeaturesonadailybasis.Wewere

conductingalotofin-personcustomerinterviews,andourproduct

developmentteamwasworkingextremelyhard.

CohortAnalysis

Toreadthegraph,youneedtounderstandsomethingcaledcohort

analysis.Thisisoneofthemostimportanttoolsofstartupanalytics.

Althoughitsoundscomplex,itisbasedonasimplepremise.

Althoughitsoundscomplex,itisbasedonasimplepremise.

Insteadoflookingatcumulativetotalsorgrossnumberssuchas

totalrevenueandtotalnumberofcustomers,onelooksatthe

performanceofeachgroupofcustomersthatcomesinto

contact

withtheproductindependently.Eachgroupiscaledacohort.The

graphshowstheconversionratestoIMVUofnewcustomerswho

joinedineachindicatedmonth.Eachconversionrateshowsthe

percentageofcustomerwhoregisteredinthatmonthwho

subsequentlywentontotaketheindicatedaction.Thus,amongal

thecustomerswhojoinedIMVUinFebruary2005,about60

percentofthemloggedintoourproductatleastonetime.

Managerswithanenterprisesalesbackgroundwilrecognizethis

funnelanalysisasthetraditionalsalesfunnelthatisusedtomanage

prospectsontheirwaytobecomingcustomers.LeanStartupsuseit

inproductdevelopment,too.Thistechniqueisusefulin

manytypes

ofbusiness,becauseeverycompanydependsforitssurvivalon

sequencesofcustomerbehaviorcaledows.Customerows

governtheinteractionofcustomerswithacompany’sproducts.

Theyalowustounderstandabusinessquantitativelyandhave

muchmorepredictivepowerthandotraditionalgrossmetrics.

Ifyoulookclosely,you’lseethatthegraphshowssomeclear

trends.Someproductimprovementsarehelping—a

litle.The

percentageofnewcustomerswhogoontousetheproductatleast

vetimeshasgrownfromlessthan5percenttoalmost20percent.

Yetdespitethisfourfoldincrease,thepercentageofnewcustomers

whopaymoneyforIMVUisstuckataround1percent.Think

aboutthatforamoment.Aftermonthsandmonthsofwork,

thousandsofindividualimprovements,focusgroups,design

sessions,andusabilitytests,thepercentageofnew

customerswho

subsequentlypaymoneyisexactlythesameasitwasattheonset

eventhoughmanymorecustomersaregetingachancetotrythe

product.

Thankstothepowerofcohortanalysis,wecouldnot

blamethis

failureonthelegacyofpreviouscustomerswhowereresistantto

change,externalmarketconditions,oranyotherexcuse.Each

cohortrepresentedanindependentreportcard,andtryaswe

might,weweregetingstraightC’s.Thishelpedusrealizewehada

might,weweregetingstraightC’s.Thishelpedusrealizewehada

problem.

Iwasinchargeoftheproductdevelopmentteam,smalthoughit

wasinthosedays,andsharedwithmycofoundersthesensethatthe

problemhadtobewithmyteam’seorts.Iworkedharder,triedto

focusonhigher-andhigher-qualityfeatures,andlostalotofsleep.

Ourfrustrationgrew.WhenIcouldthinkofnothingelseto

do,I

wasnalyreadytoturntothelastresort:talkingtocustomers.

Armedwithourfailuretomakeprogresstuningourengineof

growth,Iwasreadytoasktherightquestions.

Beforethisfailure,inthe

company’searliestdays,itwaseasyto

talktopotentialcustomersandcomeawayconvincedwewereon

therighttrack.Infact,whenwewouldinvitecustomersintothe

oceforin-personinterviewsandusabilitytests,itwaseasyto

dismissnegativefeedback.Iftheydidn’twanttousetheproduct,I

assumedtheywerenotinourtargetmarket.“Firethatcustomer,”

I’dsaytothepersonresponsibleforrecruitingforourtests.“Find

mesomeoneinourtargetdemographic.”Ifthenext

customerwas

morepositive,IwouldtakeitasconfirmationthatIwasrightinmy

targeting.Ifnot,I’dfireanothercustomerandtryagain.

Bycontrast,onceIhaddatainhand,myinteractionswith

customerschanged.Suddenly

Ihadurgentquestionsthatneeded

answering:Whyaren’tcustomersrespondingtoourproduct

“improvements”?Whyisn’tourhardworkpayingo?For

example,wekeptmakingiteasierandeasierforcustomerstouse

IMVUwiththeirexistingfriends.Unfortunately,customersdidn’t

wanttoengageinthatbehavior.Makingiteasiertousewastotaly

besidethepoint.Onceweknewwhattolookfor,genuine

understandingcamemuchfaster.Aswasdescribedin

Chapter3,

thiseventualyledtoacriticalyimportantpivot:awayfromanIM

add-onusedwithexistingfriendsandtowardastand-alonenetwork

onecanusetomakenewfriends.Suddenly,ourworriesabout

productivityvanished.Onceoureortswerealignedwithwhat

customersrealywanted,ourexperimentsweremuchmorelikely

tochangetheirbehaviorforthebeter.

Thispaternwouldrepeattimeandagain,fromthedayswhen

weweremakinglessthanathousanddolarsinrevenuepermonth

weweremakinglessthanathousanddolarsinrevenuepermonth

althewayuptothetimeweweremakingmilions.Infact,thisis

thesignofasuccessfulpivot:thenewexperimentsyourun

are

overalmoreproductivethantheexperimentsyouwererunning

before.

Thisisthepatern:poorquantitativeresultsforceustodeclare

failureandcreatethemotivation,context,and

spaceformore

qualitativeresearch.Theseinvestigationsproducenewideas—new

hypotheses—tobetested,leadingtoapossiblepivot.Eachpivot

unlocksnewopportunitiesforfurtherexperimentation,andthe

cyclerepeats.Eachtimewerepeatthissimplerhythm:establishthe

baseline,tunetheengine,andmakeadecisiontopivotor

persevere.

OPTIMIZATIONVERSUSLEARNING

Engineers,designers,andmarketersarealskiledat

optimization.

Forexample,directmarketersareexperiencedatsplittestingvalue

propositionsbysendingadierentoertotwosimilargroupsof

customerssothattheycanmeasuredierencesintheresponserates

ofthetwogroups.Engineers,ofcourse,areskiledatimprovinga

product’sperformance,justasdesignersaretalentedatmaking

productseasiertouse.Altheseactivitiesinawel-runtraditional

organizationoerincrementalbenetforincrementaleort.

As

longasweareexecutingtheplanwel,hardworkyieldsresults.

However,thesetoolsforproductimprovementdonotworkthe

samewayforstartups.Ifyouarebuildingthewrongthing,

optimizingtheproductorits

marketingwilnotyieldsignicant

results.Astartuphastomeasureprogressagainstahighbar:

evidencethatasustainablebusinesscanbebuiltarounditsproducts

orservices.That’sastandardthatcanbeassessedonlyifastartup

hasmadeclear,tangiblepredictionsaheadoftime.

Intheabsenceofthosepredictions,productandstrategydecisions

arefarmoredicultandtime-consuming.Ioftenseethisinmy

consultingpractice.I’vebeencaledinmanytimestohelpastartup

thatfeelsthatitsengineeringteam“isn’tworkinghardenough.”

thatfeelsthatitsengineeringteam“isn’tworkinghardenough.”

WhenImeetwiththoseteams,therearealwaysimprovementsto

bemadeandIrecommendthem,butinvariablythereal

problemis

notalackofdevelopmenttalent,energy,oreort.Cycleaftercycle,

theteamisworkinghard,butthebusinessisnotseeingresults.

Managerstrainedinatraditionalmodeldrawthelogical

conclusion:ourteamisnotworkinghard,notworkingeectively,

ornotworkingeficiently.

Thusthedownwardcyclebegins:theproductdevelopmentteam

valiantlytriestobuildaproductaccordingtothespecicationsitis

receivingfromthecreativeorbusinessleadership.Whengood

resultsarenotforthcoming,businessleadersassumethatany

discrepancybetweenwhatwasplannedandwhatwasbuiltisthe

causeandtrytospecifythenextiterationingreater

detail.Asthe

specicationsgetmoredetailed,theplanningprocessslowsdown,

batchsizeincreases,andfeedbackisdelayed.Ifaboardofdirectors

orCFOisinvolvedasastakeholder,itdoesn’ttakelongfor

personnelchangestofolow.

Afewyearsago,ateamthatselsproductstolargemedia

companiesinvitedmetohelpthemasaconsultantbecausethey

wereconcernedthattheirengineerswerenotworkinghardenough.

However,thefaultwasnotin

theengineers;itwasintheprocess

thewholecompanywasusingtomakedecisions.Theyhad

customersbutdidnotknowthemverywel.Theyweredeluged

withfeaturerequestsfromcustomers,theinternalsalesteam,and

thebusinessleadership.Everynewinsightbecameanemergency

thathadtobeaddressedimmediately.Asaresult,long-term

projectswerehamperedbyconstantinterruptions.Evenworse,the

teamhadnoclearsenseofwhetheranyofthechanges

theywere

makingmateredtocustomers.Despitetheconstanttuningand

tweaking,thebusinessresultswereconsistentlymediocre.

Learningmilestonespreventthisnegativespiralbyemphasizinga

morelikelypossibility:the

companyisexecuting—withdiscipline!

—aplanthatdoesnotmakesense.Theinnovationaccounting

frameworkmakesitclearwhenthecompanyisstuckandneedsto

changedirection.

Intheexampleabove,early

inthecompany’slife,theproduct

Intheexampleabove,earlyinthecompany’slife,theproduct

developmentteamwasincrediblyproductivebecausethe

company’sfoundershadidentiedalargeunmetneedinthetarget

market.Theinitialproduct,whileawed,waspopularwithearly

adopters.Addingthemajorfeaturesthatcustomersaskedfor

seemedtoworkwonders,astheearlyadoptersspreadtheword

abouttheinnovationfarandwide.Butunaskedand

unanswered

wereotherlurkingquestions:Didthecompanyhaveaworking

engineofgrowth?Wasthisearlysuccessrelatedtothedailywork

oftheproductdevelopmentteam?Inmostcases,theanswerwas

no;successwasdrivenbydecisionstheteamhadmadeinthepast.

Noneofitscurrentinitiativeswerehavinganyimpact.Butthiswas

obscuredbecausethecompany’sgrossmetricswereal“upandto

theright.”

Aswe’lseeinamoment,thisisacommondanger.Companies

ofanysizethathaveaworkingengineofgrowthcancometorely

onthewrongkindofmetricstoguidetheiractions.Thisiswhat

temptsmanagerstoresorttotheusualbagofsuccess

theatertricks:

last-minuteadbuys,channelstung,andwhiz-bangdemos,ina

desperateatempttomakethegrossnumberslookbeter.Energy

investedinsuccesstheaterisenergythatcouldhavebeenusedto

helpbuildasustainablebusiness.Icalthetraditionalnumbers

usedtojudgestartups“vanitymetrics,”andinnovationaccounting

requiresustoavoidthetemptationtousethem.

VANITYMETRICS:AWORDOFCAUTION

Toseethedangerofvanitymetricsclearly,let’sreturnoncemoreto

theearlydaysofIMVU.Takealookatthefolowinggraph,which

isfromthesameerainIMVU’shistoryasthatshownearlierinthis

chapter.Itcoversthesametimeperiodasthecohort-stylegraphon

thispage;infact,itisfromthesameboardpresentation.

ThisgraphshowsthetraditionalgrossmetricsforIMVUsofar:

totalregisteredusersandtotalpayingcustomers(thegrossrevenue

graphlooksalmostthesame).Fromthisviewpoint,thingslook

muchmoreexciting.That’swhyIcalthesevanitymetrics:theygive

muchmoreexciting.That’swhyIcalthesevanitymetrics:theygive

therosiestpossiblepicture.You’lseeatraditionalhockeystick

graph(theidealinarapid-growthcompany).Aslongasyoufocus

onthetop-linenumbers(signingupmorecustomers,anincreasein

overalrevenue),you’lbeforgivenforthinkingthis

product

developmentteamismakinggreatprogress.Thecompany’sgrowth

engineisworking.Eachmonthitisabletoacquirecustomersand

hasapositivereturnoninvestment.Theexcessrevenuefromthose

customersisreinvestedthenextmonthinacquiringmore.That’s

wherethegrowthiscomingfrom.

Butthinkbacktothesamedatapresentedinacohortstyle.

IMVUisaddingnewcustomers,butitisnotimprovingtheyieldon

eachnewgroup.Theengineisturning,buttheeortstotunethe

eachnewgroup.Theengineisturning,buttheeortstotunethe

enginearenotbearingmuchfruit.Fromthetraditionalgraph

alone,youcannottelwhetherIMVUisonpacetobuilda

sustainablebusiness;youcertainlycan’ttelanythingaboutthe

eficacyoftheentrepreneurialteambehindit.

Innovationaccountingwilnotworkifastartupisbeingmisled

bythesekindsofvanitymetrics:grossnumberof

customersandso

on.Thealternativeisthekindofmetricsweusetojudgeour

businessandourlearningmilestones,whatIcalactionablemetrics.

ACTIONABLEMETRICSVERSUSVANITYMETRICS

Togetabetersenseoftheimportanceofgoodmetrics,let’slookat

acompanycaledGrockit.Itsfounder,FarboodNivi,spentadecade

workingasateacherattwolargefor-proteducationcompanies,

PrincetonReviewandKaplan,helpingstudents

preparefor

standardizedtestssuchastheGMAT,LSAT,andSAT.Hisengaging

classroomstylewonaccoladesfromhisstudentsandpromotions

fromhissuperiors;hewashonoredwithPrincetonReview’s

NationalTeacheroftheYearaward.ButFarbwasfrustratedwith

thetraditionalteachingmethodsusedbythosecompanies.Teaching

sixtoninehoursperdaytothousandsofstudents,hehadmany

opportunitiestoexperimentwithnewapproaches.2

Overtime,Farbconcludedthatthetraditionallecturemodelof

education,withitsone-to-manyinstructionalapproach,was

inadequateforhisstudents.Hesetouttodevelopasuperior

approach,usingacombinationofteacher-led

lectures,individual

homework,andgroupstudy.Inparticular,Farbwasfascinatedby

howeectivethestudent-to-studentpeer-drivenlearningmethod

wasforhisstudents.Whenstudentscouldhelpeachother,they

benetedintwoways.First,theycouldgetcustomizedinstruction

fromapeerwhowasmuchlessintimidatingthanateacher.

Second,theycouldreinforcetheirlearningbyteachingittoothers.

Overtime,Farb’sclassesbecameincreasinglysocial—

andsuccessful.

Asthisunfolded,Farbfeltmoreandmorethathisphysical

presenceintheclassroomwaslessimportant.Hemadean

presenceintheclassroomwaslessimportant.Hemadean

importantconnection:“Ihavethissociallearningmodelinmy

classroom.There’salthissocialstugoingonontheweb.”His

ideawastobringsocialpeer-to-peerlearningtopeoplewhocould

notaordanexpensiveclassfromKaplanorPrinceton

Reviewor

anevenmoreexpensiveprivatetutor.FromthisinsightGrockitwas

born.

Farbexplains,“Whetheryou’restudyingfortheSAToryou’re

studyingforalgebra,youstudyinoneofthreeways.

Youspend

sometimewithexperts,youspendsometimeonyourown,and

youspendsometimewithyourpeers.Grockitoersthesethree

sameformatsofstudying.Whatwedoisweapplytechnologyand

algorithmstooptimizethosethreeforms.”

Farbistheclassicentrepreneurialvisionary.Herecountshis

originalinsightthisway:“Let’sforgeteducationaldesignupuntil

now,let’sforgetwhat’spossibleandjustredesignlearningwith

today’sstudentsandtoday’stechnologyinmind.Therewereplenty

ofmulti-bilion-dolarorganizationsintheeducationspace,andI

don’tthinktheywereinnovatinginthewaythatweneededthem

toandIdidn’tthinkweneededthemanymore.To

me,it’srealyal

aboutthestudentsandIdidn’tfeellikethestudentswerebeing

servedaswelastheycould.”

TodayGrockitoersmanydierenteducationalproducts,butin

thebeginningFarbfolowedaleanapproach.Grockitbuilt

a

minimumviableproduct,whichwassimplyFarbteachingtestprep

viathepopularonlinewebconferencingtoolWebEx.Hebuiltno

customsoftware,nonewtechnology.Hesimplyatemptedtobring

hisnewteachingapproachtostudentsviatheInternet.Newsabout

anewkindofprivatetutoringspreadquickly,andwithinafew

monthsFarbwasmakingadecentlivingteachingonline,with

monthlyrevenuesof$10,000to$15,000.Butlikemany

entrepreneurswithambition,Farbdidn’tbuildhisMVPjustto

makealiving.Hehadavisionofamorecolaborative,more

eectivekindofteachingforstudentseverywhere.Withhisinitial

traction,hewasabletoraisemoneyfromsomeofthe

most

prestigiousinvestorsinSiliconValey.

WhenIrstmetFarb,hiscompanywasalreadyonthefasttrack

WhenIrstmetFarb,hiscompanywasalreadyonthefasttrack

tosuccess.Theyhadraised

venturecapitalfromwel-regarded

investors,hadbuiltanawesometeam,andwerefreshoan

impressivedebutatoneofSiliconValey’sfamousstartup

competitions.

Theywereextremely

process-orientedanddisciplined.Their

productdevelopmentfolowedarigorousversionoftheagile

developmentmethodologyknownasExtremeProgramming

(describedbelow),thankstotheirpartnershipwithaSan

Francisco–basedcompanycaledPivotalLabs.Theirearlyproduct

washailedbythepressasabreakthrough.

Therewasonlyoneproblem:theywerenotseeingsucient

growthintheuseoftheproductbycustomers.Grockitisan

excelentcasestudybecauseitsproblemswerenotamaterof

failureofexecutionordiscipline.

Folowingstandardagilepractice,Grockit’sworkproceededina

seriesofsprints,orone-monthiterationcycles.Foreachsprint,Farb

wouldprioritizetheworktobedonethatmonthbywritingaseries

ofuserstories,atechniquetakenfromagiledevelopment.Instead

ofwritingaspecicationforanewfeaturethatdescribeditin

technicalterms,Farbwouldwriteastorythatdescribed

thefeature

fromthepointofviewofthecustomer.Thatstoryhelpedkeepthe

engineersfocusedonthecustomer’sperspectivethroughoutthe

developmentprocess.

Eachfeaturewasexpressedinplainlanguageinterms

everyone

couldunderstandwhethertheyhadatechnicalbackgroundornot.

Againfolowingstandardagilepractice,Farbwasfreeto

reprioritizethesestoriesatanytime.Ashelearnedmoreabout

whatcustomerswanted,hecouldmovethingsaroundinthe

productbacklog,thequeueofstoriesyettobebuilt.Theonlylimit

onthisabilitytochangedirectionswasthathecouldnotinterrupt

anytaskthatwasinprogress.Fortunately,thestorieswere

writen

insuchawaythatthebatchsizeofwork(whichI’ldiscussinmore

detailinChapter9)wasonlyadayortwo.

Thissystemiscaledagiledevelopmentforagoodreason:teams

thatemployitareableto

changedirectionquickly,staylighton

theirfeet,andbehighlyresponsivetochangesinthebusiness

theirfeet,andbehighlyresponsivetochangesinthebusiness

requirementsoftheproductowner(themanageroftheprocess—in

thiscaseFarb—whoisresponsibleforprioritizingthestories).

Howdidtheteamfeelattheendofeachsprint?They

consistentlydeliverednewproductfeatures.Theywouldcolect

feedbackfromcustomersintheformofanecdotesandinterviews

thatindicatedthatatleastsomecustomerslikedthenewfeatures.

Therewasalwaysacertainamountofdatathatshowed

improvement:perhapsthetotalnumberofcustomerswas

increasing,thetotalnumberofquestionsansweredbystudentswas

goingup,orthenumberofreturningcustomerswasincreasing.

However,IsensedthatFarbandhisteamwereleftwithlingering

doubtsaboutthecompany’soveralprogress.Wastheincreasein

theirnumbersactualycausedbytheirdevelopmenteorts?

Or

coulditbeduetootherfactors,suchasmentionsofGrockitinthe

press?WhenImettheteam,Iaskedthemthissimplequestion:

HowdoyouknowthattheprioritizationdecisionsthatFarbis

makingactualymakesense?

Theiranswer:“That’snotourdepartment.Farbmakesthe

decisions;weexecutethem.”

AtthattimeGrockitwasfocusedonjustonecustomersegment:

prospectivebusinessschoolstudentswhowerestudyingforthe

GMAT.Theproductalowedstudentstoengageinonlinestudy

sessionswithfelowstudentswhowerestudyingforthesameexam.

Theproductwasworking:thestudentswhocompletedtheir

studyingviaGrockitachievedsignicantlyhigherscoresthanthey

hadbefore.ButtheGrockitteamwasstrugglingwiththeage-old

startupproblems:Howdoweknowwhichfeaturestoprioritize?

Howcanwegetmorecustomerstosignupandpay?Howcanwe

getoutthewordaboutourproduct?

IputthisquestiontoFarb:“Howcondentareyouthatyouare

makingtherightdecisionsintermsofestablishingpriorities?”Like

moststartupfounders,hewaslookingattheavailabledataand

makingthebesteducatedguesseshecould.Butthis

leftalotof

roomforambiguityanddoubt.

Farbbelievedinhisvisionthoroughlyandcompletely,yethewas

startingtoquestionwhetherhiscompanywasonpacetorealize

startingtoquestionwhether

hiscompanywasonpacetorealize

thatvision.Theproductimprovedeveryday,butFarbwantedto

makesurethoseimprovementsmateredtocustomers.Ibelievehe

deservesalotofcreditforrealizingthis.Unlikemanyvisionaries,

whoclingtotheiroriginalvisionnomaterwhat,Farbwaswiling

toputhisvisiontothetest.

Farbworkedhardtosustainhisteam’sbeliefthatGrockitwas

destinedforsuccess.Hewasworriedthatmoralewouldsuerif

anyonethoughtthatthepersonsteeringtheshipwasuncertain

aboutwhichdirectiontogo.Farbhimselfwasn’tsureifhisteam

wouldembraceatruelearningculture.Afteral,thiswaspartof

thegrandbargainofagiledevelopment:engineers

agreetoadapt

theproducttothebusiness’sconstantlychangingrequirementsbut

arenotresponsibleforthequalityofthosebusinessdecisions.

Agileisanecientsystemofdevelopmentfromthepointof

viewofthedevelopers.Italowsthemtostayfocusedoncreating

featuresandtechnicaldesigns.Anatempttointroducetheneedto

learnintothatprocesscouldundermineproductivity.

(Leanmanufacturingfacedsimilarproblemswhenitwas

introducedinfactories.Managerswereusedtofocusingonthe

utilizationrateofeachmachine.Factoriesweredesignedtokeep

machinesrunningatfulcapacityasmuchofthetimeaspossible.

Viewedfromtheperspectiveofthemachine,thatise

cient,but

fromthepointofviewoftheproductivityoftheentirefactory,itis

wildlyinecientattimes.Astheysayinsystemstheory,thatwhich

optimizesonepartofthesystemnecessarilyunderminesthesystem

asawhole.)

WhatFarbandhisteamdidn’trealizewasthatGrockit’sprogress

wasbeingmeasuredbyvanitymetrics:thetotalnumberof

customersandthetotalnumberofquestionsanswered.Thatwas

whatwascausinghisteamtospinitswheels;thosemetricsgavethe

teamthesensationofforwardmotioneventhoughthecompany

wasmakinglitleprogress.What’sinterestingishowcloselyFarb’s

methodfolowedsupercialaspectsoftheLeanStartup

learning

milestones:theyshippedanearlyproductandestablishedsome

baselinemetrics.Theyhadrelativelyshortiterations,eachofwhich

wasjudgedbyitsabilitytoimprovecustomermetrics.

wasjudgedbyitsabilityto

improvecustomermetrics.

However,becauseGrockitwasusingthewrongkindsofmetrics,

thestartupwasnotgenuinelyimproving.Farbwasfrustratedinhis

eortstolearnfromcustomerfeedback.Ineverycycle,thetypeof

metricshisteamwasfocusedonwouldchange:onemonththey

wouldlookatgrossusagenumbers,anothermonthregistration

numbers,andsoon.Thosemetricswouldgoupanddown

seeminglyontheirown.Hecouldn’tdrawclearcause-

and-eect

inferences.Prioritizingworkcorrectlyinsuchanenvironmentis

extremelychalenging.

Farbcouldhaveaskedhisdataanalysttoinvestigateaparticular

question.Forexample,whenweshippedfeatureX,didita

ect

customerbehavior?Butthatwouldhaverequiredtremendoustime

andeort.When,exactly,didfeatureXship?Whichcustomers

wereexposedtoit?Wasanythingelselaunchedaroundthatsame

time?Werethereseasonalfactorsthatmightbeskewingthedata?

Findingtheseanswerswouldhaverequiredparsingreamsand

reamsofdata.Theansweroftenwouldcomeweeksafterthe

questionhadbeenasked.Inthemeantime,theteam

wouldhave

movedontonewprioritiesandnewquestionsthatneededurgent

atention.

Comparedtoalotofstartups,theGrockitteamhadahuge

advantage:theyweretremendouslydisciplined.Adisciplinedteam

mayapplythewrongmethodologybutcanshiftgearsquicklyonce

itdiscoversitserror.Mostimportant,adisciplinedteamcan

experimentwithitsownworkingstyleanddrawmeaningful

conclusions.

CohortsandSplit-tests

Grockitchangedthemetricstheyusedtoevaluatesuccessintwo

ways.Insteadoflookingatgrossmetrics,Grockitswitchedto

cohort-basedmetrics,andinsteadoflookingforcause-and-eect

relationshipsafterthefact,Grockitwouldlauncheachnewfeature

asatruesplit-testexperiment.

Asplit-testexperimentisoneinwhichdierentversionsofa

Asplit-testexperimentisoneinwhichdierentversionsofa

productareoeredtocustomersatthesametime.Byobservingthe

changesinbehaviorbetweenthetwogroups,onecanmake

inferencesabouttheimpactofthedierentvariations.This

techniquewaspioneeredbydirectmailadvertisers.Forexample,

consideracompanythatsendscustomersacatalogofproductsto

buy,suchasLands’EndorCrate&Barrel.Ifyouwantedtotesta

catalogdesign,youcouldsendanewversionofitto50percentof

thecustomersandsendtheoldstandardcatalogtothe

other50

percent.Toassureascienticresult,bothcatalogswouldcontain

identicalproducts;theonlydierencewouldbethechangestothe

design.Togureoutifthenewdesignwaseective,alyouwould

havetodowaskeeptrackofthesalesguresforbothgroupsof

customers.(ThistechniqueissometimescaledA/Btestingafterthe

practiceofassigningleternamestoeachvariation.)Althoughsplit

testingoftenisthoughtofasamarketing-specic(oreven

adirect

marketing–specic)practice,LeanStartupsincorporateitdirectly

intoproductdevelopment.

ThesechangesledtoanimmediatechangeinFarb’s

understandingofthebusiness.Splittestingoftenuncoverssurprising

things.Forexample,manyfeaturesthatmaketheproductbeterin

theeyesofengineersanddesignershavenoimpactoncustomer

behavior.ThiswasthecaseatGrockit,asithasbeeninevery

companyIhaveseenadoptthistechnique.Although

workingwith

splittestsseemstobemoredicultbecauseitrequiresextra

accountingandmetricstokeeptrackofeachvariation,italmost

alwayssavestremendousamountsoftimeinthelongrunby

eliminatingworkthatdoesn’tmatertocustomers.

Splittestingalsohelpsteamsrenetheirunderstandingofwhat

customerswantanddon’twant.Grockit’steamconstantlyadded

newwaysfortheircustomerstointeractwitheachotherinthe

hopethatthosesocialcommunicationtoolswouldincreasethe

product’svalue.Inherentinthoseeortswasthebeliefthat

customersdesiredmorecommunicationduringtheirstudying.

Whensplittestingrevealedthattheextrafeaturesdidnot

change

customerbehavior,itcaledthatbeliefintoquestion.

Thequestioninginspiredtheteamtoseekadeeper

Thequestioninginspiredtheteamtoseekadeeper

understandingofwhatcustomersrealywanted.Theybrainstormed

newideasforproductexperimentsthatmighthavemoreimpact.In

fact,manyoftheseideaswerenotnew.Theyhadsimplybeen

overlookedbecausethecompanywasfocusedonbuildingsocial

tools.Asaresult,Grockittestedanintensivesolo-

studyingmode,

completewithquestsandgamelikelevels,sothatstudentscould

havethechoiceofstudyingbythemselvesorwithothers.Justasin

Farb’soriginalclassroom,thisprovedextremelyeective.Without

thedisciplineofsplittesting,thecompanymightnothavehadthis

realization.Infact,overtime,throughdozensoftests,itbecame

clearthatthekeytostudentengagementwastooerthema

combinationofsocialandsolofeatures.Students

preferredhavinga

choiceofhowtostudy.

Kanban

Folowingtheleanmanufacturingprincipleofkanban,orcapacity

constraint,Grockitchangedtheproductprioritizationprocess.

Underthenewsystem,userstorieswerenotconsideredcomplete

untiltheyledtovalidatedlearning.Thus,storiescouldbecataloged

asbeinginoneoffourstatesofdevelopment:intheproduct

backlog,activelybeingbuilt,done(featurecompletefrom

a

technicalpointofview),orintheprocessofbeingvalidated.

Validatedwasdenedas“knowingwhetherthestorywasagood

ideatohavebeendoneintherstplace.”Thisvalidationusualy

wouldcomeintheformofasplittestshowingachangein

customerbehaviorbutalsomightincludecustomerinterviewsor

surveys.

Thekanbanrulepermitedonlysomanystoriesineachofthe

fourstates.Asstoriesow

fromonestatetotheother,thebuckets

lup.Onceabucketbecomesful,itcannotacceptmorestories.

Onlywhenastoryhasbeenvalidatedcanitberemovedfromthe

kanbanboard.Ifthevalidationfailsanditturnsoutthestoryisa

badidea,therelevantfeatureisremovedfromtheproduct(seethe

chartonthispage).

KANBANDIAGRAMOFWORKASITPROGRESSES

FROMSTAGETOSTAGE

(Nobucketcancontainmorethanthreeprojectsatatime.)

WorkonAbegins.DandEareindevelopment.Fawaitsvalidation.

Fisvalidated.DandEawaitvalidation.G,H,Iarenewtaskstobeundertaken.BandC

arebeingbuilt.Acompletesdevelopment.

BandChavebeenbuilt,butunderkanban,cannotbemovedtothenextbucketfor

validationuntilA,D,Ehave

beenvalidated.WorkcannotbeginonHandIuntilspace

opensupinthebucketsahead.

Ihaveimplementedthissystemwithseveralteams,andthe

Ihaveimplementedthissystemwithseveralteams,andthe

initialresultisalwaysfrustrating:eachbucketlsup,startingwith

the“validated”bucketandmovingontothe“done”bucket,until

it’snotpossibletostartanymorework.Teamsthatareusedto

measuringtheirproductivitynarrowly,bythenumberof

stories

theyaredelivering,feelstuck.Theonlywaytostartworkonnew

featuresistoinvestigatesomeofthestoriesthataredonebut

haven’tbeenvalidated.Thatoftenrequiresnonengineeringeorts:

talkingtocustomers,lookingatsplit-testdata,andthelike.

Pretysooneveryonegetsthehangofit.Thisprogressoccursin

tsandstartsatrst.Engineeringmaynishabigbatchofwork,

folowedbyextensivetestingandvalidation.Asengineerslookfor

waystoincreasetheirproductivity,theystarttorealizethatifthey

includethevalidationexercisefromthebeginning,thewholeteam

canbemoreproductive.

Forexample,whybuildanewfeaturethatisnotpartofasplit-

testexperiment?Itmaysaveyoutimeintheshortrun,butitwil

takemoretimelatertotest,duringthevalidationphase.Thesame

logicappliestoastorythatanengineerdoesn’tunderstand.Under

theoldsystem,heorshewouldjustbuilditandndout

laterwhat

itwasfor.Inthenewsystem,thatbehaviorisclearly

counterproductive:withoutaclearhypothesis,howcanastoryever

bevalidated?WesawthisbehavioratIMVU,too.Ioncesawa

juniorengineerfacedowna

seniorexecutiveoverarelatively

minorchange.Theengineerinsistedthatthenewfeaturebesplit-

tested,justlikeanyother.Hispeersbackedhimup;itwas

consideredabsolutelyobviousthatalfeaturesshouldberoutinely

tested,nomaterwhowascommissioningthem.(Embarrassingly,

altoooftenIwastheexecutiveinquestion.)Asolidprocesslays

thefoundationforahealthyculture,onewhereideasareevaluated

bymeritandnotbyjobtitle.

Mostimportant,teamsworkinginthissystembegintomeasure

theirproductivityaccordingtovalidatedlearning,notintermsof

theproductionofnewfeatures.

HypothesisTestingatGrockit

WhenGrockitmadethistransition,theresultsweredramatic.In

onecase,theydecidedtotestoneoftheirmajorfeatures,caled

lazyregistration,toseeifitwasworththeheavyinvestmentthey

weremakinginongoingsupport.Theywerecondent

inthis

featurebecauselazyregistrationisconsideredoneofthedesignbest

practicesforonlineservices.Inthissystem,customersdonothave

toregisterfortheserviceupfront.Instead,theyimmediatelybegin

usingtheserviceandareaskedtoregisteronlyaftertheyhavehad

achancetoexperiencetheservice’sbenefit.

Forastudent,lazyregistrationworkslikethis:whenyoucometo

theGrockitwebsite,you’reimmediatelyplacedinastudysession

withotherstudentsworkingonthesametest.Youdon’thaveto

giveyourname,e-mailaddress,orcreditcardnumber.Thereis

nothingtopreventyoufromjumpinginandgetingstarted

immediately.ForGrockit,thiswasessentialtotesting

oneofits

coreassumptions:thatcustomerswouldbewilingtoadoptthis

newwayoflearningonlyiftheycouldseeproofthatitwas

workingearlyon.

Asaresultofthishypothesis,Grockit’sdesignrequired

thatit

managethreeclassesofusers:unregisteredguests,registered(trial)

guests,andcustomerswhohadpaidforthepremiumversionofthe

product.Thisdesignrequiredsignicantextraworktobuildand

maintain:themoreclassesofusersthereare,themoreworkis

requiredtokeeptrackofthem,andthemoremarketingeortis

requiredtocreatetherightincentivestoenticecustomersto

upgradetothenextclass.Grockithadundertakenthis

extraeort

becauselazyregistrationwasconsideredanindustrybestpractice.

Iencouragedtheteamtotryasimplesplit-test.Theytookone

cohortofcustomersandrequiredthattheyregisterimmediately,

basedonnothingmorethanGrockit’smarketingmaterials.Totheir

surprise,thiscohort’sbehaviorwasexactlythesameasthatofthe

lazyregistrationgroup:theyhadthesamerateofregistration,

activation,andsubsequentretention.Inotherwords,the

extraeort

oflazyregistrationwasacompletewasteeventhoughitwas

consideredanindustrybestpractice.

consideredanindustrybestpractice.

Evenmoreimportantthanreducingwastewasthe

insightthat

thistestsuggested:customerswerebasingtheirdecisionabout

Grockitonsomethingotherthantheiruseoftheproduct.

Thinkaboutthis.Thinkaboutthecohortofcustomerswhowere

requiredtoregisterforthe

productbeforeenteringastudysession

withotherstudents.Theyhadverylitleinformationaboutthe

product,nothingmorethanwaspresentedonGrockit’shomepage

andregistrationpage.Bycontrast,thelazyregistrationgrouphada

tremendousamountofinformationabouttheproductbecausethey

hadusedit.Yetdespitethisinformationdisparity,customer

behaviorwasexactlythesame.

ThissuggestedthatimprovingGrockit’spositioningand

marketingmighthaveamoresignicantimpactonatractingnew

customersthanwouldaddingnewfeatures.Thiswasjusttherstof

manyimportantexperimentsGrockitwasabletorun.Sincethose

earlydays,theyhaveexpandedtheircustomerbase

dramaticaly:

theynowoertestprepfornumerousstandardizedtests,including

theGMAT,SAT,ACT,andGRE,aswelasonlinemathandEnglish

coursesforstudentsingrades7through12.

Grockitcontinuestoevolve

itsprocess,seekingcontinuous

improvementateveryturn.Withmorethantwentyemployeesin

itsSanFranciscooce,Grockitcontinuestooperatewiththesame

deliberate,disciplinedapproachthathasbeentheirhalmarkal

along.Theyhavehelpedclosetoamilionstudentsandaresureto

helpmilionsmore.

THEVALUEOFTHETHREEA’S

TheseexamplesfromGrockitdemonstrateeachofthethreeA’sof

metrics:actionable,

accessible,andauditable.

Actionable

Forareporttobeconsideredactionable,itmustdemonstrateclear

Forareporttobeconsideredactionable,itmustdemonstrateclear

causeandeect.Otherwise,itisavanitymetric.The

reportsthat

Grockit’steambegantousetojudgetheirlearningmilestonesmade

itextremelyclearwhatactionswouldbenecessarytoreplicatethe

results.

Bycontrast,vanitymetricsfailthiscriterion.Takethe

numberof

hitstoacompanywebsite.Let’ssaywehave40,000hitsthismonth

—anewrecord.Whatdoweneedtodotogetmorehits?Wel,that

depends.Wherearethenewhitscomingfrom?Isitfrom40,000

newcustomersorfromoneguywithanextremelyactiveweb

browser?ArethehitstheresultofanewmarketingcampaignorPR

push?Whatisahit,anyway?Doeseachpageinthebrowsercount

asonehit,ordoaltheembeddedimagesand

multimediacontent

countaswel?Thosewhohavesatinameetingdebatingtheunits

ofmeasurementinareportwilrecognizethisproblem.

Vanitymetricswreakhavocbecausetheypreyonaweaknessof

thehumanmind.Inmy

experience,whenthenumbersgoup,

peoplethinktheimprovementwascausedbytheiractions,by

whatevertheywereworkingonatthetime.Thatiswhyit’sso

commontohaveameetinginwhichmarketingthinksthenumbers

wentupbecauseofanewPRormarketingeortandengineering

thinksthebeternumbersaretheresultofthenewfeaturesit

added.Findingoutwhatisactualygoingonisextremelycostly,

andsomostmanagerssimplymoveon,doingthebestthey

canto

formtheirownjudgmentonthebasisoftheirexperienceandthe

colectiveinteligenceintheroom.

Unfortunately,whenthenumbersgodown,itresultsinavery

dierentreaction:nowit’s

somebodyelse’sfault.Thus,mostteam

membersordepartmentsliveinaworldwheretheirdepartmentis

constantlymakingthingsbeter,onlytohavetheirhardwork

sabotagedbyotherdepartmentsthatjustdon’tgetit.Isitany

wonderthesedepartmentsdeveloptheirowndistinctlanguage,

jargon,culture,anddefensemechanismsagainstthebozosworking

downthehal?

Actionablemetricsaretheantidotetothisproblem.Whencause

andeectisclearlyunderstood,peoplearebeterabletolearn

fromtheiractions.Humanbeingsareinnatelytalentedlearners

fromtheiractions.Humanbeingsareinnatelytalentedlearners

whengivenaclearandobjectiveassessment.

Accessible

Altoomanyreportsarenotunderstoodbytheemployeesand

managerswhoaresupposedtousethemtoguidetheirdecision

making.Unfortunately,mostmanagersdonotrespondtothis

complexitybyworkinghandinhandwiththedatawarehousing

teamtosimplifythereportssothattheycanunderstandthem

beter.Departmentstoooftenspendtheirenergylearninghowto

usedatatogetwhattheywantratherthanasgenuine

feedbackto

guidetheirfutureactions.

Thereisanantidotetothismisuseofdata.First,makethereports

assimpleaspossiblesothateveryoneunderstandsthem.

Rememberthesaying“Metricsarepeople,too.”Theeasiestwayto

makereportscomprehensibleistousetangible,concreteunits.

Whatisawebsitehit?Nobodyisrealysure,buteveryoneknows

whatapersonvisitingthewebsiteis:onecanpracticalypicture

thosepeoplesitingattheircomputers.

Thisiswhycohort-basedreportsarethegoldstandardoflearning

metrics:theyturncomplexactionsintopeople-basedreports.Each

cohortanalysissays:amongthepeoplewhousedourproductin

thisperiod,here’showmanyofthemexhibitedeachofthe

behaviorswecareabout.IntheIMVUexample,wesawfour

behaviors:downloadingtheproduct,loggingintotheproductfrom

one’scomputer,engaginginachatwithothercustomers,and

upgradingtothepaidversionoftheproduct.Inother

words,the

reportdealswithpeopleandtheiractions,whicharefarmore

usefulthanpilesofdatapoints.Forexample,thinkabouthowhard

itwouldhavebeentotelifIMVUwasbeingsuccessfulifwehad

reportedonlyonthetotalnumberofperson-to-person

conversations.Let’ssaywehave10,000conversationsinaperiod.Is

thatgood?Isthatonepersonbeingvery,verysocial,orisit10,000

peopleeachtryingtheproductonetimeandthengivingup?

There’snowaytoknowwithoutcreatingamoredetailedreport.

There’snowaytoknowwithoutcreatingamoredetailedreport.

Asthegrossnumbersgetlarger,accessibilitybecomesmoreand

moreimportant.Itishardtovisualizewhatitmeansifthe

number

ofwebsitehitsgoesdownfrom250,000inonemonthto200,000

thenextmonth,butmostpeopleunderstandimmediatelywhatit

meanstolose50,000customers.That’spracticalyawholestadium

fulofpeoplewhoareabandoningtheproduct.

Accessibilityalsoreferstowidespreadaccesstothereports.

Grockitdidthisespecialywel.Everydaytheirsystem

automaticalygeneratedadocumentcontainingthelatestdatafor

everysingleoneoftheirsplit-testexperimentsandotherleap-of-

faithmetrics.Thisdocumentwasmailedtoeveryemployeeofthe

company:theyalalwayshadafreshcopyintheire-mailin-boxes.

Thereportswerewellaidoutandeasytoread,witheach

experimentanditsresultsexplainedinplainEnglish.

Anotherwaytomakereportsaccessibleistouseatechniquewe

developedatIMVU.Insteadofhousingtheanalyticsordataina

separatesystem,ourreportingdataanditsinfrastructurewere

consideredpartoftheproductitselfandwereownedbythe

productdevelopmentteam.Thereportswereavailableonour

website,accessibletoanyonewithanemployeeaccount.

Eachemployeecouldlogintothesystematanytime,choose

fromalistofalcurrentandpastexperiments,andseeasimple

one-pagesummaryoftheresults.Overtime,thoseone-page

summariesbecamethedefactostandardforsetlingproduct

argumentsthroughouttheorganization.Whenpeople

needed

evidencetosupportsomethingtheyhadlearned,theywouldbring

aprintoutwiththemtotherelevantmeeting,condentthat

everyonetheyshowedittowouldunderstanditsmeaning.

Auditable

Wheninformedthattheirpetprojectisafailure,mostofusare

temptedtoblamethemessenger,thedata,themanager,thegods,

oranythingelsewecanthinkof.That’swhythethirdAofgood

metrics,“auditable,”issoessential.Wemustensurethatthedatais

metrics,“auditable,”issoessential.Wemustensurethatthedatais

credibletoemployees.

TheemployeesatIMVUwouldbrandishone-pagereportsto

demonstratewhattheyhadlearnedtosetlearguments,butthe

processoftenwasn’tsosmooth.Mostofthetime,whenamanager,

developer,orteamwasconfrontedwithresultsthatwouldkila

petproject,theloseroftheargumentwouldchalenge

theveracity

ofthedata.

Suchchalengesaremorecommonthanmostmanagerswould

admit,andunfortunately,mostdatareportingsystemsarenot

designedtoanswerthemsuccessfuly.Sometimesthis

istheresultof

awel-intentionedbutmisplaceddesiretoprotecttheprivacyof

customers.Moreoften,thelackofsuchsupportingdocumentation

issimplyamaterofneglect.Mostdatareportingsystemsarenot

builtbyproductdevelopmentteams,whosejobistoprioritizeand

buildproductfeatures.Theyarebuiltbybusinessmanagersand

analysts.Managerswhomustusethesesystemscanonlycheckto

seeifthereportsaremutualyconsistent.Theyaltoo

oftenlacka

waytotestifthedataisconsistentwithreality.

Thesolution?First,rememberthat“Metricsarepeople,too.”We

needtobeabletotestthedatabyhand,inthemessyrealworld,by

talkingtocustomers.Thisis

theonlywaytobeabletocheckifthe

reportscontaintruefacts.Managersneedtheabilitytospotcheck

thedatawithrealcustomers.Italsohasasecondbenet:systems

thatprovidethislevelofauditabilitygivemanagersand

entrepreneurstheopportunitytogaininsightsintowhycustomers

arebehavingthewaythedataindicate.

Second,thosebuildingreportsmustmakesurethemechanisms

thatgeneratethereportsarenottoocomplex.Wheneverpossible,

reportsshouldbedrawndirectlyfromthemasterdata,ratherthan

fromanintermediatesystem,whichreducesopportunitiesforerror.

Ihavenoticedthateverytimeateamhasoneofitsjudgmentsor

assumptionsoverturnedasaresultofatechnicalproblem

withthe

data,itsconfidence,morale,anddisciplineareundermined.

Whenwewatchentrepreneurssucceedinthemythmakingworldof

Holywood,books,andmagazines,thestoryisalwaysstructuredthe

sameway.First,weseethepluckyprotagonisthavinganepiphany,

hatchingagreatnewidea.Welearnabouthisorhercharacterand

personality,howheorshecametobeintherightplaceattheright

time,andhowheorshetookthedramaticleaptostarta

business.

Thenthephotomontagebegins.It’susualyshort,justafew

minutesoftime-lapsephotographyornarrative.Weseethe

protagonistbuildingateam,maybeworkinginalab,writingon

whiteboards,closingsales,poundingonafewkeyboards.Atthe

endofthemontage,thefoundersaresuccessful,andthestorycan

moveontomoreinterestingfare:howtosplitthespoilsoftheir

success,whowilappearonmagazinecovers,whosues

whom,and

implicationsforthefuture.

Unfortunately,therealworkthatdeterminesthesuccessof

startupshappensduringthephotomontage.Itdoesn’tmakethecut

intermsofthebigstorybecauseitistooboring.Only

5percentof

entrepreneurshipisthebigidea,thebusinessmodel,the

whiteboardstrategizing,andthesplitingupofthespoils.Theother

95percentisthegrityworkthatismeasuredbyinnovation

accounting:product

prioritizationdecisions,decidingwhich

customerstotargetorlistento,andhavingthecouragetosubjecta

grandvisiontoconstanttestingandfeedback.

Onedecisionstandsoutabovealothersasthemostdicult,the

mosttime-consuming,andthebiggestsourceofwasteformost

startups.Wealmustfacethisfundamentaltest:decidingwhento

pivotandwhentopersevere.Tounderstandwhathappensduring

thephotomontage,wehavetounderstandhowtopivot,

andthatis

thesubjectofChapter8.

8PIVOT(ORPERSEVERE)

Everyentrepreneureventualyfacesanoverridingchalengein

developingasuccessfulproduct:decidingwhentopivotand

whentopersevere.Everythingthathasbeendiscussedsofarisa

preludetoaseeminglysimplequestion:arewemakingsucient

progresstobelievethatouroriginalstrategichypothesisiscorrect,

ordoweneedtomakeamajorchange?Thatchangeis

caleda

pivot:astructuredcoursecorrectiondesignedtotestanew

fundamentalhypothesisabouttheproduct,strategy,andengineof

growth.

Becauseofthescienticmethodologythatunderlies

theLean

Startup,thereisoftenamisconceptionthatitoersarigidclinical

formulaformakingpivotorperseveredecisions.Thisisnottrue.

Thereisnowaytoremovethehumanelement—vision,intuition,

judgment—fromthepracticeofentrepreneurship,norwouldthat

bedesirable.

Mygoalinadvocatingascienticapproachtothecreationof

startupsistochannelhumancreativityintoitsmostproductive

form,andthereisnobiggerdestroyerofcreativepotentialthanthe

misguideddecisiontopersevere.Companiesthatcannotbring

themselvestopivottoanewdirectiononthebasisoffeedback

fromthemarketplacecangetstuckinthelandoftheliving

dead,

neithergrowingenoughnordying,consumingresourcesand

commitmentfromemployeesandotherstakeholdersbutnot

movingahead.

Thereisgoodnewsaboutourrelianceonjudgment,

though.We

Thereisgoodnewsaboutourrelianceonjudgment,though.We

areabletolearn,weareinnatelycreative,andwehavea

remarkableabilitytoseethesignalinthenoise.Infact,weareso

goodatthisthatsometimesweseesignalsthataren’tthere.The

heartofthescienticmethodistherealizationthatalthoughhuman

judgmentmaybefaulty,wecanimproveourjudgmentby

subjectingourtheoriestorepeatedtesting.

Startupproductivityisnotaboutcrankingoutmorewidgetsor

features.Itisaboutaligningoureortswithabusinessandproduct

thatareworkingtocreatevalueanddrivegrowth.Inotherwords,

successfulpivotsputusonapathtowardgrowinga

sustainable

business.

INNOVATIONACCOUNTINGLEADSTOFASTERPIVOTS

Toseethisprocessinaction,meetDavidBineti,theCEOof

Votizen.Davidhashadalongcareerhelpingtobring

theAmerican

politicalprocessintothetwenty-rstcentury.Intheearly1990s,he

helpedbuildUSA.gov,therstportalforthefederalgovernment.

He’salsoexperiencedsomeclassicstartupfailures.Whenitcame

timetobuildVotizen,Davidwasdeterminedtoavoidbetingthe

farmonhisvision.

Davidwantedtotackletheproblemofcivicparticipationinthe

politicalprocess.Hisrstproductconceptwasasocialnetworkof

veriedvoters,aplacewherepeoplepassionateaboutciviccauses

couldgettogether,shareideas,andrecruittheirfriends.Davidbuilt

hisfirstminimumviableproductforjustover$1,200inaboutthree

monthsandlaunchedit.

Davidwasn’tbuildingsomethingthatnobodywanted.Infact,

fromitsearliestdays,Votizenwasabletoatractearlyadopters

wholovedthecoreconcept.Likealentrepreneurs,Davidhadto

renehisproductandbusinessmodel.Whatmade

David’s

chalengeespecialyhardwasthathehadtomakethosepivotsin

thefaceofmoderatesuccess.

David’sinitialconceptinvolvedfourbigleapsoffaith:

1.Customerswouldbeinterestedenoughinthe

socialnetworkto

signup.(Registration)

2.Votizenwouldbeabletoverifythemasregisteredvoters.

(Activation)

3.Customerswhowereveriedvoterswouldengagewiththe

site’sactivismtoolsovertime.(Retention)

4.Engagedcustomerswouldteltheirfriendsabouttheservice

andrecruitthemintociviccauses.(Referral)

Threemonthsand$1,200later,David’srstMVPwasin

customers’hands.Inthe

initialcohorts,5percentsignedupforthe

serviceand17percentveriedtheirregisteredvoterstatus(seethe

chartbelow).Thenumbersweresolowthattherewasn’tenough

datatotelwhatsortofengagementorreferralwouldoccur.Itwas

timetostartiterating.

INITIALMVP

Registration

5%

Activation

17%

Retention

Toolow

Referral

Toolow

Davidspentthenexttwomonthsandanother$5,000splittesting

newproductfeatures,messaging,andimprovingtheproduct’s

designtomakeiteasierto

use.Thosetestsshoweddramatic

improvements,goingfroma5percentregistrationrateto17

percentandfroma17percentactivationratetoover90percent.

Suchisthepowerofsplittesting.ThisoptimizationgaveDavida

criticalmassofcustomerswithwhichtomeasurethenexttwoleaps

offaith.However,asshowninthechartbelow,thosenumbers

provedtobeevenmorediscouraging:Davidachievedareferralrate

ofonly4percentandaretentionrateof5percent.

INITIALMVP

AFTEROPTIMIZATION

Registration

5%

17%

Activation

17%

90%

Retention

Toolow

5%

Referral

Toolow

4%

Davidknewhehadtodo

moredevelopmentandtesting.Forthe

nextthreemonthshecontinuedtooptimize,splittest,andrene

hispitch.Hetalkedtocustomers,heldfocusgroups,anddid

countlessA/Bexperiments.AswasexplainedinChapter7,ina

splittest,dierentversionsofaproductareoeredtodierent

customersatthesametime.Byobservingthechangesinbehavior

betweenthetwogroups,onecanmakeinferencesabouttheimpact

ofthedierentvariations.Asshowninthechartbelow,the

referral

ratenudgedupslightlyto6percentandtheretentionratewentup

to8percent.AdisappointedDavidhadspenteightmonthsand

$20,000tobuildaproductthatwasn’tlivinguptothegrowth

modelhe’dhopedfor.

BEFOREOPTIMIZATIONAFTEROPTIMIZATION

Registration

17%

17%

Activation

90%

90%

Retention

5%

8%

Referral

4%

6%

Davidfacedthedicultchal

engeofdecidingwhethertopivot

orpersevere.Thisisoneofthehardestdecisionsentrepreneursface.

Thegoalofcreatinglearningmilestonesisnottomakethedecision

Thegoalofcreatinglearningmilestonesisnottomakethedecision

easy;itistomakesurethatthereisrelevantdataintheroomwhen

itcomestimetodecide.

Remember,atthispointDavidhashadmanycustomer

conversations.Hehasplentyoflearningthathecanuseto

rationalizethefailurehehas

experiencedwiththecurrentproduct.

That’sexactlywhatmanyentrepreneursdo.InSiliconValey,we

calthisexperiencegetingstuckinthelandofthelivingdead.It

happenswhenacompanyhasachievedamodicumofsuccess—just

enoughtostayalive—butisnotlivinguptotheexpectationsofits

foundersandinvestors.Suchcompaniesareaterribledrainof

humanenergy.Outofloyalty,theemployeesandfoundersdon’t

wanttogivein;theyfeelthatsuccessmightbejustaround

the

corner.

Davidhadtwoadvantagesthathelpedhimavoidthisfate:

1.Despitebeingcommitedtoasignicantvision,hehaddone

hisbesttolaunchearlyanditerate.Thus,hewasfacinga

pivot

orperseveremomentjusteightmonthsintothelifeofhis

company.Themoremoney,time,andcreativeenergythathas

beensunkintoanidea,theharderitistopivot.Davidhad

doneweltoavoidthattrap.

2.Davidhadidentiedhisleap-of-faithquestionsexplicitlyatthe

outsetand,moreimportant,hadmadequantitativepredictions

abouteachofthem.Itwouldnothavebeendicultforhimto

declaresuccessretroactivelyfromthatinitialventure.Afteral,

someofhismetrics,suchasactivation,weredoingquitewel.

Intermsofgrossmetricssuchastotalusage,thecompanyhad

positivegrowth.ItisonlybecauseDavidfocusedon

actionable

metricsforeachofhisleap-of-faithquestionsthathewasable

toacceptthathiscompanywasfailing.Inaddition,because

DavidhadnotwastedenergyonprematurePR,hewasableto

makethisdeterminationwithoutpublicembarrassmentor

distraction.

Failureisaprerequisitetolearning.Theproblemwiththenotion

ofshippingaproductandthenseeingwhathappensisthatyouare

ofshippingaproductandthenseeingwhathappensisthatyouare

guaranteedtosucceed—atseeingwhathappens.Butthenwhat?As

soonasyouhaveahandfulofcustomers,you’relikelytohaveve

opinionsaboutwhattodonext.Whichshouldyou

listento?

Votizen’sresultswereokay,buttheywerenotgoodenough.

Davidfeltthatalthoughhisoptimizationwasimprovingthe

metrics,theywerenottrendingtowardamodelthatwouldsustain

thebusinessoveral.Butlikealgoodentrepreneurs,hedidnot

giveupprematurely.Daviddecidedtopivotandtestanew

hypothesis.Apivotrequiresthatwekeeponefootrootedinwhat

we’velearnedsofar,whilemakingafundamental

changein

strategyinordertoseekevengreatervalidatedlearning.Inthis

case,David’sdirectcontactwithcustomersprovedessential.

Hehadheardthreerecurringbitsoffeedbackinhistesting:

1.“Ialwayswantedtogetmoreinvolved;thismakesitsomuch

easier.”

2.“ThefactthatyouproveI’mavotermaters.”

3.“There’snoonehere.What’sthepointofcomingback?”1

Daviddecidedtoundertake

whatIcalazoom-inpivot,

refocusingtheproductonwhatpreviouslyhadbeenconsideredjust

onefeatureofalargerwhole.Thinkofthecustomercomments

above:customersliketheconcept,theylikethevoterregistration

technology,buttheyaren’tgetingvalueoutofthesocial

networkingpartoftheproduct.

DaviddecidedtochangeVotizenintoaproductcaled@2gov,a

“sociallobbyingplatform.”Ratherthangetcustomersintegratedin

acivicsocialnetwork,@2govalowsthemtocontacttheirelected

representativesquicklyandeasilyviaexistingsocialnetworkssuch

asTwiter.Thecustomerengagesdigitaly,but@2govtranslates

thatdigitalcontactintopaperform.MembersofCongress

receive

old-fashionedprintedletersandpetitionsasaresult.Inother

words,@2govtranslatesthehigh-techworldofitscustomersinto

thelow-techworldofpolitics.

@2govhadaslightlydierent

setofleap-of-faithquestionsto

@2govhadaslightlydierentsetofleap-of-faithquestionsto

answer.Itstildependedoncustomerssigningup,verifyingtheir

voterstatus,andreferringtheirfriends,butthegrowthmodel

changed.Insteadofrelyingonanengagement-drivenbusiness

(“sticky”growth),@2govwasmoretransactional.David’s

hypothesiswasthatpassionateactivistswouldbewilingtopay

moneytohave@2govfacilitatecontactsonbehalf

ofvoterswho

caredabouttheirissues.

David’snewMVPtookfourmonthsandanother$30,000.He’d

nowspentagrandtotalof$50,000andworkedfortwelvemonths.

Buttheresultsfromhisnextroundoftestingwere

dramatic:

registrationrate42percent,activation83percent,retention21

percent,andreferralawhopping54percent.However,thenumber

ofactivistswilingtopaywaslessthan1percent.Thevalueofeach

transactionwasfartoolowtosustainaprotablebusinesseven

afterDavidhaddonehisbesttooptimizeit.

BeforewegettoDavid’snextpivot,noticehowconvincinglyhe

wasabletodemonstratevalidatedlearning.Hehopedthatwiththis

newproduct,hewouldbeabletoimprovehisleap-of-faithmetrics

dramaticaly,andhedid(seethechartbelow).

BEFOREPIVOT

AFTERPIVOT

Engineofgrowth

Sticky

Paid

Registrationrate

17%

42%

Activation

90%

83%

Retention

8%

21%

Referral

6%

54%

Revenue

n/a

1%

Lifetimevalue(LTV)

n/a

Minimal

Hedidthisnotbyworkingharderbutbyworkingsmarter,taking

Hedidthisnotbyworkingharderbutbyworking

smarter,taking

hisproductdevelopmentresourcesandapplyingthemtoanew

anddierentproduct.Comparedwiththepreviousfourmonthsof

optimization,thenewfourmonthsofpivotinghadresultedina

dramaticalyhigherreturnoninvestment,butDavidwasstilstuck

inanage-oldentrepreneurialtrap.Hismetricsandproductwere

improving,butnotfastenough.

Davidpivotedagain.Thistime,ratherthanrelyonactiviststo

paymoneytodrivecontacts,hewenttolargeorganizations,

professionalfund-raisers,andbigcompanies,whichalhavea

professionalorbusinessinterestinpoliticalcampaigning.The

companiesseemedextremelyeagertouseandpayfor

David’s

service,andDavidquicklysignedletersofintenttobuildthe

functionalitytheyneeded.Inthispivot,DaviddidwhatIcala

customersegmentpivot,keepingthefunctionalityoftheproduct

thesamebutchangingtheaudiencefocus.Hefocusedonwhopays:

fromconsumerstobusinessesandnonprotorganizations.Inother

words,Davidwentfrombeingabusiness-to-consumer(B2C)

companytobeingabusiness-to-business(B2B)company.

Inthe

processhechangedhisplannedgrowthmodel,asweltoone

wherehewouldbeabletofundgrowthoutoftheprotsgenerated

fromeachB2Bsale.

Threemonthslater,Davidhadbuiltthefunctionalityhe

had

promised,basedonthoseearlyletersofintent.Butwhenhewent

backtocompaniestocolecthischecks,hediscoveredmore

problems.Companyaftercompanyprocrastinated,delayed,and

ultimatelypasseduptheopportunity.Althoughtheyhadbeen

excitedenoughtosignaleterofintent,closingarealsalewas

muchmoredicult.Itturnedoutthatthosecompanieswerenot

earlyadopters.

Onthebasisoftheletersofintent,Davidhadincreasedhishead

count,takingonadditionalsalesstaandengineersinanticipation

ofhavingtoservicehigher-marginbusiness-to-businessaccounts.

Whenthesalesdidn’tmaterialize,thewholeteam

hadtowork

hardertotrytondrevenueelsewhere.Yetnomaterhowmany

salescalstheywentonandnomaterhowmuchoptimizationthey

didtotheproduct,themodelwasn’tworking.Returningtohis

didtotheproduct,themodelwasn’tworking.Returningtohis

leap-of-faithquestions,Davidconcludedthattheresultsrefutedhis

business-to-businesshypothesis,andsohedecidedtopivotonce

again.

Althistime,Davidwaslearningandgainingfeedbackfromhis

potentialcustomers,buthewasinanunsustainablesituation.You

can’tpaystawithwhatyou’velearned,andraisingmoneyatthat

juncturewouldhaveescalatedtheproblem.

Raisingmoneywithout

earlytractionisnotacertainthing.Ifhehadbeenabletoraise

money,hecouldhavekeptthecompanygoingbutwouldhave

beenpouringmoneyintoavalue-destroyingengineofgrowth.He

wouldbeinahigh-pressuresituation:useinvestor’scashtomake

theengineofgrowthworkorriskhavingtoshutdownthe

company(orbereplaced).

Daviddecidedtoreducestaandpivotagain,thistime

atemptingwhatIcalaplatformpivot.Insteadofsel

ingan

applicationtoonecustomeratatime,Davidenvisionedanew

growthmodelinspiredbyGoogle’sAdWordsplatform.Hebuilta

self-servesalesplatformwhereanyonecouldbecomeacustomer

withjustacreditcard.Thus,nomaterwhatcauseyouwere

passionateabout,youcouldgoto@2gov’swebsiteand@2gov

wouldhelpyoundnewpeopletogetinvolved.Asalways,the

newpeoplewereveriedregisteredvoters,andsotheir

opinions

carriedweightwithelectedoficials.

Thenewproducttookonlyoneadditionalmonthtobuildand

immediatelyshowedresults:51percentsign-uprate,92percent

activationrate,28percent

retentionrate,64percentreferralrate

(seethechartbelow).Mostimportant,11percentofthese

customerswerewilingtopay20centspermessage.Most

important,thiswasthebeginningofanactualgrowthmodelthat

couldwork.Receiving20centspermessagemightnotsoundlike

much,butthehighreferralratemeantthat@2govcouldgrowits

tracwithoutspendingsignicantmarketingmoney(thisisthe

viralengineofgrowth).

BEFOREPIVOT

AFTERPIVOT

Engineofgrowth

Paid

Viral

Registrationrate

42%

51%

Activation

83%

92%

Retention

21%

28%

Referral

54%

64%

Revenue

1%

11%

Lifetimevalue(LTV)

Minimal

$0.20permessage

Votizen’sstoryexhibitssomecommonpaterns.Oneofthemost

importanttonoteistheaccelerationofMVPs.TherstMVPtook

eightmonths,thenextfourmonths,thenthree,thenone.Eachtime

Davidwasabletovalidateor

refutehisnexthypothesisfasterthan

before.

Howcanoneexplainthisacceleration?Itistemptingtocreditit

totheproductdevelopmentworkthathadbeengoingon.Many

featureshadbeencreated,

andwiththemafairamountof

infrastructure.Therefore,eachtimethecompanypivoted,itdidn’t

havetostartfromscratch.Butthisisnotthewholestory.Forone

thing,muchoftheproducthadtobediscardedbetweenpivots.

Worse,theproductthatremainedwasclassifiedasalegacyproduct,

onethatwasnolongersuitedtothegoalsofthecompany.Asis

usualythecase,theeortrequiredtoreformalegacyproducttook

extrawork.Counteractingtheseforceswerethehard-

wonlessons

Davidhadlearnedthrougheachmilestone.Votizenacceleratedits

MVPprocessbecauseitwaslearningcriticalthingsaboutits

customers,market,andstrategy.

Today,twoyearsafterits

inception,Votizenisdoingwel.They

recentlyraised$1.5milionfromFacebook’sinitialinvestorPeter

Thiel,oneoftheveryfewconsumerInternetinvestmentshehas

madeinrecentyears.Votizen’ssystemnowcanprocessvoter

identityinrealtimeforforty-sevenstatesrepresenting94percentof

identityinrealtimeforforty-sevenstatesrepresenting94percentof

theU.S.populationandhasdeliveredtensofthousandsofmessages

toCongress.TheStartupVisacampaignused

Votizen’stoolsto

introducetheStartupVisaAct(S.565),whichistherstlegislation

introducedintotheSenatesolelyasaresultofsociallobbying.

Theseactivitieshaveatractedtheatentionofestablished

WashingtonconsultantswhoareseekingtoemployVotizen’stools

infuturepoliticalcampaigns.

DavidBinetisumsuphisexperiencebuildingaLeanStartup:

In2003Istartedacompanyinroughlythesamespaceas

I’mintoday.Ihadroughly

thesamedomainexpertiseand

industrycredibility,freshotheUSA.govsuccess.Butback

thenmycompanywasatotalfailure(despiteconsuming

signicantlygreaterinvestment),whilenowIhavea

businessmakingmoneyandclosingdeals.BackthenIdid

thetraditionallinearproductdevelopmentmodel,releasing

anamazingproduct(itrealywas)after12monthsof

development,onlytondthatnoonewouldbuyit.This

timeIproducedfourversions

intwelveweeksand

generatedmyrstsalerelativelysoonafterthat.Anditisn’t

justmarkettiming—twoothercompaniesthatlaunchedin

asimilarspacein2003subsequentlysoldfortensof

milionsofdolars,and

othersin2010folowedalinear

modelstraighttothedeadpool.

ASTARTUP’SRUNWAYISTHENUMBEROFPIVOTSITCAN

STILLMAKE

Seasonedentrepreneursoftenspeakoftherunwaythattheir

startup

hasleft:theamountoftimeremaininginwhichastartupmust

eitherachievelift-oorfail.Thisusualyisdenedasthe

remainingcashinthebankdividedbythemonthlyburnrate,ornet

drainonthataccount

balance.Forexample,astartupwith$1

milioninthebankthatisspending$100,000permonthhasa

projectedrunwayoftenmonths.

projectedrunwayoftenmonths.

Whenstartupsstarttorun

lowoncash,theycanextendthe

runwaytwoways:bycutingcostsorbyraisingadditionalfunds.

Butwhenentrepreneurscutcostsindiscriminately,theyareasliable

tocutthecoststhatarealowingthecompanytogetthroughits

Build-Measure-Learnfeedbackloopastheyaretocutwaste.Ifthe

cutsresultinaslowdowntothisfeedbackloop,altheyhave

accomplishedistohelpthestartupgooutofbusinessmoreslowly.

Thetruemeasureofrunwayishowmanypivotsastartup

has

left:thenumberofopportunitiesithastomakeafundamental

changetoitsbusinessstrategy.Measuringrunwaythroughthelens

ofpivotsratherthanthatoftimesuggestsanotherwaytoextend

thatrunway:gettoeachpivotfaster.Inotherwords,thestartuphas

tondwaystoachievethesameamountofvalidatedlearningat

lowercostorinashortertime.AlthetechniquesintheLean

Startupmodelthathavebeendiscussedsofarhavethisas

their

overarchinggoal.

PIVOTSREQUIRECOURAGE

Askmostentrepreneurswhohavedecidedtopivotandtheywil

telyouthattheywishtheyhadmadethedecisionsooner.Ibelieve

therearethreereasonswhythishappens.

First,vanitymetricscanalowentrepreneurstoformfalse

conclusionsandliveintheirownprivatereality.Thisisparticularly

damagingtothedecisiontopivotbecauseitrobsteamsofthe

beliefthatitisnecessarytochange.Whenpeopleareforcedto

changeagainsttheirbeterjudgment,theprocessisharder,takes

longer,andleadstoalessdecisiveoutcome.

Second,whenanentrepreneurhasanunclearhypothesis,it’s

almostimpossibletoexperiencecompletefailure,andwithout

failurethereisusualynoimpetustoembarkontheradicalchange

apivotrequires.AsImentionedearlier,thefailureofthe“launchit

andseewhathappens”approachshouldnowbe

evident:youwil

alwayssucceed—inseeingwhathappens.Exceptinrarecases,the

earlyresultswilbeambiguous,andyouwon’tknowwhetherto

earlyresultswilbeambiguous,andyouwon’tknowwhetherto

pivotorpersevere,whethertochangedirectionorstaythecourse.

Third,manyentrepreneursareafraid.Acknowledgingfailurecan

leadtodangerouslylowmorale.Mostentrepreneurs’biggestfearis

notthattheirvisionwilprovetobewrong.Moreterrifying

isthe

thoughtthatthevisionmightbedeemedwrongwithouthaving

beengivenarealchancetoproveitself.Thisfeardrivesmuchof

theresistancetotheminimumviableproduct,splittesting,and

othertechniquestotesthypotheses.Ironicaly,thisfeardrivesup

theriskbecausetestingdoesn’toccuruntilthevisionisfuly

represented.However,bythattimeitisoftentoolatetopivot

becausefundingisrunningout.Toavoidthisfate,

entrepreneurs

needtofacetheirfearsandbewilingtofail,ofteninapublicway.

Infact,entrepreneurswhohaveahighprole,eitherbecauseof

personalfameorbecausetheyareoperatingaspartofafamous

brand,faceanextremeversionofthisproblem.

AnewstartupinSiliconValeycaledPathwasstartedby

experiencedentrepreneurs:DaveMorin,whopreviouslyhad

overseenFacebook’splatforminitiative;DustinMierau,product

designerandcocreatorofMacster;andShawnFanningofNapster

fame.Theydecidedtoreleaseaminimumviableproductin2010.

Becauseofthehigh-prolenatureofitsfounders,theMVPatracted

signicantpressatention,especialyfromtechnology

andstartup

blogs.Unfortunately,theirproductwasnottargetedattechnology

earlyadopters,andasaresult,theearlybloggerreactionwasquite

negative.(Manyentrepreneursfailtolaunchbecausetheyareafraid

ofthiskindofreaction,worryingthatitwilharmthemoraleofthe

entirecompany.Thealureofpositivepress,especialyinour

“home”industry,isquitestrong.)

Luckily,thePathteamhadthecouragetoignorethisfearand

focusonwhattheircustomerssaid.Asaresult,theywereableto

getessentialearlyfeedbackfromactualcustomers.Path’sgoalisto

createamorepersonalsocialnetworkthatmaintainsitsquality

overtime.Manypeoplehavehadtheexperienceofbeing

overconnectedonexistingsocialnetworks,sharingwithpast

coworkers,highschoolfriends,relatives,andcoleagues.Suchbroad

groupsmakeithardtoshareintimatemoments.Pathtookan

groupsmakeithardtoshareintimatemoments.Pathtook

an

unusualapproach.Forexample,itlimitedthenumberof

connectionstofty,basedonbrainresearchbytheanthropologist

RobinDunbaratOxford.Hisresearchsuggeststhatftyisroughly

thenumberofpersonalrelationshipsinanyperson’slifeatany

giventime.

Formembersofthetechpress(andmanytechearlyadopters)

this“articial”constraintonthenumberofconnectionswas

anathema.Theyroutinelyusenewsocialnetworkingproductswith

thousandsofconnections.Fiftyseemedwaytoosmal.Asaresult,

Pathenduredalotofpubliccriticism,whichwashardtoignore.

Butcustomersockedtotheplatform,andtheirfeedback

was

decidedlydierentfromthenegativityinthepress.Customersliked

theintimatemomentsandconsistentlywantedfeaturesthatwere

notontheoriginalproductroadmap,suchastheabilitytoshare

howfriends’picturesmadethemfeelandtheabilitytoshare“video

moments.”

DaveMorinsummeduphisexperiencethisway:

Therealityofourteamandourbackgroundsbuiltupa

massivewalofexpectations.Idon’tthinkitwouldhave

materedwhatwewouldhavereleased;wewouldhave

beenmetwithexpectationsthatarehardtoliveupto.But

tousitjustmeantweneededtogetourproductandour

visionoutintothemarketbroadlyinordertogetfeedback

andtobeginiteration.Wehumblytestourtheoriesandour

approachtoseewhatthemarketthinks.Listentofeedback

honestly.Andcontinuetoinnovateinthedirectionswe

thinkwilcreatemeaningintheworld.

Path’sstoryisjustbeginning,butalreadytheircourageinfacing

downcriticsispayingo.Ifandwhentheyneedtopivot,they

won’tbehamperedbyfear.Theyrecentlyraised$8.5milionin

venturecapitalinaroundledbyKleinerPerkinsCaueld&

Byers.

Indoingso,Pathreportedlyturneddownanacquisitionoerfor

$100milionfromGoogle.2

THEPIVOTORPERSEVEREMEETING

Thedecisiontopivotrequiresaclear-eyedandobjectivemind-set.

We’vediscussedtheteltalesignsoftheneedtopivot:the

decreasingeectivenessofproductexperimentsandthegeneral

feelingthatproductdevelopmentshouldbemoreproductive.

Wheneveryouseethosesymptoms,considerapivot.

Thedecisiontopivotisemotionalychargedforanystartupand

hastobeaddressedinastructuredway.Onewaytomitigatethis

chalengeistoschedulethemeetinginadvance.Irecommendthat

everystartuphavearegular“pivotorpersevere”meeting.

Inmy

experience,lessthanafewweeksbetweenmeetingsistoooften

andmorethanafewmonthsistooinfrequent.However,each

startupneedstofinditsownpace.

Eachpivotorpersevere

meetingrequirestheparticipationof

boththeproductdevelopmentandbusinessleadershipteams.At

IMVU,wealsoaddedtheperspectivesofoutsideadviserswho

couldhelpusseepastourpreconceptionsandinterpretdatain

newways.Theproductdevelopmentteammustbringacomplete

reportoftheresultsofitsproductoptimizationeortsovertime

(notjustthepastperiod)aswelasacomparisonofhowthose

resultsstackupagainstexpectations(again,over

time).The

businessleadershipshouldbringdetailedaccountsoftheir

conversationswithcurrentandpotentialcustomers.

Let’stakealookatthisprocessinactioninadramaticpivot

donebyacompanycaled

Wealthfront.Thatcompanywasfounded

in2007byDanCarrolandaddedAndyRachleasCEOshortly

thereafter.Andyisawel-knowngureinSiliconValey:heisa

cofounderandformergeneralpartneroftheventurecapitalrm

BenchmarkCapitalandisonthefacultyoftheStanfordGraduate

SchoolofBusiness,whereheteachesavarietyofcourseson

technologyentrepreneurship.I

rstmetAndywhenhe

commissionedacasestudy

onIMVUtoteachhisstudentsaboutthe

processwehadusedtobuildthecompany.

Wealthfront’smissionistodisruptthemutualfundindustryby

bringinggreatertransparency,access,andvaluetoretailinvestors.

bringinggreatertransparency,access,andvaluetoretailinvestors.

WhatmakesWealthfront’sstoryunusual,however,isnotwhereitis

todaybuthowitbegan:asanonlinegame.

InWealthfront’soriginalincarnationitwascaledkaChingand

wasconceivedasakindoffantasyleagueforamateurinvestors.It

alowedanyonetoopenavirtualtradingaccountandbuilda

portfoliothatwasbasedonrealmarketdatawithouthavingto

investrealmoney.Theideawastoidentifydiamondsin

therough:

amateurtraderswholackedtheresourcestobecomefundmanagers

butwhopossessedmarketinsight.Wealthfront’sfoundersdidnot

wanttobeintheonlinegamingbusinessperse;kaChingwaspart

ofasophisticatedstrategyintheserviceoftheirlargervision.Any

studentofdisruptiveinnovationwouldhavelookedon

approvingly:theywerefolowingthatsystemperfectlybyinitialy

servingcustomerswhowereunabletoparticipateinthe

mainstreammarket.Overtime,theybelieved,theproductwould

becomemoreandmoresophisticated,eventualyalowingusersto

serve(anddisrupt)existingprofessionalfundmanagers.

Toidentifythebestamateurtradingsavants,Wealthfrontbuilt

sophisticatedtechnologytoratetheskilofeachfundmanager,

usingtechniquesemployedbythemostsophisticatedevaluatorsof

moneymanagers,thepremierU.S.universityendowments.Those

methodsalowedthemtoevaluatenotjustthereturns

themanagers

generatedbutalsotheamountofrisktheyhadtakenalongwith

howconsistenttheyperformedrelativetotheirdeclaredinvestment

strategy.Thus,fundmanagerswhoachievedgreatreturnsthrough

recklessgambles(i.e.,investmentsoutsidetheirareaofexpertise)

wouldberankedlowerthanthosewhohadfiguredouthowtobeat

themarketthroughskil.

WithitskaChinggame,Wealthfronthopedtotesttwoleap-of-

faithassumptions:

1.Asignicantpercentageofthegameplayerswould

demonstrateenoughtalentasvirtualfundmanagerstoprove

themselvessuitabletobecomemanagersofrealassets(the

valuehypothesis).

valuehypothesis).

2.Thegamewouldgrowusingtheviralengineofgrowthand

generatevalueusingafreemiumbusinessmodel.Thegame

wasfreetoplay,buttheteamhopedthatapercentageofthe

playerswouldrealizethattheywerelousytradersand

thereforewanttoconverttopayingcustomersonce

Wealthfrontstartedoeringrealassetmanagementservices

(thegrowthhypothesis).

kaChingwasahugeearlysuccess,atractingmorethan

450,000

gamersinitsinitiallaunch.Bynow,youshouldbesuspiciousof

thiskindofvanitymetric.Manylessdisciplinedcompanieswould

havecelebratedthatsuccessandfelttheirfuturewassecure,but

Wealthfronthadidentieditsassumptionsclearlyandwasableto

thinkmorerigorously.BythetimeWealthfrontwasreadytolaunch

itspaidnancialproduct,onlysevenamateurmanagershad

qualiedasworthyofmanagingotherpeople’smoney,farlessthan

theidealmodelhadanticipated.Afterthepaidproductlaunched,

theywereabletomeasuretheconversionrateofgamersinto

payingcustomers.Heretoothenumberswerediscouraging:the

conversionratewasclosetozero.Theirmodelhad

predictedthat

hundredsofcustomerswouldsignup,butonlyfourteendid.

Theteamworkedvaliantlytondwaystoimprovetheproduct,

butnoneshowedanyparticularpromise.Itwastimeforapivotor

perseveremeeting.

Ifthedatawehavediscussedsofarwasalthatwasavailableat

thatcriticalmeeting,Wealthfrontwouldhavebeenintrouble.They

wouldhaveknownthattheircurrentstrategywasn’tworkingbut

notwhattodotoxit.Thatiswhyitwascriticalthatthey

folowedtherecommendationearlierinthischaptertoinvestigate

alternativepossibilities.Inthiscase,Wealthfronthadpursuedtwo

importantlinesofinquiry.

Therstwasaseriesof

conversationswithprofessionalmoney

managers,beginningwithJohnPowers,theheadofStanford

University’sendowment,whoreactedsurprisinglypositively.

Wealthfront’sstrategywaspremisedontheassumptionthat

professionalmoneymanagerswouldbereluctanttojointhesystem

professionalmoneymanagerswouldbereluctanttojointhesystem

becausetheincreasedtransparencywouldthreatentheirsenseof

authority.Powershadnosuchconcerns.CEOAndy

Rachlethen

beganaseriesofconversationswithotherprofessionalinvestment

managersandbroughttheresultsbacktothecompany.Hisinsights

wereasfolows:

1.Successfulprofessionalmoneymanagersfeltthey

hadnothing

tofearfromtransparency,sincetheybelieveditwouldvalidate

theirskils.

2.Moneymanagersfacedsignicantchalengesinmanagingand

scalingtheirownbusinesses.Theywerehamperedbythe

dicultyofservicingtheirownaccountsandthereforehadto

requirehighminimuminvestmentsasawaytoscreennew

clients.

ThesecondproblemwassoseverethatWealthfrontwaselding

coldcalsfromprofessionalmanagersaskingoutofthebluetojoin

theplatform.Thesewereclassicearlyadopterswhohadthevision

toseepastthecurrentproducttosomethingtheycoulduseto

achieveacompetitiveadvantage.

Thesecondcriticalqualitativeinformationcameoutof

conversationswithconsumers.Itturnedoutthattheyfoundthe

blendingofvirtualandrealportfoliomanagementonthekaChing

websiteconfusing.Farfrombeingacleverwayof

acquiring

customers,thefreemiumstrategywasgetinginthewayby

promotingconfusionaboutthecompany’spositioning.

Thisdatainformedthepivotorperseveremeeting.With

everyonepresent,theteamdebatedwhattodowithits

future.The

currentstrategywasn’tworking,butmanyemployeeswerenervous

aboutabandoningtheonlinegame.Afteral,itwasanimportant

partofwhattheyhadsignedontobuild.Theyhadinvested

signicanttimeandenergybuildingandsupportingthose

customers.Itwaspainful—asitalwaysis—torealizethatthat

energyhadbeenwasted.

Wealthfrontdecideditcouldnotpersevereasitexisted.The

companychoseinsteadto

celebratewhatithadlearned.Ifithad

companychoseinsteadtocelebratewhatithadlearned.Ifithad

notlauncheditscurrentproduct,theteamneverwouldhave

learnedwhatitneededtoknowtopivot.Infact,theexperience

taughtthemsomethingessentialabouttheirvision.AsAndysays,

“Whatwerealywantedtochangewasnotwhomanagesthe

moneybutwhohasaccesstothebestpossibletalent.We’d

originalythoughtwe’dneedtobuildasignicantbusinesswith

amateurmanagerstogetprofessionalstocomeonboard,but

fortunatelyitturnsoutthatwasn’tnecessary.”

Thecompanypivoted,abandoningthegamingcustomers

altogetherandfocusingonprovidingaservicethatalowed

customerstoinvestwithprofessionalmanagers.Onthesurface,the

pivotseemsquitedramaticinthatthecompanychangedits

positioning,itsname,anditspartnerstrategy.Itevenjetisoneda

largeproportionofthefeaturesithadbuilt.Butatitscore,a

surprisingamountstayedthesame.Themostvaluableworkthe

companyhaddonewasbuildingtechnologytoevaluatemanagers’

eectiveness,andthisbecamethekernelaroundwhichthenew

businesswasbuilt.Thisisalsocommonwithpivots;it

isnot

necessarytothrowouteverythingthatcamebeforeandstartover.

Instead,it’saboutrepurposingwhathasbeenbuiltandwhathas

beenlearnedtofindamorepositivedirection.

Today,Wealthfrontis

prosperingasaresultofitspivot,with

over$180milioninvestedontheplatformandmorethanforty

professionalmanagers.3ItrecentlywasnamedoneofFast

Company’stenmostinnovativecompaniesinnance.4The

companycontinuestooperatewithagility,scalinginlinewiththe

growthprinciplesoutlinedinChapter12.Wealthfrontisalsoa

leadingadvocateofthedevelopmenttechniqueknownas

continuousdeployment,whichwe’ldiscussin

Chapter9.

FAILURETOPIVOT

Thedecisiontopivotissodicultthatmanycompaniesfailto

makeit.IwishIcouldsaythateverytimeIwasconfrontedwith

theneedtopivot,Ihandleditwel,butthisisfarfromtrue.

I

theneedtopivot,Ihandleditwel,butthisisfarfromtrue.I

rememberonefailuretopivotespecialywel.

AfewyearsafterIMVU’sfounding,thecompanywashaving

tremendoussuccess.The

businesshadgrowntoover$1milionper

monthinrevenue;wehadcreatedmorethantwentymilionavatars

forourcustomers.Wemanagedtoraisesignicantnewroundsof

nancing,andliketheglobaleconomy,wewereridinghigh.But

dangerlurkedaroundthecorner.

Unknowingly,wehadfalenintoaclassicstartuptrap.Wehad

beensosuccessfulwithourearlyeortsthatwewereignoringthe

principlesbehindthem.Asaresult,wemissedtheneedtopivot

evenasitstaredusintheface.

Wehadbuiltanorganizationthatexceledatthekindsof

activitiesdescribedinearlierchapters:creatingminimumviable

productstotestnewideasandrunningexperimentstotunethe

engineofgrowth.Beforewehadbeguntoenjoysuccess,many

peoplehadadvisedagainstour“low-quality”minimumviable

productandexperimentalapproach,urgingustoslowdown.They

wantedustodothingsrightandfocusonqualityinstead

ofspeed.

Weignoredthatadvice,mostlybecausewewantedtoclaimthe

advantagesofspeed.Afterourapproachwasvindicated,theadvice

wereceivedchanged.Nowmostoftheadviceweheardwasthat

“youcan’targuewithsuccess,”urgingustostaythecourse.We

likedthisadvicebeter,butitwasequalywrong.

Rememberthattherationaleforbuildinglow-qualityMVPsis

thatdevelopinganyfeaturesbeyondwhatearlyadoptersrequireis

aformofwaste.However,thelogicofthistakesyouonlysofar.

Onceyouhavefoundsuccesswithearlyadopters,youwanttosel

tomainstreamcustomers.Mainstreamcustomershavedierent

requirementsandaremuchmoredemanding.

Thekindofpivotweneedediscaledacustomersegmentpivot.

Inthispivot,thecompanyrealizesthattheproductit’sbuilding

solvesarealproblemforrealcustomersbutthattheyarenotthe

customersitoriginalyplannedtoserve.Inother

words,theproduct

hypothesisisconrmedonlypartialy.(Thischapterdescribedsuch

apivotintheVotizenstory,above.)

Acustomersegmentpivotisanespecialytrickypivottoexecute

Acustomersegmentpivotis

anespecialytrickypivottoexecute

because,aswelearnedthehardwayatIMVU,theveryactionsthat

madeussuccessfulwithearlyadopterswerediametricalyopposed

totheactionswe’dhavetomastertobesuccessfulwithmainstream

customers.Welackedaclearunderstandingofhowourengineof

growthoperated.Wehadbeguntotrustourvanitymetrics.Wehad

stoppedusinglearningmilestonestoholdourselvesaccountable.

Instead,itwasmuchmoreconvenienttofocusonthe

ever-larger

grossmetricsthatweresoexciting:breakingnewrecordsinsigning

uppayingcustomersandactiveusers,monitoringourcustomer

retentionrate—younameit.Underthesurface,itshouldhavebeen

clearthatourefortsattuningtheenginewerereachingdiminishing

returns,theclassicsignoftheneedtopivot.

Forexample,wespentmonthstryingtoimprovetheproduct’s

activationrate(therateatwhichnewcustomersbecomeactive

consumersoftheproduct),whichremainedstubbornlylow.Wedid

countlessexperiments:usabilityimprovements,newpersuasion

techniques,incentiveprograms,customerquests,andothergame-

likefeatures.Individualy,manyofthesenewfeatures

andnew

marketingtoolsweresuccessful.Wemeasuredthemrigorously,

usingA/Bexperimentation.Buttakeninaggregate,overthecourse

ofmanymonths,wewereseeingnegligiblechangesintheoveral

driversofourengineofgrowth.Evenouractivationrate,whichhad

beenthecenterofourfocus,edgeduponlyafewpercentage

points.

Weignoredthesignsbecausethecompanywasstilgrowing,

deliveringmonthaftermonthof“upandtotheright”results.But

wewerequicklyexhaustingourearlyadoptermarket.Itwas

getingharderandhardertondcustomerswecouldacquireatthe

priceswewereaccustomedtopaying.Aswedroveour

marketing

teamtondmorecustomers,theywereforcedtoreachoutmoreto

mainstreamcustomers,butmainstreamcustomersarelessforgiving

ofanearlyproduct.Theactivationandmonetizationratesofnew

customersstartedtogodown,drivingupthecostofacquiringnew

customers.Pretysoon,ourgrowthwasatliningandourengine

sputeredandstaled.

Ittookusfartoolongtomakethechangesnecessarytoxthis

Ittookusfartoolongtomakethechangesnecessarytoxthis

situation.Aswithalpivots,wehadtogetbacktobasicsandstart

theinnovationaccountingcycleover.Itfeltlikethecompany’s

secondfounding.Wehadgotenrealygoodatoptimizing,

tuning,

anditerating,butintheprocesswehadlostsightofthepurposeof

thoseactivities:testingaclearhypothesisintheserviceofthe

company’svision.Instead,wewerechasinggrowth,revenue,and

profitswhereverwecouldfindthem.

Weneededtoreacquaintourselveswithournewmainstream

customers.Ourinteractiondesignersledthewaybydevelopinga

clearcustomerarchetypethatwasbasedonextensivein-person

conversationsandobservation.Next,weneededtoinvestheavilyin

amajorproductoverhauldesignedtomaketheproduct

dramaticalyeasiertouse.Becauseofouroverfocusonne-tuning,

wehadstoppedmakinglargeinvestmentslikethese,preferringto

investinlower-riskandlower-yieldtestingexperiments.

However,investinginquality,design,andlargerprojectsdidnot

requirethatweabandonourexperimentalroots.Onthecontrary,

oncewerealizedourmistakeandexecutedthepivot,those

skils

serveduswel.Wecreatedasandboxforexperimentationlikethe

onedescribedinChapter12andhadacross-functionalteamwork

exclusivelyonthismajorredesign.Astheybuilt,theycontinuously

testedtheirnewdesignheadtoheadagainsttheoldone.Initialy,

thenewdesignperformedworsethantheoldone,asisusualythe

case.Itlackedthefeaturesandfunctionalityoftheolddesignand

hadmanynewmistakesaswel.Buttheteam

relentlesslyimproved

thedesignuntil,monthslater,itperformedbeter.Thisnewdesign

laidthefoundationforourfuturegrowth.

Thisfoundationhaspaidohandsomely.By2009,revenuehad

morethandoubledtoover

$25milionannualy.Butwemight

haveenjoyedthatsuccessearlierifwehadpivotedsooner.5

ACATALOGOFPIVOTS

Pivotscomeindierentavors.Thewordpivotsometimesisused

incorrectlyasasynonymfor

change.Apivotisaspecialkindof

incorrectlyasasynonymforchange.Apivotisaspecialkindof

changedesignedtotestanewfundamentalhypothesisaboutthe

product,businessmodel,andengineofgrowth.

Zoom-inPivot

Inthiscase,whatpreviouslywasconsideredasinglefeatureina

productbecomesthewholeproduct.Thisisthetypeofpivot

Votizenmadewhenitpivotedawayfromafulsocialnetworkand

towardasimplevotercontactproduct.

Zoom-outPivot

Inthereversesituation,sometimesasinglefeatureisinsucientto

supportawholeproduct.Inthistypeofpivot,whatwasconsidered

thewholeproductbecomesa

singlefeatureofamuchlarger

product.

CustomerSegmentPivot

Inthispivot,thecompanyrealizesthattheproductitisbuilding

solvesarealproblemforrealcustomersbutthattheyarenotthe

typeofcustomersitoriginalyplannedtoserve.Inotherwords,the

producthypothesisispartialyconrmed,solvingtheright

problem,butforadiferentcustomerthanoriginalyanticipated.

CustomerNeedPivot

Asaresultofgetingtoknow

customersextremelywel,it

sometimesbecomesclearthattheproblemwe’retryingtosolvefor

themisnotveryimportant.However,becauseofthiscustomer

intimacy,weoftendiscoverotherrelatedproblemsthatare

importantandcanbesolvedbyourteam.Inmanycases,these

relatedproblemsmayrequirelitlemorethanrepositioningthe

relatedproblemsmayrequirelitlemorethanrepositioningthe

existingproduct.Inothercases,itmayrequirea

completelynew

product.Again,thisacasewheretheproducthypothesisispartialy

conrmed;thetargetcustomerhasaproblemworthsolving,just

nottheonethatwasoriginalyanticipated.

Afamousexampleisthe

chainPotbelySandwichShop,which

todayhasovertwohundredstores.Itbeganasanantiquestorein

1977;theownersstartedtoselsandwichesasawaytobolster

tractotheirstores.Pretysoontheyhadpivotedtheirwayintoan

entirelydiferentlineofbusiness.

PlatformPivot

Aplatformpivotreferstoachangefromanapplicationtoa

platformorviceversa.Mostcommonly,startupsthataspireto

createanewplatformbegin

lifebyselingasingleapplication,the

so-caledkilerapp,fortheirplatform.Onlylaterdoestheplatform

emergeasavehicleforthirdpartiestoleverageasawaytocreate

theirownrelatedproducts.However,thisorderisnotalwayssetin

stone,andsomecompanieshavetoexecutethispivotmultiple

times.

BusinessArchitecturePivot

ThispivotborrowsaconceptfromGeoreyMoore,whoobserved

thatcompaniesgeneralyfolowoneoftwomajorbusiness

architectures:highmargin,lowvolume(complexsystemsmodel)or

lowmargin,highvolume(volumeoperationsmodel).6Theformer

commonlyisassociatedwithbusinesstobusiness(B2B)or

enterprisesalescycles,andthelaterwithconsumerproducts(there

arenotableexceptions).Inabusinessarchitecturepivot,astartup

switchesarchitectures.Somecompanieschangefromhighmargin,

lowvolumebygoingmassmarket(e.g.,Google’ssearch

“appliance”);others,originalydesignedforthemassmarket,

turnedouttorequirelongandexpensivesalescycles.

ValueCapturePivot

Therearemanywaystocapturethevalueacompanycreates.These

methodsarereferredtocommonlyasmonetizationorrevenue

models.Thesetermsare

muchtoolimiting.Implicitintheideaof

monetizationisthatitisaseparate“feature”ofaproductthatcan

beaddedorremovedatwil.Inreality,capturingvalueisan

intrinsicpartoftheproducthypothesis.Often,changestothewaya

companycapturesvaluecanhavefar-reachingconsequencesforthe

restofthebusiness,product,andmarketingstrategies.

EngineofGrowthPivot

Aswe’lseeinChapter10,therearethreeprimaryenginesof

growththatpowerstartups:

theviral,sticky,andpaidgrowth

models.Inthistypeofpivot,acompanychangesitsgrowthstrategy

toseekfasterormoreprofitablegrowth.Commonlybutnotalways,

theengineofgrowthalsorequiresachangeinthewayvalueis

captured.

ChannelPivot

Intraditionalsalesterminology,themechanismbywhicha

companydeliversitsproducttocustomersiscaledthesales

channelordistributionchannel.Forexample,

consumerpackaged

goodsaresoldinagrocerystore,carsaresoldindealerships,and

muchenterprisesoftwareissold(withextensivecustomization)by

consultingandprofessionalservicesrms.Often,therequirements

ofthechanneldeterminetheprice,features,andcompetitive

landscapeofaproduct.Achannelpivotisarecognitionthatthe

samebasicsolutioncouldbedeliveredthroughadierentchannel

withgreatereectiveness.Wheneveracompany

abandonsa

previouslycomplexsalesprocessto“seldirect”toitsendusers,a

channelpivotisinprogress.

channelpivotisinprogress.

Itispreciselybecauseofitsdestructiveeectonsaleschannels

thattheInternethashadsuchadisruptiveinuenceinindustries

thatpreviouslyrequiredcomplexsalesanddistributionchannels,

suchasnewspaper,magazine,andbookpublishing.

TechnologyPivot

Occasionaly,acompanydiscoversawaytoachievethesame

solutionbyusingacompletelydierenttechnology.Technology

pivotsaremuchmorecommoninestablishedbusinesses.Inother

words,theyareasustaininginnovation,anincremental

improvementdesignedtoappealtoandretainanexistingcustomer

base.Establishedcompaniesexcelatthiskindofpivotbecauseso

muchisnotchanging.Thecustomersegmentisthesame,the

customer’sproblemisthesame,thevalue-capture

modelisthe

same,andthechannelpartnersarethesame.Theonlyquestionis

whetherthenewtechnologycanprovidesuperiorpriceand/or

performancecomparedwiththeexistingtechnology.

APIVOTISASTRATEGIC

HYPOTHESIS

Althoughthepivotsidentiedabovewilbefamiliartostudentsof

businessstrategy,theabilitytopivotisnosubstituteforsound

strategicthinking.Theproblemwithprovidingfamousexamplesof

pivotsisthatmostpeoplearefamiliaronlywiththesuccessfulend

strategiesoffamouscompanies.MostreadersknowthatSouthwest

orWalmartisanexampleofalow-costdisruptionintheirmarkets,

thatMicrosoftanexampleofaplatformmonopoly,and

that

Starbuckshasleveragedapowerfulpremiumbrand.Whatis

generalylesswelknownarethepivotsthatwererequiredto

discoverthosestrategies.Companieshaveastrongincentivetoalign

theirPRstoriesaroundtheheroicfounderandmakeitseemthat

theirsuccesswastheinevitableresultofagoodidea.

Thus,althoughstartupsoftenpivotintoastrategythatseems

Thus,althoughstartupsoften

pivotintoastrategythatseems

similartothatofasuccessfulcompany,itisimportantnottoput

toomuchstockintheseanalogies.It’sextremelydiculttoknowif

theanalogyhasbeendrawnproperly.Havewecopiedtheessential

featuresorjustsupercialones?Wilwhatworkedinthatindustry

workinours?Wilwhathasworkedinthepastworktoday?A

pivotisbeterunderstoodasanewstrategichypothesisthatwil

requireanewminimumviableproducttotest.

Pivotsareapermanentfactoflifeforanygrowingbusiness.Even

afteracompanyachievesinitialsuccess,itmustcontinuetopivot.

Thosefamiliarwiththetechnologylifecycleideasoftheoristssuch

asGeoreyMooreknowcertainlater-stagepivotsby

thenameshe

hasgiventhem:theChasm,theTornado,theBowlingAley.

Readersofthedisruptiveinnovationliteraturespearheadedby

Harvard’sClaytonChristensenwilbefamiliarwithestablished

companiesthatfailtopivotwhentheyshould.Thecriticalskilfor

managerstodayistomatchthosetheoriestotheirpresentsituation

sothattheyapplytherightadviceattherighttime.

Modernmanagerscannothaveescapedthedelugeofrecent

bookscalingonthemtoadapt,change,reinvent,orupendtheir

existingbusinesses.Manyoftheworksinthiscategoryarelongon

exhortationsandshortonspecifics.

Apivotisnotjustanexhortationtochange.Remember,itisa

specialkindofstructuredchangedesignedtotestanew

fundamentalhypothesisabouttheproduct,businessmodel,and

engineofgrowth.ItistheheartoftheLeanStartupmethod.Itis

whatmakesthecompaniesthatfolowLeanStartupresilientinthe

faceofmistakes:ifwetakeawrongturn,wehavethetoolswe

needtorealizeitandtheagilitytofindanotherpath.

InPartTwo,wehavelookedatastartupideafromitsinitialleaps

offaith,testeditwithaminimumviableproduct,usedinnovation

accountingandactionablemetricstoevaluatetheresults,andmade

thedecisiontopivotorpersevere.

Ihavetreatedthesesubjectsingreatdetailtoprepareforwhat

Ihavetreatedthesesubjectsingreatdetailtoprepareforwhat

comesnext.Onthepage,theseprocessesmayseemclinical,slow,

andsimple.Intherealworld,somethingdierentisneeded.We

havelearnedtosteerwhenmovingslowly.Nowwemustlearnto

race.Layingasolidfoundationisonlytherststep

towardourreal

destination:acceleration.

PartThree

PartThree

ACCELERATE

StartYourEngines

Mostofthedecisionsstartupsfacearenotclear-cut.Howoften

shouldyoureleaseaproduct?Isthereareasontoreleaseweekly

ratherthandailyorquarterlyorannualy?Productreleasesincur

overhead,andsofromaneciencypointofview,releasingoften

leaveslesstimetodevotetobuildingtheproduct.However,

waitingtoolongtoreleasecanleadtotheultimate

waste:making

somethingthatnobodywants.

Howmuchtimeandenergyshouldcompaniesinvestin

infrastructureandplanningearlyoninanticipationofsuccess?

Spendtoomuchandyouwasteprecioustimethat

couldhavebeen

spentlearning.Spendtoolitleandyoumayfailtotakeadvantage

ofearlysuccessandcedemarketleadershiptoafastfolower.

Whatshouldemployeesspendtheirdaysdoing?Howdowehold

peopleaccountableforlearningatanorganizationallevel?

Traditionaldepartmentscreateincentivestructuresthatkeep

peoplefocusedonexcelenceintheirspecialties:marketing,sales,

productdevelopment.Butwhatifthecompany’sbest

interestsare

servedbycross-functionalcolaboration?Startupsneed

organizationalstructuresthatcombattheextremeuncertaintythatis

astartup’schiefenemy.

Theleanmanufacturingmovementfacedsimilarquestionsonthe

factoryoor.Theiranswersarerelevantforstartupsaswel,with

somemodifications.

Thecriticalrstquestionforanyleantransformationis:which

Thecriticalrstquestionforanyleantransformationis:which

activitiescreatevalueandwhichareaformofwaste?Onceyou

understandthisdistinction,youcanbeginusingleantechniquesto

driveoutwasteandincreasetheeciencyofthevalue-creating

activities.Forthesetechniquestobeusedina

startup,theymustbe

adaptedtotheuniquecircumstancesofentrepreneurship.Recal

fromChapter3thatvalueinastartupisnotthecreationofstu,

butrathervalidatedlearningabouthowtobuildasustainable

business.Whatproductsdocustomersrealywant?Howwilour

businessgrow?Whoisourcustomer?Whichcustomersshouldwe

listentoandwhichshouldweignore?Thesearethequestionsthat

needansweringasquicklyaspossibletomaximizea

startup’s

chancesofsuccess.Thatiswhatcreatesvalueforastartup.

InPartThree,wewildeveloptechniquesthatalowLean

Startupstogrowwithoutsacricingthespeedandagilitythatare

thelifebloodofeverystartup.Contrarytocommonbelief,lethargy

andbureaucracyarenottheinevitablefateofcompaniesasthey

achievematurity.Ibelievethatwiththeproperfoundation,Lean

Startupscangrowtobecomeleanenterprisesthatmaintain

their

agility,learningorientation,andcultureofinnovationevenasthey

scale.

InChapter9,wewilseehowLeanStartupstakeadvantageof

thecounterintuitivepowerofsmalbatches.Justaslean

manufacturinghaspursuedajust-in-timeapproachtobuilding

products,reducingtheneedforin-processinventory,LeanStartups

practicejust-in-timescalability,conductingproductexperiments

withoutmakingmassiveup-frontinvestmentsinplanning

and

design.

Chapter10wilexplorethemetricsstartupsshoulduseto

understandtheirgrowthastheyaddnewcustomersanddiscover

newmarkets.Sustainablegrowthfolowsoneofthreeenginesof

growth:paid,viral,orsticky.Byidentifyingwhichengineofgrowth

astartupisusing,itcanthendirectenergywhereitwilbemost

eectiveingrowingthebusiness.Eachenginerequiresafocuson

uniquemetricstoevaluatethesuccessofnewproducts

and

prioritizenewexperiments.Whenusedwiththeinnovation

accountingmethoddescribedinPartTwo,thesemetricsalow

accountingmethoddescribedinPartTwo,thesemetricsalow

startupstogureoutwhentheirgrowthisatriskofrunningout

andpivotaccordingly.

Chapter11showshowtobuildanadaptiveorganizationby

investingintherightamountofprocesstokeepteamsnimbleas

theygrow.Wewilseehowtechniquesfromthetoolkitoflean

manufacturing,suchastheFiveWhys,helpstartupteamsgrow

withoutbecomingbureaucraticordysfunctional.Wealsowilsee

howleandisciplinessetthe

stageforastartuptotransitionintoan

establishedcompanydrivenbyoperationalexcelence.

InChapter12,we’lcomefulcircle.Asstartupsgrowinto

establishedcompanies,theyfacethesamepressuresthatmakeit

necessaryfortoday’s

enterprisestondnewwaystoinvestin

disruptiveinnovation.Infact,we’lseethatanadvantageofa

successfulstartup’srapidgrowthisthatthecompanycankeepits

entrepreneurialDNAevenasitmatures.Today’scompaniesmust

learntomasteramanagementportfolioofsustainableand

disruptiveinnovation.Itisanobsoleteviewthatseesstartupsas

goingthroughdiscretephasesthatleaveearlierkindsofwork—

suchasinnovation—behind.Rather,moderncompanies

mustexcel

atdoingmultiplekindsofworkinparalel.Todoso,we’lexplore

techniquesforincubatinginnovationteamswithinthecontextofan

establishedcompany.

Ihaveincludedanepiloguecaled“WasteNot”inwhich

I

considersomeofthebroaderimplicationsofthesuccessoftheLean

Startupmovement,placeitinhistoricalcontext(including

cautionarylessonsfrompastmovements),andmakesuggestionsfor

itsfuturedirection.

9BATCH

InthebookLeanThinking,JamesWomackandDanielJones

recountastoryofstungnewsletersintoenvelopeswiththe

assistanceofoneoftheauthor’stwoyoungchildren.Every

envelopehadtobeaddressed,stamped,ledwithaleter,and

sealed.Thedaughters,agesixandnine,knewhowtheyshouldgo

aboutcompletingtheproject:“Daddy,rstyoushouldfoldalof

thenewsleters.Thenyoushouldatachtheseal.Then

youshould

putonthestamps.”Theirfatherwantedtodoitthe

counterintuitiveway:completeeachenvelopeoneatatime.They

—likemostofus—thoughtthatwasbackward,explainingtohim

“thatwouldn’tbeeficient!”

Heandhisdaughterseachtookhalfthe

envelopesandcompetedtoseewhowouldfinishfirst.

Thefatherwontherace,andnotjustbecauseheisanadult.It

happenedbecausetheoneenvelopeatatimeapproachisafaster

wayofgetingthejobdoneeventhoughitseemsinecient.This

hasbeenconrmedinmanystudies,includingonethatwas

recordedonvideo.1

Theoneenvelopeatatimeapproachiscaled“single-piece

ow”inleanmanufacturing.Itworksbecauseofthesurprising

powerofsmalbatches.Whenwedoworkthatproceedsinstages,

the“batchsize”referstohowmuchworkmovesfromonestageto

thenextatatime.Forexample,ifwewerestung

onehundred

envelopes,theintuitivewaytodoit—foldingonehundredletersat

atime—wouldhaveabatchsizeofonehundred.Single-pieceow

issonamedbecauseithasabatchsizeofone.

issonamedbecauseithasa

batchsizeofone.

Whydoesstungoneenvelopeatatimegetthejobdonefaster

eventhoughitseemslikeitwouldbeslower?Becauseourintuition

doesn’ttakeintoaccounttheextratimerequiredtosort,stack,and

movearoundthelargepilesofhalf-completeenvelopeswhenit’s

donetheotherway.2Itseemsmoreeficienttorepeatthesametask

overandover,inpartbecauseweexpectthatwewilgetbeterat

thissimpletaskthemorewedoit.Unfortunately,in

process-

orientedworklikethis,individualperformanceisnotnearlyas

importantastheoveralperformanceofthesystem.

Eveniftheamountoftimethateachprocesstookwasexactlythe

same,thesmalbatch

productionapproachstilwouldbesuperior,

andforevenmorecounterintuitivereasons.Forexample,imagine

thattheletersdidn’ttintheenvelopes.Withthelarge-batch

approach,wewouldn’tndthatoutuntilnearlytheend.With

smalbatches,we’dknowalmostimmediately.Whatifthe

envelopesaredefectiveandwon’tseal?Inthelarge-batch

approach,we’dhavetounstualtheenvelopes,getnewones,and

restuthem.Inthesmal-batchapproach,we’dndthisout

immediatelyandhavenoreworkrequired.

Altheseissuesarevisibleinaprocessassimpleasstung

envelopes,buttheyareofrealandmuchgreaterconsequenceinthe

workofeverycompany,largeorsmal.Thesmal-batchapproach

producesanishedproducteveryfewseconds,whereasthelarge-

batchapproachmustdeliveraltheproductsatonce,attheend.

Imaginewhatthismightlooklikeifthetimehorizonwashours,

days,orweeks.Whatifitturnsoutthatthecustomers

havedecided

theydon’twanttheproduct?Whichprocesswouldalowa

companytofindthisoutsooner?

Leanmanufacturersdiscoveredthebenetsofsmalbatches

decadesago.Inthepost–WorldWarIeconomy,

Japanese

carmakerssuchasToyotacouldnotcompetewithhugeAmerican

factoriesthatusedthelatestmassproductiontechniques.Folowing

theintuitivelyecientwayofbuilding,massproductionfactories

builtcarsbyusingever-largerbatchsizes.Theywouldspendhuge

amountsofmoneybuyingmachinesthatcouldproducecarpartsby

amountsofmoneybuyingmachinesthatcouldproducecarpartsby

thetens,hundreds,orthousands.Bykeepingthose

machines

runningatpeakspeed,theycoulddrivedowntheunitcostofeach

partandproducecarsthatwereincrediblyinexpensivesolongas

theywerecompletelyuniform.

TheJapanesecarmarketwas

fartoosmalforcompaniessuchas

Toyotatoemploythoseeconomiesofscale;thus,Japanese

companiesfacedintensepressurefrommassproduction.Also,in

thewar-ravagedJapaneseeconomy,capitalwasnotavailablefor

massiveinvestmentsinlargemachines.

ItwasagainstthisbackdropthatinnovatorssuchasTaichiOhno,

ShigeoShingo,andothersfoundawaytosucceedbyusingsmal

batches.Insteadofbuyinglargespecializedmachinesthatcould

producethousandsofpartsatatime,Toyotausedsmalergeneral-

purposemachinesthatcouldproduceawidevarietyofpartsin

smalbatches.Thisrequiredguringoutwaystorecongureeach

machinerapidlytomaketherightpartattherighttime.

By

focusingonthis“changeovertime,”Toyotawasabletoproduce

entireautomobilesbyusingsmalbatchesthroughouttheprocess.

Thisrapidchangingofmachineswasnoeasyfeat.Asinanylean

transformation,existingsystemsandtoolsoftenneedtobe

reinventedtosupportworkinginsmalerbatches.ShigeoShingo

createdtheconceptofSMED(Single-MinuteExchangeofDie)in

ordertoenableasmalerbatchsizeofworkinearly

Toyota

factories.Hewassorelentlessinrethinkingthewaymachineswere

operatedthathewasabletoreducechangeovertimesthat

previouslytookhourstolessthantenminutes.Hedidthis,notby

askingworkerstowork

faster,butbyreimaginingandrestructuring

theworkthatneededtobedone.Everyinvestmentinbetertools

andprocesshadacorrespondingbenetintermsofshrinkingthe

batchsizeofwork.

Becauseofitssmalerbatch

size,Toyotawasabletoproducea

muchgreaterdiversityofproducts.Itwasnolongernecessarythat

eachproductbeexactlythesametogaintheeconomiesofscale

thatpoweredmassproduction.Thus,Toyotacouldserveitssmaler,

morefragmentedmarketsandstilcompetewiththemass

producers.Overtime,thatcapabilityalowedToyotatomove

producers.Overtime,thatcapabilityalowedToyotatomove

successfulyintolargerandlargermarketsuntilit

becamethe

world’slargestautomakerin2008.

Thebiggestadvantageofworkinginsmalbatchesisthatquality

problemscanbeidentiedmuchsooner.Thisistheoriginof

Toyota’sfamousandoncord,

whichalowsanyworkertoaskfor

helpassoonastheynoticeanyproblem,suchasadefectina

physicalpart,stoppingtheentireproductionlineifitcannotbe

correctedimmediately.Thisisanotherverycounterintuitive

practice.Anassemblylineworksbestwhenitisfunctioning

smoothly,rolingcaraftercarotheendoftheline.Theandon

cordcaninterruptthiscarefulowasthelineishaltedrepeatedly.

However,thebenetsofndingandxingproblems

faster

outweighthiscost.Thisprocessofcontinuouslydrivingoutdefects

hasbeenawin-winforToyotaanditscustomers.Itistherootcause

ofToyota’shistorichighqualityratingsandlowcosts.

SMALLBATCHESIN

ENTREPRENEURSHIP

WhenIteachentrepreneursthismethod,Ioftenbeginwithstories

aboutmanufacturing.Beforelong,Icanseethequestioninglooks:

whatdoesthishavetodowithmystartup?Thetheorythatisthe

foundationofToyota’ssuccesscanbeusedtodramaticalyimprove

thespeedatwhichstartupsfindvalidatedlearning.

Toyotadiscoveredthatsmalbatchesmadetheirfactoriesmore

ecient.Incontrast,intheLeanStartupthegoalisnottoproduce

morestueciently.Itisto—asquicklyaspossible—learnhowto

buildasustainablebusiness.

Thinkbacktotheexampleofenvelopestung.Whatifitturns

outthatthecustomerdoesn’twanttheproductwe’rebuilding?

Althoughthisisnevergoodnewsforanentrepreneur,ndingout

soonerismuchbeterthanndingoutlater.Workinginsmal

batchesensuresthatastartupcanminimizetheexpenditureof

time,money,andeortthatultimatelyturnsouttohave

been

wasted.

SmalBatchesatIMVU

AtIMVU,weappliedtheselessonsfrommanufacturingtotheway

wework.Normaly,newversionsofproductslikeoursarereleased

tocustomersonamonthly,quarterly,oryearlycycle.

Takealookatyourcelphone.Oddsare,itisnottheveryrst

versionofitskind.EveninnovativecompaniessuchasApple

produceanewversionoftheiragshipphonesaboutonceayear.

Bundledupinthatproductreleasearedozensofnewfeatures(at

thereleaseofiPhone4,Appleboastedmorethan1,500changes).

Ironicaly,manyhigh-techproductsaremanufacturedin

advancedfacilitiesthatfolowthelatestinleanthinking,including

smalbatchesandsingle-pieceow.However,theprocessthatis

usedtodesigntheproductisstuckintheeraofmassproduction.

Thinkofalthechangesthataremadetoaproductsuchasthe

iPhone;al1,500ofthemarereleasedtocustomersinone

giant

batch.

Behindthescenes,inthedevelopmentanddesignoftheproduct

itself,largebatchesarestiltherule.Theworkthatgoesintothe

developmentofanewproductproceedsonavirtual

assemblyline.

Productmanagersgureoutwhatfeaturesarelikelytoplease

customers;productdesignersthengureouthowthosefeatures

shouldlookandfeel.Thesedesignsarepassedtoengineering,

whichbuildssomethingnewormodiesanexistingproductand,

oncethisisdone,handsitotosomebodyresponsibleforverifying

thatthenewproductworksthewaytheproductmanagersand

designersintended.ForaproductsuchastheiPhone,

theseinternal

handofsmayhappenonamonthlyorquarterlybasis.

Thinkbackonemoretimetotheenvelope-stungexercise.

Whatisthemosteficientwaytodothiswork?

AtIMVU,weatemptedtodesign,develop,andshipournew

featuresoneatatime,takingadvantageofthepowerofsmal

batches.Here’swhatitlookedlike.

Insteadofworkinginseparatedepartments,engineersand

designerswouldworktogethersidebysideononefeatureata

time.Wheneverthatfeaturewasreadytobetestedwithcustomers,

time.Wheneverthatfeaturewasreadytobetestedwithcustomers,

theyimmediatelywouldreleaseanewversionoftheproduct,

whichwouldgoliveonourwebsiteforarelativelysmal

number

ofpeople.Theteamwouldbeableimmediatelytoassessthe

impactoftheirwork,evaluateitseectoncustomers,anddecide

whattodonext.Fortinychanges,thewholeprocessmightbe

repeatedseveraltimesperday.Infact,intheaggregate,IMVU

makesaboutftychangestoitsproduct(onaverage)everysingle

day.

JustaswiththeToyotaProductionSystem,thekeytobeingable

tooperatethisquicklyistocheckfordefectsimmediately,thus

preventingbiggerproblemslater.Forexample,wehadan

extensivesetofautomatedteststhatassuredthataftereverychange

ourproductstilworkedasdesigned.Let’ssayanengineer

accidentalyremovedanimportantfeature,suchasthecheckout

butonononeofoure-commercepages.Withoutthisbuton,

customersnolongercouldbuyanythingfromIMVU.It’sasifour

businessinstantlybecameahobby.Analogouslytothe

Toyota

andoncord,IMVUusedanelaboratesetofdefensemechanisms

thatpreventedengineersfromaccidentalybreakingsomething

important.

Wecaledthisourproduct’simmunesystembecause

those

automaticprotectionswentbeyondcheckingthattheproduct

behavedasexpected.Wealsocontinuouslymonitoredthehealthof

ourbusinessitselfsothatmistakeswerefoundandremoved

automaticaly.

Goingbacktoourbusiness-to-hobbyexampleofthemissing

checkoutbuton,let’smaketheproblemalitlemoreinteresting.

Imaginethatinsteadofremovingthebutonaltogether,anengineer

makesamistakeandchangesthebuton’scolorsothatitisnow

whiteonawhitebackground.Fromthepointofviewofautomated

functionaltests,thebutonisstilthereandeverythingisworking

normaly;fromthecustomer’spointofview,the

butonisgone,

andsonobodycanbuyanything.Thisclassofproblemsishardto

detectsolelywithautomationbutisstilcatastrophicfroma

businesspointofview.AtIMVU,ourimmunesystemis

programmedtodetectthese

businessconsequencesand

programmedtodetectthesebusinessconsequencesand

automaticalyinvokeourequivalentoftheandoncord.

Whenourimmunesystemdetectsaproblem,anumberofthings

happenimmediately:

1.Thedefectivechangeisremovedimmediatelyand

automaticaly.

2.Everyoneontherelevantteamisnotifiedoftheproblem.

3.Theteamisblockedfromintroducinganyfurtherchanges,

preventingtheproblemfrom

beingcompoundedbyfuture

mistakes…

4.…untiltherootcauseoftheproblemisfoundandxed.(This

rootcauseanalysisisdiscussedingreaterdetailinChapter11.)

AtIMVU,wecaledthiscontinuousdeployment,and

eveninthe

fast-movingworldofsoftwaredevelopmentitisstilconsidered

controversial.3AstheLeanStartupmovementhasgainedtraction,it

hascometobeembracedbymoreandmorestartups,eventhose

thatoperatemission-criticalapplications.Amongthemostcuting

edgeexamplesisWealthfront,whosepivotwasdescribedin

Chapter8.Thecompanypracticestruecontinuousdeployment—

includingmorethanadozenreleasestocustomersevery

day—inan

SEC-regulatedenvironment.4

ContinuousDeploymentBeyondSoftware

WhenItelthisstorytopeoplewhoworkinaslower-moving

industry,theythinkIamdescribingsomethingfuturistic.But

increasingly,moreandmoreindustriesareseeingtheirdesign

processacceleratedbythesameunderlyingforcesthatmakethis

kindofrapiditerationpossibleinthesoftwareindustry.Thereare

threewaysinwhichthisishappening:

1.Hardwarebecomingsoftware.Thinkaboutwhathashappened

inconsumerelectronics.Thelatestphonesandtabletcomputersare

inconsumerelectronics.Thelatestphonesandtabletcomputersare

litlemorethanascreenconnectedtotheInternet.

Almostalof

theirvalueisdeterminedbytheirsoftware.Evenold-school

productssuchasautomobilesareseeingever-largerpartsoftheir

valuebeinggeneratedbythesoftwaretheycarryinside,which

controlseverythingfromtheentertainmentsystemtotuningthe

enginetocontrolingthebrakes.Whatcanbebuiltoutofsoftware

canbemodiedmuchfasterthanaphysicalormechanicaldevice

can.

2.Fastproductionchanges.Becauseofthesuccessofthelean

manufacturingmovement,manyassemblylinesaresetuptoalow

eachnewproductthatcomesothelinetobecustomized

completelywithoutsacricingqualityorcost-eectiveness.

Historicaly,thishasbeenusedtooerthecustomermanychoices

ofproduct,butinthefuture,thiscapabilitywilalowthedesigners

ofproductstogetmuchfasterfeedbackaboutnewversions.When

thedesignchanges,thereisnoexcessinventoryofthe

oldversionto

slowthingsdown.Sincemachinesaredesignedforrapid

changeovers,assoonasthenewdesignisready,newversionscan

beproducedquickly.

3.3Dprintingandrapidprototypingtools.Asjustone

example,

mostproductsandpartsthataremadeoutofplastictodayaremass

producedusingatechniquecaledinjectionmolding.Thisprocess

isextremelyexpensiveandtime-consumingtosetup,butonceitis

upandrunning,itcanreproducehundredsofthousandsofidentical

individualitemsatanextremelylowcost.Itisaclassiclarge-batch

productionprocess.Thishasputentrepreneurswhowantto

developanewphysicalproductatadisadvantage,

sinceingeneral

onlylargecompaniescanaordtheselargeproductionrunsfora

newproduct.However,newtechnologiesarealowing

entrepreneurstobuildsmalbatchesofproductsthatareofthe

samequalityasproducts

madewithinjectionmolding,butatmuch

lowercostandmuch,muchfaster.

Theessentiallessonisnotthateveryoneshouldbeshippingfty

timesperdaybutthatbyreducingbatchsize,wecangetthrough

theBuild-Measure-Learnfeedbackloopmorequicklythanour

competitorscan.Theabilitytolearnfasterfromcustomersisthe

essentialcompetitiveadvantagethatstartupsmustpossess.

SMALLBATCHESINACTION

Toseethisprocessinaction,letmeintroduceyoutoacompanyin

Boise,Idaho,caledSGWDesignworks.SGW’sspecialtyisrapid

productiontechniquesforphysicalproducts.Manyofitsclientsare

startups.

SGWDesignworkswasengagedbyaclientwhohadbeenasked

byamilitarycustomertobuildacomplexeldx-raysystemto

detectexplosivesandotherdestructivedevicesatbordercrossings

andinwarzones.

Conceptualy,thesystemconsistedofanadvancedheadunitthat

readx-raylm,multiplex-raylmpanels,andtheframeworkto

holdthepanelswhilethelmwasbeingexposed.Theclient

alreadyhadthetechnologyforthex-raypanelsandthe

headunit,

buttomaketheproductworkinruggedmilitarysetings,SGW

neededtodesignanddeliverthesupportingstructurethatwould

makethetechnologyusableintheeld.Theframeworkhadtobe

stabletoensureaqualityx-rayimage,durableenoughforuseina

warzone,easytodeploywithminimaltraining,andsmalenough

tocolapseintoabackpack.

Thisispreciselythekindofproductweareaccustomedto

thinkingtakesmonthsor

yearstodevelop,yetnewtechniquesare

shrinkingthattimeline.SGWimmediatelybegantogeneratethe

visualprototypesbyusing3Dcomputer-aideddesign(CAD)

software.The3Dmodelsservedasarapidcommunicationtool

betweentheclientandtheSGWteamtomakeearlydesign

decisions.

Theteamandclientsetledonadesignthatusedanadvanced

Theteamandclientsetledonadesignthatusedanadvanced

lockinghingetoprovidethecolapsibilityrequiredwithout

compromisingstability.Thedesignalsointegratedasuction

cup/pumpmechanismtoalowforfast,repeatableatachmentto

thex-raypanels.Soundscomplicated,right?

Threedayslater,theSGWteamdeliveredtherstphysical

prototypestotheclient.Theprototypesweremachinedoutof

aluminumdirectlyfromthe3Dmodel,usingatechniquecaled

computernumericalcontrol(CNC)andwerehand

assembledby

theSGWteam.

Theclientimmediatelytooktheprototypestoitsmilitarycontact

forreview.Thegeneralconceptwasacceptedwithanumberof

minordesignmodications.Inthenextvedays,another

fulcycle

ofdesigniteration,prototyping,anddesignreviewwascompleted

bytheclientandSGW.Therstproductionrunoffortycompleted

unitswasreadyfordeliverythreeandahalfweeksafterthe

initiationofthedevelopmentproject.

SGWrealizedthatthiswasawinningmodelbecausefeedbackon

designdecisionswasnearlyinstantaneous.Theteamusedthesame

processtodesignanddelivereightproducts,servingawiderange

offunctions,inatwelve-monthperiod.Halfofthoseproductsare

generatingrevenuetoday,andtherestareawaitinginitialorders,

althankstothepowerofworkinginsmalbatches.

THEPROJECTTIMELINE

Designandengineeringof

theinitialvirtualprototype

1day

Productionandassemblyofinitialhardprototypes

3days

Designiteration:twoadditionalcycles

5days

Initialproductionrunandassemblyofinitialfortyunits15days

SmalBatchesinEducation

Noteverytypeofproduct—asitexiststoday—alowsfordesign

Noteverytypeofproduct—asitexiststoday—alowsfordesign

changeinsmalbatches.Butthatisnoexcuseforstickingto

outdatedmethods.Asignicantamountofworkmaybeneededto

enableinnovatorstoexperimentinsmalbatches.Aswaspointed

outinChapter2,forestablishedcompanies

lookingtoaccelerate

theirinnovationteams,buildingthisplatformforexperimentation

istheresponsibilityofseniormanagement.

Imaginethatyouareaschoolteacherinchargeofteachingmath

tomiddleschoolstudents.

Althoughyoumayteachconceptsin

smalbatches,onedayatatime,youroveralcurriculumcannot

changeveryoften.Becauseyoumustsetupthecurriculumin

advanceandteachthesameconceptsinthesameordertoevery

studentintheclassroom,youcantryanewcurriculumatmostonly

onceayear.

Howcouldamathteacherexperimentwithsmalbatches?Under

thecurrentlarge-batchsystemforeducatingstudents,itwouldbe

quitedicult;ourcurrenteducationalsystemwasdesignedinthe

eraofmassproductionanduseslargebatchesextensively.

Anewbreedofstartupsisworkinghardtochangealthat.In

SchoolofOne,studentshavedaily“playlists”oftheir

learningtasks

thatareatunedtoeachstudent’slearningneeds,basedonthat

student’sreadinessandlearningstyle.Forexample,Juliaisway

aheadofgradelevelinmathandlearnsbestinsmalgroups,soher

playlistmightincludethreeorfourvideosmatchedtoheraptitude

level,athirty-minuteone-on-onetutoringsessionwithherteacher,

andasmalgroupactivityinwhichsheworksonamathpuzzle

withthreepeersatsimilaraptitudelevels.Thereare

assessments

builtintoeachactivitysothatdatacanbefedbacktotheteacherto

chooseappropriatetasksforthenextplaylist.Thisdatacanbe

aggregatedacrossclasses,schools,orevenwholedistricts.

Nowimaginetryingtoexperimentwithacurriculumbyusinga

toolsuchasSchoolofOne.Eachstudentisworkingathisorher

ownpace.Let’ssayyouareateacherwhohasanewsequencein

mindforhowmathconceptsshouldbetaught.Youcansee

immediatelytheimpactofthechangeonthoseofyourstudents

whoareatthatpointinthecurriculum.Ifyoujudgeittobeagood

change,youcouldrolitoutimmediatelyforeverysinglestudent;

change,youcouldrolitoutimmediatelyforeverysingle

student;

whentheygettothatpartofthecurriculum,theywilgetthenew

sequenceautomaticaly.Inotherwords,toolslikeSchoolofOne

enableteacherstoworkinmuchsmalerbatches,tothebenetof

theirstudents.(And,astoolsreachwide-scaleadoption,successful

experimentsbyindividualteacherscanberoledoutdistrict-,city-,

orevennationwide.)Thisapproachishavinganimpactand

earningaccolades.Timemagazinerecentlyincluded

SchoolofOne

inits“mostinnovativeideas”list;itwastheonlyeducational

organizationtomakethelist.5

THELARGE-BATCHDEATHSPIRAL

Smalbatchesposeachalengetomanagerssteepedin

traditional

notionsofproductivityandprogress,becausetheybelievethat

functionalspecializationismoreeficientforexpertworkers.

Imagineyou’reaproductdesigneroverseeinganewproductand

youneedtoproducethirtyindividualdesigndrawings.Itprobably

seemsthatthemostecientwaytoworkisinseclusion,by

yourself,producingthedesignsonebyone.Then,whenyou’re

donewithalofthem,youpassthedrawingsontothe

engineering

teamandletthemwork.Inotherwords,youworkinlargebatches.

Fromthepointofviewofindividualeciency,workinginlarge

batchesmakessense.Italsohasotherbenets:itpromotesskil

building,makesiteasiertoholdindividualcontributors

accountable,and,mostimportant,alowsexpertstoworkwithout

interruption.Atleastthat’sthetheory.Unfortunately,realityseldom

worksoutthatway.

Considerourhypothetical

example.Afterpassingthirtydesign

drawingstoengineering,thedesignerisfreetoturnhisorher

atentiontothenextproject.Butremembertheproblemsthatcame

upduringtheenvelope-stungexercise.Whathappenswhen

engineeringhasquestionsabouthowthedrawingsaresupposedto

work?Whatifsomeofthedrawingsareunclear?Whatif

somethinggoeswrongwhenengineeringatemptstousethe

drawings?

drawings?

Theseproblemsinevitablyturnintointerruptionsforthe

designer,andnowthoseinterruptionsareinterferingwiththenext

largebatchthedesignerissupposedtobeworkingon.Ifthe

drawingsneedtoberedone,

theengineersmaybecomeidlewhile

theywaitforthereworktobecompleted.Ifthedesignerisnot

available,theengineersmayhavetoredothedesignsthemselves.

Thisiswhysofewproductsareactualybuiltthewaytheyare

designed.

WhenIworkwithproductmanagersanddesignersincompanies

thatuselargebatches,Ioftendiscoverthattheyhavetoredotheir

workveorsixtimesforeveryrelease.OneproductmanagerI

workedwithwassoinundatedwithinterruptionsthathetookto

comingintotheoceinthemiddleofthenightsothathecould

workuninterrupted.WhenIsuggestedthathetryswitchingthe

workprocessfromlarge-batchtosingle-pieceow,he

refused—

becausethatwouldbeinecient!Sostrongistheinstincttowork

inlargebatches,thatevenwhenalarge-batchsystemis

malfunctioning,wehaveatendencytoblameourselves.

Largebatchestendtogrowovertime.Becausemoving

thebatch

forwardoftenresultsinadditionalwork,rework,delays,and

interruptions,everyonehasanincentivetodoworkinever-larger

batches,tryingtominimizethisoverhead.Thisiscaledthelarge-

batchdeathspiralbecause,unlikeinmanufacturing,thereareno

physicallimitsonthemaximumsizeofabatch.6Itispossiblefor

batchsizetokeepgrowingandgrowing.Eventualy,onebatchwil

becomethehighest-priorityproject,a“betthecompany”

new

versionoftheproduct,becausethecompanyhastakensuchalong

timesincethelastrelease.Butnowthemanagersareincentivized

toincreasebatchsizeratherthanshiptheproduct.Inlightofhow

longtheproducthasbeenindevelopment,whynotxonemore

bugoraddonemorefeature?Whorealywantstobethemanager

whoriskedthesuccessofthishugereleasebyfailingtoaddressa

potentialycriticalflaw?

Iworkedatacompanythatenteredthisdeathspiral.Wehad

beenworkingformonthsonanewversionofarealycoolproduct.

beenworkingformonthsonanewversionofarealycoolproduct.

Theoriginalversionhadbeenyearsinthemaking,and

expectationsforthenextreleasewereincrediblyhigh.Butthe

longerweworked,themoreafraidwebecameofhowcustomers

wouldreactwhentheynalysawthenewversion.Asourplans

becamemoreambitious,sotoodidthenumberofbugs,

conicts,

andproblemswehadtodealwith.Pretysoonwegotintoa

situationinwhichwecouldnotshipanything.Ourlaunchdate

seemedtorecedeintothedistance.Themoreworkwegotdone,

themoreworkwehadtodo.Thelackofabilitytoshipeventualy

precipitatedacrisisandachangeofmanagement,albecauseofthe

trapoflargebatches.

Thesemisconceptionsaboutbatchsizeareincrediblycommon.

Hospitalpharmaciesoftendeliverbigbatchesofmedicationsto

patientoorsonceadaybecauseit’secient(asingletrip,right?).

Butmanyofthosemedsgetsentbacktothepharmacywhena

patient’sordershavechangedorthepatientismovedor

discharged,

causingthepharmacystaftodolotsofreworkandreprocessing(or

trashing)ofmeds.Deliveringsmalerbatcheseveryfourhours

reducesthetotalworkloadforthepharmacyandensuresthatthe

rightmedsareattherightplacewhenneeded.

Hospitallabbloodcolectionsoftenaredoneinhourlybatches;

phlebotomistscolectbloodforanhourfrommultiplepatientsand

thensendortakealthesamplestothelab.Thisaddsto

turnaroundtimefortestresultsandcanharmtestquality.Ithas

becomecommonforhospitalstobringsmalbatches(twopatients)

orasingle-patientowofspecimenstothelabeveniftheyhaveto

hireanextraphlebotomistortwotodoso,becausethe

totalsystem

costislower.7

PULL,DON’TPUSH

Let’ssayyouareoutforadrive,ponderingthemeritsofsmal

batches,andndyourselfaccidentalyputingadentinyournew

2011blueToyotaCamry.Youtakeitintothedealershipforrepair

andwaittohearthebadnews.Therepairtechniciantelsyouthat

andwaittohearthebadnews.Therepairtechniciantelsyouthat

youneedtohavethebumperreplaced.Hegoestocheck

their

inventorylevelsandtelsyouhehasanewbumperinstockand

theycancompleteyourrepairimmediately.Thisisgoodnewsfor

everyone—youbecauseyougetyourcarbacksoonerandthe

dealershipbecausetheyhaveahappycustomeranddon’trunthe

riskofyourtakingthecarsomewhereelseforrepair.Also,they

don’thavetostoreyourcarorgiveyoualoanerwhiletheywaitfor

theparttocomein.

Intraditionalmassproduction,thewaytoavoidstockouts—not

havingtheproductthecustomerwants—istokeepalarge

inventoryofsparesjustincase.Itmaybethattheblue2011Camry

bumperisquitepopular,butwhataboutlastyear’smodel

orthe

modelfromveyearsago?Themoreinventoryyoukeep,the

greaterthelikelihoodyouwilhavetherightproductinstockfor

everycustomer.Butlargeinventoriesareexpensivebecausethey

havetobetransported,stored,andtracked.Whatifthe2011

bumperturnsouttohaveadefect?Althesparesinalthe

warehousesinstantlybecomewaste.

Leanproductionsolvestheproblemofstockoutswitha

techniquecaledpul.When

youbringacarintothedealershipfor

repair,oneblue2011Camrybumpergetsused.Thiscreatesa

“hole”inthedealer’sinventory,whichautomaticalycausesasignal

tobesenttoalocalrestockingfacilitycaledtheToyotaParts

DistributionCenter(PDC).ThePDCsendsthedealeranewbumper,

whichcreatesanotherholeininventory.Thissendsasimilarsignal

toaregionalwarehousecaledtheToyotaPartsRedistribution

Center(PRC),wherealpartssuppliersshiptheirproducts.

That

warehousesignalsthefactorywherethebumpersaremadeto

produceonemorebumper,whichismanufacturedandshippedto

thePRC.

Theidealgoalistoachievesmalbatchesalthewaydown

to

single-pieceowalongtheentiresupplychain.Eachstepinthe

linepulsthepartsitneedsfromthepreviousstep.Thisisthe

famousToyotajust-in-timeproductionmethod.8

Whencompaniesswitchto

thiskindofproduction,their

Whencompaniesswitchtothiskindofproduction,their

warehousesimmediatelyshrink,astheamountofjust-in-case

inventory[caledwork-in-progress(WIP)inventory]isreduced

dramaticaly.Thisalmost

magicalshrinkageofWIPiswherelean

manufacturinggetsitsname.It’sasifthewholesupplychain

suddenlywentonadiet.

Startupsstruggletoseetheirwork-in-progressinventory.When

factorieshaveexcessWIP,it

literalypilesuponthefactoryoor.

Becausemoststartupworkisintangible,it’snotnearlyasvisible.

Forexample,altheworkthatgoesintodesigningtheminimum

viableproductis—untilthemomentthatproductisshipped—just

WIPinventory.Incompletedesigns,not-yet-validatedassumptions,

andmostbusinessplansareWIP.AlmosteveryLeanStartup

techniquewe’vediscussedsofarworksitsmagicintwoways:by

convertingpushmethodstopulandreducingbatchsize.

Bothhave

thenetefectofreducingWIP.

Inmanufacturing,pulisusedprimarilytomakesureproduction

processesaretunedtolevelsofcustomerdemand.Withoutthis,

factoriescanwindupmaking

muchmore—ormuchless—ofa

productthancustomersrealywant.However,applyingthis

approachtodevelopingnewproductsisnotstraightforward.Some

peoplemisunderstandtheLeanStartupmodelassimplyapplying

pultocustomerwants.Thisassumesthatcustomerscouldtelus

whatproductstobuildandthatthiswouldactasthepulsignalto

productdevelopmenttomakethem.9

Aswasmentionedearlier,thisisnotthewaytheLeanStartup

modelworks,becausecustomersoftendon’tknowwhattheywant.

Ourgoalinbuildingproductsistobeabletorunexperimentsthat

wilhelpuslearnhowtobuildasustainablebusiness.Thus,the

rightwaytothinkabouttheproductdevelopmentprocess

ina

LeanStartupisthatitisrespondingtopulrequestsintheformof

experimentsthatneedtoberun.

Assoonasweformulateahypothesisthatwewanttotest,the

productdevelopmentteam

shouldbeengineeredtodesignandrun

thisexperimentasquicklyaspossible,usingthesmalestbatchsize

thatwilgetthejobdone.Rememberthatalthoughwewritethe

thatwilgetthejobdone.Rememberthatalthoughwewritethe

feedbackloopasBuild-Measure-Learnbecausetheactivitieshappen

inthatorder,ourplanningrealyworksinthereverseorder:we

gureoutwhatweneedtolearnandthenworkbackwardstosee

whatproductwilworkasanexperimenttogetthat

learning.Thus,

itisnotthecustomer,butratherourhypothesisaboutthecustomer,

thatpulsworkfromproductdevelopmentandotherfunctions.Any

otherworkiswaste.

HypothesisPulinCleanTech

Toseethisinaction,let’stakealookatBerkeley-basedstartup

AlphabetEnergy.Anymachineorprocessthatgeneratespower,

whetheritisamotorinafactoryoracoal-burningpowerplant,

generatesheatasaby-product.AlphabetEnergyhas

developeda

productthatcangenerateelectricityfromthiswasteheat,usinga

newkindofmaterialcaledathermoelectric.AlphabetEnergy’s

thermoelectricmaterialwasdevelopedovertenyearsbyscientists

attheLawrenceBerkeleyNationalLaboratories.

Aswithmanycleantechnologyproducts,therearehuge

chalengesinbringingaproductlikethistomarket.Whileworking

throughitsleap-of-faithassumptions,Alphabetguredoutearly

thatdevelopingasolutionforwastethermoelectricityrequired

buildingaheatexchangerandagenericdevicetotransferheatfrom

onemediumtoanotheraswelasdoingproject-specic

engineering.Forinstance,ifAlphabetwantedtobuildasolutionfor

autilitysuchasPacicGasandElectric,theheatexchangerwould

havetobecongured,shaped,andinstaledtocapturetheheat

fromapowerplant’sexhaustsystem.

WhatmakesAlphabetEnergyuniqueisthatthecompanymadea

savvydecisionearlyonintheresearchprocess.Insteadofusing

relativelyrareelementsasmaterials,theydecidedtobasetheir

researchonsiliconwafers,thesamephysicalsubstancethat

computercentralprocessingunits(CPUs)aremadefrom.

AsCEO

MathewSculinexplains,“Ourthermoelectricistheonlyonethat

canuselow-costsemiconductorinfrastructureformanufacturing.”

canuselow-costsemiconductorinfrastructureformanufacturing.”

ThishasenabledAlphabetEnergytodesignandbuilditsproducts

insmalbatches.

Bycontrast,mostsuccessfulcleantechnologystartupshavehadto

makesubstantialearlyinvestments.Thesolarpanelprovider

SunPowerhadtobuildinfactoriestomanufactureitspanelsand

partnerwithinstalersbeforebecomingfulyoperational.Similarly,

BrightSourceraised$291miliontobuildandoperatelarge-scale

solarplantswithoutdeliveringawattoasingle

customer.

Insteadofhavingtoinvesttimeandmoneyinexpensive

fabricationfacilities,Alphabetisabletotakeadvantageofthe

massiveexistinginfrastructurethatproducessiliconwafersfor

computerelectronics.Asa

result,Alphabetcangofromaproduct

concepttoholdingaphysicalversioninitshandinjustsixweeks

fromendtoend.Alphabet’schalengehasbeentondthe

combinationofperformance,price,andphysicalshapethatisa

matchforearlycustomers.Althoughitstechnologyhas

revolutionarypotential,earlyadopterswildeployitonlyifthey

canseeaclearreturnoninvestment.

ItmightseemthatthemostobviousmarketforAlphabet’s

technologywouldbepowerplants,andindeed,thatwastheteam’s

initialhypothesis.Alphabethypothesizedthatsimplecyclegas

turbineswouldbeanidealapplication;theseturbines,whichare

similartojetenginesstrappedtotheground,are

usedbypower

generatorstoprovideenergyforpeakdemand.Alphabetbelieved

thatatachingitssemiconductorstothoseturbineswouldbesimple

andcheap.

Thecompanywentabouttestingthishypothesisin

smalbatches

bybuildingsmal-scalesolutionsforitscustomersasawayof

learning.Aswithmanyinitialideas,theirhypothesiswasdisproved

quickly.Powercompanieshavealowtoleranceforrisk,making

themunlikelytobecomeearlyadopters.Becauseitwasn’tweighed

downbyalarge-batchapproach,Alphabetwasreadytopivotafter

justthreemonthsofinvestigation.

Alphabethaseliminatedmanyotherpotentialmarketsaswel,

leadingtoaseriesofcustomersegmentpivots.Thecompany’s

currenteortsarefocusedonmanufacturingrms,whichhavethe

currenteortsarefocusedonmanufacturingrms,whichhavethe

abilitytoexperimentwith

newtechnologiesinseparatepartsof

theirfactory;thisalowsearlyadopterstoevaluatethereal-world

benetsbeforecommitingtoalargerdeployment.Theseearly

deploymentsareputingmoreofAlphabet’sassumptionstothe

test.Unlikeinthecomputerhardwarebusiness,customersarenot

wilingtopaytopdolarformaximumperformance.Thishas

requiredsignicantchangesinAlphabet’sproduct,conguringitto

achievethelowestcostperwatpossible.

Althisexperimentationhascostthecompanyatinyfractionof

whatotherenergystartupshaveconsumed.Todate,Alphabethas

raisedapproximately$1milion.Onlytimewilteliftheywil

prevail,butthankstothepowerofsmalbatches,they

wilbeable

todiscoverthetruthmuchfaster.10

TheToyotaProductionSystemisprobablythemostadvanced

systemofmanagementintheworld,butevenmoreimpressiveis

thefactthatToyotahasbuilt

themostadvancedlearning

organizationinhistory.Ithasdemonstratedanabilitytounleashthe

creativityofitsemployees,achieveconsistentgrowth,andproduce

innovativenewproductsrelentlesslyoverthecourseofnearlya

century.11

Thisisthekindoflong-termsuccesstowhichentrepreneurs

shouldaspire.Althoughleanproductiontechniquesarepowerful,

theyareonlyamanifestationofahigh-functioningorganizationthat

iscommitedtoachievingmaximumperformancebyemployingthe

rightmeasuresofprogressoverthelongterm.Processisonlythe

foundationuponwhichagreatcompanyculturecandevelop.But

withoutthisfoundation,eortstoencouragelearning,

creativity,

andinnovationwilfalat—asmanydisilusioneddirectorsofHR

canatest.

TheLeanStartupworksonlyifweareabletobuildan

organizationasadaptableandfastasthechalengesitfaces.This

requirestacklingthehumanchalengesinherentinthisnewwayof

working;thatisthesubjectoftheremainderofPartThree.

THESTARTUPWAY

10

GROW

Irecentlyhadtwostartupsseekmyadviceonthesameday.As

typesofbusinesses,theycouldnothavebeenmoredierent.The

rstisdevelopingamarketplacetohelptradersofcolectibles

connectwithoneanother.Thesepeoplearehard-core

fansof

movies,anime,orcomicswhostrivetoputtogethercomplete

colectionsoftoysandotherpromotionalmerchandiserelatedto

thecharacterstheylove.Thestartupaspirestocompetewithonline

marketplacessuchaseBayaswelasphysicalmarketplaces

atachedtoconventionsandothergatheringsoffans.

Thesecondstartupselsdatabasesoftwaretoenterprise

customers.Theyhaveanext-generationdatabasetechnologythat

cansupplementorreplaceoeringsfromlargecompaniessuchas

Oracle,IBM,andSAP.Theircustomersarechiefinformationoficers

(CIOs),ITmanagers,andengineersinsomeoftheworld’slargest

organizations.Thesearelong-lead-timesalesthat

require

salespeople,salesengineering,instalationsupport,and

maintenancecontracts.

Youcouldbeforgivenforthinkingthesetwocompanieshave

absolutelynothingincommon,yetbothcameto

mewiththeexact

sameproblem.Eachonehadearlycustomersandpromisingearly

revenue.Theyhadvalidatedandinvalidatedmanyhypothesesin

theirbusinessmodelsandwereexecutingagainsttheirproductroad

mapssuccessfuly.Theircustomershadprovidedahealthymixof

positivefeedbackandsuggestionsforimprovements.Both

companieshadusedtheirearlysuccesstoraisemoneyfromoutside

companieshadusedtheirearlysuccesstoraisemoney

fromoutside

investors.

Theproblemwasthatneithercompanywasgrowing.

BothCEOsbroughtmeidentical-lookinggraphsshowingthat

theirearlygrowthhadatlined.Theycouldnotunderstandwhy.

Theywereacutelyawareoftheneedtoshowprogresstotheir

employeesandinvestorsandcametomebecausetheywanted

adviceonhowtojump-starttheirgrowth.Shouldtheyinvestin

moreadvertisingormarketingprograms?Should

theyfocuson

productqualityornewfeatures?Shouldtheytrytoimprove

conversionratesorpricing?

Asitturnsout,bothcompaniesshareadeepsimilarityintheway

theirbusinessesgrow—andthereforeasimilarconfusion

about

whattodo.Bothareusingthesameengineofgrowth,thetopicof

thischapter.

WHEREDOESGROWTHCOMEFROM?

Theengineofgrowthisthemechanismthatstartupsusetoachieve

sustainablegrowth.Iusethewordsustainabletoexcludealone-

timeactivitiesthatgenerateasurgeofcustomersbuthavenolong-

termimpact,suchasasingleadvertisementorapublicitystuntthat

mightbeusedtojump-startgrowthbutcouldnotsustain

that

growthforthelongterm.

Sustainablegrowthischaracterizedbyonesimplerule:

Newcustomerscomefromtheactionsofpastcustomers.

Therearefourprimarywayspastcustomersdrivesustainable

growth:

1.Wordofmouth.Embeddedinmostproductsisanaturallevel

ofgrowththatiscausedbysatisedcustomers’enthusiasmforthe

product.Forexample,whenIboughtmyrstTiVoDVR,Icouldn’t

stoptelingmyfriendsandfamilyaboutit.Pretysoon,myentire

familywasusingone.

2.Asasideeectofproductusage.Fashionorstatus,suchas

luxurygoodsproducts,driveawarenessofthemselveswhenever

theyareused.Whenyouseesomeonedressedinthelatestclothes

ordrivingacertaincar,youmaybeinuencedtobuythatproduct.

Thisisalsotrueofso-caledviralproductssuchasFacebookand

PayPal.Whenacustomersendsmoneytoafriend

usingPayPal,the

friendisexposedautomaticalytothePayPalproduct.

3.Throughfundedadvertising.Mostbusinessesemploy

advertisingtoenticenewcustomerstousetheirproducts.Forthis

tobeasourceofsustainable

growth,theadvertisingmustbepaid

foroutofrevenue,notone-timesourcessuchasinvestmentcapital.

Aslongasthecostofacquiringanewcustomer(theso-caled

marginalcost)islessthantherevenuethatcustomergenerates(the

marginalrevenue),theexcess(themarginalprot)canbeusedto

acquiremorecustomers.Themoremarginalprot,thefasterthe

growth.

4.Throughrepeatpurchaseoruse.Someproductsaredesigned

tobepurchasedrepeatedlyeitherthroughasubscriptionplan(a

cablecompany)orthroughvoluntaryrepurchases(groceriesor

lightbulbs).Bycontrast,manyproductsandservicesare

intentionalydesignedasone-timeevents,suchas

wedding

planning.

ThesesourcesofsustainablegrowthpowerfeedbackloopsthatI

havetermedenginesofgrowth.Eachislikeacombustionengine,

turningoverandover.Thefastertheloopturns,the

fasterthe

companywilgrow.Eachenginehasanintrinsicsetofmetricsthat

determinehowfastacompanycangrowwhenusingit.

THETHREEENGINESOFGROWTH

WesawinPartTwohow

importantitisforstartupstousetheright

kindofmetrics—actionablemetrics—toevaluatetheirprogress.

However,thisleavesalargeamountofvarietyintermsofwhich

numbersoneshouldmeasure.Infact,oneofthemostexpensive

formsofpotentialwasteforastartupisspendingtimearguing

abouthowtoprioritizenewdevelopmentonceithasaproducton

themarket.Atanytime,thecompanycouldinvestitsenergyin

ndingnewcustomers,servicingexistingcustomers

beter,

improvingoveralquality,ordrivingdowncosts.Inmyexperience,

thediscussionsaboutthesekindsofprioritydecisionscanconsume

asubstantialfractionofthecompany’stime.

Enginesofgrowthare

designedtogivestartupsarelativelysmal

setofmetricsonwhichtofocustheirenergies.Asoneofmy

mentors,theventurecapitalinvestorShawnCarolan,putit,

“Startupsdon’tstarve;theydrown.”Therearealwaysazilionnew

ideasabouthowtomaketheproductbeteroatingaround,but

thehardtruthisthatmostofthoseideasmakeadierenceonlyat

themargins.Theyaremereoptimizations.Startupshavetofocuson

thebigexperimentsthatleadtovalidatedlearning.The

enginesof

growthframeworkhelpsthemstayfocusedonthemetricsthat

mater.

TheStickyEngineofGrowth

Thisbringsusbacktothetwostartupsthatkickedothischapter.

Bothareusingtheexactsameengineofgrowthdespitebeingin

verydierentindustries.Bothproductsaredesignedtoatractand

retaincustomersforthelongterm.Theunderlyingmechanismof

thatretentionisdierentinthetwocases.Forthecol

ectible

company,theideaistobecomethenumberoneshopping

destinationforfanaticalcolectors.Thesearepeoplewhoare

constantlyhuntingforthelatestitemsandthebestdeals.Ifthe

company’sproductworksasdesigned,colectorswhostartusingit

wilcheckconstantlyandrepeatedlytoseeifnewitemsareforsale

aswelaslistingtheirownitemsforsaleortrade.

aswelaslistingtheirownitemsforsaleortrade.

Thestartupdatabasevendorreliesonrepeatusageforavery

dierentreason.Databasetechnologyisusedonlyasthefoundation

foracustomer’sownproducts,suchasawebsiteorapointofsale

system.Onceyoubuildaproductontopofaparticular

database

technology,itisextremelydiculttoswitch.IntheITindustry,

suchcustomersaresaidtobelockedintothevendortheychoose.

Forsuchaproducttogrow,ithastooersuchacompelingnew

capabilitythatcustomersarewilingtoriskbeingtiedtoa

proprietaryvendorforapotentialylongtime.

Thus,bothbusinessesrelyonhavingahighcustomerretention

rate.Theyhaveanexpectationthatonceyoustartusingtheir

product,youwilcontinuetodoso.Thisisthesamedynamicasa

mobiletelephoneserviceprovider:whenacustomercancelshisor

herservice,itgeneralymeansthatheorsheisextremely

dissatisedorisswitchingtoacompetitor’sproduct.This

isin

contrastto,say,groceriesonastoreaisle.Inthegroceryretail

business,customertastesuctuate,andifacustomerbuysaPepsi

thisweekinsteadofCoke,it’snotnecessarilyabigdeal.

Therefore,companiesusingthestickyengineofgrowthtrack

theiratritionrateorchurnrateverycarefuly.Thechurnrateis

denedasthefractionofcustomersinanyperiodwhofailto

remainengagedwiththecompany’sproduct.

Therulesthatgovernthestickyengineofgrowthareprety

simple:iftherateofnewcustomeracquisitionexceedsthechurn

rate,theproductwilgrow.Thespeedofgrowthisdeterminedby

whatIcaltherateofcompounding,whichis

simplythenatural

growthrateminusthechurnrate.Likeabankaccountthatearns

compoundinginterest,havingahighrateofcompoundingwillead

toextremelyrapidgrowth—withoutadvertising,viralgrowth,or

publicitystunts.

Unfortunately,bothofthesestickystartupsweretrackingtheir

progressusinggenericindicatorssuchasthetotalnumberof

customers.Eventheactionablemetricstheywereusing,suchasthe

activationrateandrevenuepercustomer,weren’tveryhelpful

becauseinthestickyengineofgrowth,thesevariableshavelitle

impactongrowth.(Inthestickyengineofgrowth,theyarebeter

impactongrowth.(Inthestickyengineofgrowth,they

arebeter

suitedtotestingthevaluehypothesisthatwasdiscussedinChapter

5.)Afterourmeeting,oneofthetwostartupstookmeuponmy

advicetomodelitscustomerbehaviorbyusingthestickyengineof

growthasatemplate.Theresultswerestriking:a61percent

retentionrateanda39percentgrowthrateofnewcustomers.In

otherwords,itschurnrateandnewcustomeracquisitionbalanced

eachotheralmostperfectly,leadingtoacompounding

growthrate

ofjust0.02percent—almostzero.

Thisistypicalforcompaniesinanengagementbusinessthatare

strugglingtondgrowth.Aninsiderwhoworkedatthedot-com-

eracompanyPointCastonce

showedmehowthatcompany

sueredasimilardysfunction.WhenPointCastwasstrugglingto

grow,itwasnonethelessincrediblysuccessfulinnewcustomer

acquisition—justlikethisstickystartup(39percenteveryperiod).

Unfortunately,thisgrowthisbeingosetbyanequivalentamount

ofchurn.Onceitismodeledthisway,thegoodnewsshouldbe

apparent:thereareplentyofnewcustomerscominginthedoor.

Thewaytondgrowthistofocusonexistingcustomers

forthe

productevenmoreengagingtothem.Forexample,thecompany

couldfocusongetingmoreandbeterlistings.Thiswouldcreate

anincentiveforcustomerstocheckbackoften.Alternatively,the

companycoulddosomethingmoredirectsuchasmessagingthem

aboutlimited-timesalesorspecialofers.Eitherway,itsfocusneeds

tobeonimprovingcustomerretention.Thisgoesagainstthe

standardintuitioninthatifacompanylacksgrowth,it

should

investmoreinsalesandmarketing.Thiscounterintuitiveresultis

hardtoinferfromstandardvanitymetrics.

TheViralEngineofGrowth

OnlinesocialnetworksandTupperwareareexamplesofproducts

forwhichcustomersdothelion’sshareofthemarketing.Awareness

oftheproductspreadsrapidlyfrompersontopersonsimilarlyto

thewayavirusbecomesanepidemic.Thisisdistinctfromthe

thewayavirusbecomesanepidemic.Thisisdistinct

fromthe

simpleword-of-mouthgrowthdiscussedabove.Instead,products

thatexhibitviralgrowthdependonperson-to-persontransmission

asanecessaryconsequenceofnormalproductuse.Customersare

notintentionalyactingasevangelists;theyarenotnecessarily

tryingtospreadthewordabouttheproduct.Growthhappens

automaticalyasasideeectofcustomersusingtheproduct.

Virusesarenotoptional.

Forexample,oneofthemostfamousviralsuccessstoriesisa

companycaledHotmail.In1996,SabeerBhatiaandJackSmith

launchedanewweb-basede-mailservicethatoeredcustomers

freeaccounts.Atrst,growthwassluggish;withonlya

smalseed

investmentfromtheventurecapitalrmDraperFisherJurvetson,

theHotmailteamcouldnotaordanextensivemarketing

campaign.Buteverythingchangedwhentheymadeonesmal

tweaktotheproduct.They

addedtothebotomofeverysinglee-

mailthemessage“P.S.Getyourfreee-mailatHotmail”alongwith

aclickablelink.

Withinweeks,thatsmalproductchangeproducedmassive

results.Withinsixmonths,

BhatiaandSmithhadsignedupmore

than1milionnewcustomers.Fiveweekslater,theyhitthe2

milionmark.Eighteenmonthsafterlaunchingtheservice,with12

milionsubscribers,theysoldthecompanytoMicrosoftfor$400

milion.1

ThesamephenomenonisatworkinTupperware’sfamous

“houseparties,”inwhichcustomersearncommissionsbyselingthe

producttotheirfriendsandneighbors.Everysalespitchisan

opportunitynotonlytoselTupperwareproductsbutalsoto

persuadeothercustomerstobecomeTupperwarerepresentatives.

Tupperwarepartiesarestilgoingstrongdecadesaftertheystarted.

Manyothercontemporarycompanies,suchasPampered

Chef

(ownedbyWarrenBuet’sBerkshireHathaway),SouthernLiving,

andTastefulySimple,haveadoptedasimilarmodelsuccessfuly.

Liketheotherenginesofgrowth,theviralengineispoweredby

afeedbackloopthatcanbequantied.Itiscaledtheviralloop,

anditsspeedisdeterminedbyasinglemathematicaltermcaled

anditsspeedisdeterminedbyasinglemathematicaltermcaled

theviralcoecient.Thehigherthiscoecientis,the

fasterthe

productwilspread.Theviralcoecientmeasureshowmanynew

customerswiluseaproductasaconsequenceofeachnew

customerwhosignsup.Putanotherway,howmanyfriendswil

eachcustomerbringwith

himorher?Sinceeachfriendisalsoa

newcustomer,heorshehasanopportunitytorecruityetmore

friends.

Foraproductwithaviralcoecientof0.1,oneineveryten

customerswilrecruitoneofhisorherfriends.Thisisnot

a

sustainableloop.Imaginethatonehundredcustomerssignup.They

wilcausetenfriendstosignup.Thosetenfriendswilcauseone

additionalpersontosignup,buttheretheloopwilfizzleout.

Bycontrast,aviralloopwithacoecientthatisgreaterthan1.0

wilgrowexponentialy,becauseeachpersonwhosignsupwil

bring,onaverage,morethanoneotherpersonwithhimorher.

Toseetheseefectsgraphicaly,takealookatthischart:

Companiesthatrelyontheviralengineofgrowthmustfocuson

increasingtheviralcoecientmorethananythingelse,because

increasingtheviralcoecientmorethananythingelse,because

eventinychangesinthisnumberwilcausedramatic

changesin

theirfutureprospects.

Aconsequenceofthisisthatmanyviralproductsdonotcharge

customersdirectlybutrelyonindirectsourcesofrevenuesuchas

advertising.Thisisthecasebecauseviralproductscannot

aordto

haveanyfrictionimpedetheprocessofsigningcustomersupand

recruitingtheirfriends.Thiscanmaketestingthevaluehypothesis

forviralproductsespecialychalenging.

Thetruetestofthevalue

hypothesisisalwaysavoluntary

exchangeofvaluebetweencustomersandthestartupthatserves

them.Alotofconfusionstemsfromthefactthatthisexchangecan

bemonetary,asinthecaseofTupperware,ornonmonetary,asin

thecaseofFacebook.Intheviralengineofgrowth,monetary

exchangedoesnotdrivenewgrowth;itisusefulonlyasan

indicatorthatcustomersvaluetheproductenoughtopayforit.If

FacebookorHotmailhadstartedchargingcustomersintheirearly

days,itwouldhavebeenfoolish,asitwouldhaveimpededtheir

abilitytogrow.However,itisnottruethatcustomersdonotgive

thesecompaniessomethingofvalue:byinvestingtheirtimeand

atentionintheproduct,theymaketheproductvaluableto

advertisers.Companiesthatseladvertisingactualyservetwo

dierentgroupsofcustomers—consumersandadvertisers—and

exchangeadiferentcurrencyofvaluewitheach.2

Thisismarkedlydierentfromcompaniesthatactivelyuse

moneytofueltheirexpansion,suchasaretailchainthatcangrow

asfastasitcanfundtheopeningofnewstoresatsuitablelocations.

Thesecompaniesareusingadiferentengineofgrowthaltogether.

ThePaidEngineofGrowth

Imagineanotherpairofbusinesses.Therstmakes$1oneach

customeritsignsup;thesecondmakes$100,000fromeach

customeritsignsup.Topredictwhichcompanywilgrowfaster,

youneedtoknowonlyoneadditionalthing:howmuchit

coststo

signupanewcustomer.

signupanewcustomer.

ImaginethattherstcompanyusesGoogleAdWordstondnew

customersonlineandpaysanaverageof80centseachtimeanew

customerjoins.Thesecondcompanyselsheavygoodstolarge

companies.Eachsalerequiresasignicanttimeinvestmentfroma

salespersonandon-sitesalesengineeringtohelpinstaltheproduct;

thesehardcoststotalupto$80,000pernewcustomer.

Both

companieswilgrowattheexactsamerate.Eachhasthesame

proportionofrevenue(20percent)availabletoreinvestinnew

customeracquisition.Ifeithercompanywantstoincreaseitsrateof

growth,itcandosoinoneoftwoways:increasetherevenuefrom

eachcustomerordrivedownthecostofacquiringanewcustomer.

That’sthepaidengineofgrowthatwork.

InrelatingtheIMVUstoryinChapter3,Italkedabouthowwe

madeamajorearlymistakeinsetinguptheIMVUstrategy.We

ultimatelywounduphavingtomakeanengineofgrowthpivot.

WeoriginalythoughtthatourIMadd-onstrategywouldalowthe

producttogrowviraly.Unfortunately,customers

refusedtogo

alongwithourbriliantstrategy.

Ourbasicmisconceptionwasabeliefthatcustomerswouldbe

wilingtouseIMVUasanadd-ontoexistinginstantmessaging

networks.Webelievedthat

theproductwouldspreadviraly

throughthosenetworks,passedfromcustomertocustomer.The

problemwiththattheoryisthatsomekindsofproductsarenot

compatiblewithviralgrowth.

IMVU’scustomersdidn’t

wanttousetheproductwiththeir

existingfriends.Theywantedtouseittomakenewfriends.

Unfortunately,thatmeanttheydidnothaveastrongincentiveto

bringnewcustomerstotheproduct;theyviewedthatasourjob.

Fortunately,IMVUwasabletogrowbyusingpaidadvertising

becauseourcustomerswerewilingtopaymoreforourproduct

thanitcostustoreachthemviaadvertising.

Liketheotherengines,thepaidengineofgrowthispoweredby

afeedbackloop.Eachcustomerpaysacertainamountofmoneyfor

theproductoverhisorher“lifetime”asacustomer.Oncevariable

costsarededucted,thisusualyiscaledthecustomerlifetimevalue

(LTV).Thisrevenuecanbeinvestedingrowthbybuying

(LTV).Thisrevenuecanbeinvestedingrowthbybuying

advertising.

Supposeanadvertisementcosts$100andcausesftynew

customerstosignupfortheservice.Thisadhasacostper

acquisition(CPA)of$2.00.

Inthisexample,iftheproducthasan

LTVthatisgreaterthan$2,theproductwilgrow.Themargin

betweentheLTVandtheCPAdetermineshowfastthepaidengine

ofgrowthwilturn(thisiscaledthemarginalprot).Conversely,

iftheCPAremainsat$2.00buttheLTVfalsbelow$2.00,the

company’sgrowthwilslow.Itmaymakeupthedierencewith

one-timetacticssuchasusinginvestedcapitalorpublicitystunts,

butthosetacticsarenotsustainable.Thiswasthefate

ofmany

failedcompanies,includingnotabledot-comameoutsthat

erroneouslybelievedthattheycouldlosemoneyoneachcustomer

but,astheoldjokegoes,makeitupinvolume.

AlthoughIhaveexplainedthepaidengineofgrowthin

termsof

advertising,itisfarbroaderthanthat.Startupsthatemployan

outboundsalesforcearealsousingthisengine,asareretail

companiesthatrelyonfoottrac.Althesecostsshouldbe

factoredintothecostper

acquisition.

Forexample,onestartupIworkedwithbuiltcolaborationtools

forteamsandgroups.Itwentthrougharadicalpivot,switching

fromatoolthatwasusedprimarilybyhobbyistsandsmalclubsto

onethatwassoldprimarilytoenterprises,nongovernmental

organizations(NGOs),andotherextremelylargeorganizations.

However,theymadethatcustomersegmentpivotwithoutchanging

theirengineofgrowth.Previously,theyhaddone

customer

acquisitiononline,usingweb-baseddirectmarketingtechniques.I

rememberoneearlysituationinwhichthecompanyeldedacal

fromamajorNGOthatwantedtobuyitsproductandrolitout

acrossmanydivisions.Thestartuphadan“unlimited”pricingplan,

itsmostexpensive,thatcostonlyafewhundreddolarspermonth.

TheNGOliteralycouldnotmakethepurchasebecauseithadno

processinplaceforbuyingsomethingsoinexpensive.

Additionaly,

theNGOneededsubstantialhelpinmanagingtherolout,educating

itsstaonthenewtool,andtrackingtheimpactofthechange;

thosewerealservicesthecompanywasilequippedtooer.

thosewerealservicesthecompanywasilequippedtooer.

Changingcustomersegmentsrequiredthemtoswitchtohiringa

sizableoutboundsalesstathatspenttimeatendingconferences,

educatingexecutives,andauthoringwhitepapers.

Thosemuch

highercostscamewithacorrespondingreward:thecompany

switchedfrommakingonlyafewdolarspercustomertomaking

tensandthenhundredsofthousandsofdolarspermuchlarger

customer.Theirnewengineofgrowthledtosustainedsuccess.

Mostsourcesofcustomeracquisitionaresubjecttocompetition.

Forexample,primeretailstorefrontshavemorefoottracandare

thereforemorevaluable.Similarly,advertisingthatis

targetedto

moreauentcustomersgeneralycostsmorethanadvertisingthat

reachesthegeneralpublic.Whatdeterminesthesepricesisthe

averagevalueearnedinaggregatebythecompaniesthatarein

competitionforanygivencustomer’satention.Wealthyconsumers

costmoretoreachbecausetheytendtobecomemoreprotable

customers.

Overtime,anysourceofcustomeracquisitionwiltendtohave

itsCPAbidupbythiscompetition.Ifeveryoneinanindustry

makesthesameamountofmoneyoneachsale,theyalwilwind

uppayingmostoftheirmarginalprottothesourceofacquisition.

Thus,theabilitytogrowinthelongtermbyusingthe

paidengine

requiresadierentiatedabilitytomonetizeacertainsetof

customers.

IMVUisacaseinpoint.Ourcustomerswerenotconsideredvery

lucrativebyotheronlineservices:theyincludedalot

ofteenagers,

low-incomeadults,andinternationalcustomers.Otherservices

tendedtoassumethosepeoplewouldnotpayforanythingonline.

AtIMVU,wedevelopedtechniquesforcolectingonlinepayments

fromcustomerswhodidnothaveacreditcard,suchasalowing

themtobiltotheirmobilephonesorsenduscashinthemail.

Therefore,wecouldaordtopaymoretoacquirethosecustomers

thanourcompetitorscould.

ATechnicalCaveat

Technicaly,morethanoneengineofgrowthcanoperateina

businessatatime.Forexample,thereareproductsthathave

extremelyfastviralgrowthaswelasextremelylowcustomer

churnrates.Also,thereisnoreasonwhyaproductcannothave

bothhighmarginsandhighretention.However,inmyexperience,

successfulstartupsusualyfocusonjustoneengineofgrowth,

specializingineverythingthatisrequiredtomakeit

work.

Companiesthatatempttobuildadashboardthatincludesalthree

enginestendtocausealotofconfusionbecausetheoperations

expertiserequiredtomodelaltheseeectssimultaneouslyisquite

complicated.Therefore,Istronglyrecommendthatstartupsfocuson

oneengineatatime.Mostentrepreneursalreadyhaveastrong

leap-of-faithhypothesisaboutwhichengineismostlikelytowork.

Iftheydonot,timespentoutofthebuildingwith

customerswil

quicklysuggestonethatseemsprotable.Onlyafterpursuingone

enginethoroughlyshouldastartupconsiderapivottooneofthe

others.

ENGINESOFGROWTHDETERMINE

PRODUCT/MARKETFIT

MarcAndreessen,thelegendaryentrepreneurandinvestorandone

ofthefathersoftheWorldWideWeb,coinedtheterm

product/marketttodescribethemomentwhenastartupnaly

findsawidespreadsetof

customersthatresonatewithitsproduct:

Inagreatmarket—amarketwithlotsofrealpotential

customers—themarketpulsproductoutofthestartup.

Thisisthestoryofsearchkeywordadvertising,Internet

auctions,andTCP/IProuters.Conversely,inaterrible

market,youcanhavethebestproductintheworldandan

absolutelykilerteam,anditdoesn’tmater—you’regoing

tofail.3

Whenyouseeastartupthathasfoundatwithalargemarket,

it’sexhilarating.Itleavesnoroomfordoubt.ItisFord’s

ModelT

it’sexhilarating.Itleavesnoroomfordoubt.ItisFord’sModelT

yingoutofthefactoryasfastasitcouldbemade,Facebook

sweepingcolegecampusespracticalyovernight,orLotustaking

thebusinessworldbystorm,seling$54milionworthofLotus1-2-

3initsfirstyearofoperation.

Startupsoccasionalyaskmetohelpthemevaluatewhetherthey

haveachievedproduct/markett.It’seasytoanswer:ifyouare

asking,you’renotthereyet.Unfortunately,thisdoesn’thelp

companiesgureouthowtogetclosertoproduct/markett.How

canyoutelifyouareonthevergeofsuccessorhopelesslyfar

away?

AlthoughIdon’tthinkAndreessenintendedthisaspartofhis

denition,tomanyentrepreneursitimpliesthatapivotisafailure

event—“ourstartuphasfailedtoachieveproduct/markett.”It

alsoimpliestheinverse—thatonceourproducthas

achieved

product/markett,wewon’thavetopivotanymore.Both

assumptionsarewrong.

Ibelievetheconceptoftheengineofgrowthcanputtheideaof

product/markettonamorerigorousfooting.Sinceeachengineof

growthcanbedenedquantitatively,eachhasauniquesetof

metricsthatcanbeusedtoevaluatewhetherastartupisonthe

vergeofachievingproduct/markett.Astartupwithaviral

coecientof0.9ormoreisonthevergeofsuccess.Even

beter,the

metricsforeachengineofgrowthworkintandemwiththe

innovationaccountingmodeldiscussedinChapter7togive

directiontoastartup’sproductdevelopmenteorts.Forexample,if

astartupisatemptingtousetheviralengineofgrowth,itcan

focusitsdevelopmenteortsonthingsthatmightaectcustomer

behavior—ontheviralloop—andsafelyignorethosethatdonot.

Suchastartupdoesnotneedtospecializeinmarketing,

advertising,

orsalesfunctions.Conversely,acompanyusingthepaidengine

needstodevelopthosemarketingandsalesfunctionsurgently.

Astartupcanevaluatewhetheritisgetingcloserto

product/markettasittunes

itsenginebyevaluatingeachtrip

throughtheBuild-Measure-Learnfeedbackloopusinginnovation

accounting.Whatrealymatersisnottherawnumbersorvanity

metricsbutthedirectionanddegreeofprogress.

metricsbutthedirectionanddegreeofprogress.

Forexample,imaginetwostartupsthatareworkingdiligentlyto

tunethestickyengineofgrowth.Onehasacompoundingrateof

growthof5percent,andtheother10percent.Whichcompanyis

thebeterbet?Onthesurface,itmayseemthatthelargerrateof

growthisbeter,butwhatifeachcompany’sinnovationaccounting

dashboardlookslikethefolowingchart?

COMPOUNDINGGROWTHRATEASCOMPANYCOMPANY

OF

A

B

Sixmonthsago

0.1%

9.8%

Fivemonthsago

0.5%

9.6%

Fourmonthsago

2.0%

9.9%

Threemonthsago

3.2%

9.8%

Twomonthsago

4.5%

9.7%

Onemonthago

5.0%

10.0%

Evenwithnoinsightintothesetwocompanies’gross

numbers,

wecantelthatcompanyAismakingrealprogresswhereas

companyBisstuckinthemud.ThisistrueeventhoughcompanyB

isgrowingfasterthancompanyArightnow.

WHENENGINESRUNOUT

Getingastartup’sengineofgrowthupandrunningishardenough,

butthetruthisthateveryengineofgrowtheventualyrunsoutof

gas.Everyengineistiedtoagivensetofcustomersandtheir

relatedhabits,preferences,advertisingchannels,and

interconnections.Atsomepoint,thatsetofcustomerswilbe

exhausted.Thismaytakealongtimeorashorttime,dependingon

one’sindustryandtiming.

one’sindustryandtiming.

Chapter6emphasizedtheimportanceofbuildingthe

minimum

viableproductinsuchawaythatitcontainsnoadditionalfeatures

beyondwhatisrequiredbyearlyadopters.Folowingthatstrategy

successfulywilunlockanengineofgrowththatcanreachthat

targetaudience.However,makingthetransitiontomainstream

customerswilrequiretremendousadditionalwork.4Oncewehave

aproductthatisgrowingamongearlyadopters,wecouldintheory

stopworkinproductdevelopmententirely.The

productwould

continuetogrowuntilitreachedthelimitsofthatearlymarket.

Thengrowthwouldleveloorevenstopcompletely.The

chalengecomesfromthefactthatthisslowdownmighttake

monthsorevenyearstotake

place.RecalfromChapter8that

IMVUfailedthistest—atfirst—forpreciselythisreason.

Someunfortunatecompanieswindupfolowingthisstrategy

inadvertently.Becausetheyareusingvanitymetricsandtraditional

accounting,theythinktheyaremakingprogresswhentheyseetheir

numbersgrowing.Theyfalselybelievetheyaremakingtheir

productbeterwheninfacttheyarehavingnoimpactoncustomer

behavior.Thegrowthisalcomingfromanengineof

growththatis

working—runningecientlytobringinnewcustomers—notfrom

improvementsdrivenbyproductdevelopment.Thus,whenthe

growthsuddenlyslows,itprovokesacrisis.

Thisisthesameproblemthat

establishedcompaniesexperience.

Theirpastsuccesseswerebuiltonanelytunedengineofgrowth.

Ifthatenginerunsitscourseandgrowthslowsorstops,therecan

beacrisisifthecompanydoesnothavenewstartupsincubating

withinitsranksthatcanprovidenewsourcesofgrowth.

Companiesofanysizecansuerfromthisperpetualaiction.

Theyneedtomanageaportfolioofactivities,simultaneouslytuning

theirengineofgrowthanddevelopingnewsourcesof

growthfor

whenthatengineinevitablyrunsitscourse.Howtodothisisthe

subjectofChapter12.However,beforewecanmanagethat

portfolio,weneedanorganizationalstructure,culture,and

disciplinethatcanhandletheserapidandoftenunexpected

changes.Icalthisanadaptiveorganization,anditisthesubjectof

changes.Icalthisanadaptiveorganization,anditisthesubjectof

Chapter11.

11

ADAPT

WhenIwastheCTOofIMVU,IthoughtIwasdoingagoodjob

mostofthetime.Ihadbuiltanagileengineeringorganization,

andweweresuccessfulyexperimentingwiththe

techniques

thatwouldcometobeknownastheLeanStartup.However,ona

coupleofoccasionsIsuddenlyrealizedthatIwasfailingatmyjob.

Foranachievement-orientedperson,thatisincrediblydisarming.

Worstofal,youdon’tgetamemo.Ifyoudid,itwouldread

somethinglikethis:

DearEric,

Congratulations!Thejobyouusedtodoatthiscompany

isnolongeravailable.However,youhavebeentransferred

toanewjobinthecompany.Actualy,it’snotthesame

companyanymore,eventhoughithasthesamenameand

manyofthesamepeople.Andalthoughthejobhasthe

sametitle,too,andyouusedtobegoodatyouroldjob,

you’realreadyfailingatthe

newone.Thistransferis

eectiveasofsixmonthsago,sothisistoalertyouthat

you’vealreadybeenfailingatitforquitesometime.

Bestofluck!

Everytimethishappenedtome,Istruggledtogureoutwhatto

do.Iknewthatasthecompanygrew,wewouldneedadditional

processesandsystemsdesignedtocoordinatethecompany’s

operationsateachlargersize.AndyetIhadalsoseenmanystartups

operationsateachlargersize.AndyetIhadalsoseenmany

startups

becomeossiedandbureaucraticoutofamisplaceddesireto

become“professional.”

HavingnosystematalwasnotanoptionforIMVUandisnot

anoptionforyou.Therearesomanywaysforastartupto

fail.I’ve

livedthroughtheoverarchitecturefailure,inwhichatemptingto

preventalthevariouskindsofproblemsthatcouldoccurwound

updelayingthecompanyfromputingoutanyproduct.I’veseen

companiesfailtheotherwayfromtheso-caledFriendstereect,

sueringahigh-proletechnicalfailurejustwhencustomer

adoptionisgoingwild.Asadepartmentexecutive,thisoutcomeis

worstofal,becausethefailureisbothhigh-prole

andatributable

toasinglefunctionordepartment—yours.Notonlywilthe

companyfail,itwilbeyourfault.

MostoftheadviceI’veheardonthistopichassuggestedakindof

split-the-dierenceapproach

(asin,“engageinalitleplanning,but

nottoomuch”).Theproblemwiththiswily-nilyapproachisthat

it’shardtogiveanyrationaleforwhyweshouldanticipateone

particularproblembutignoreanother.Itcanfeellikethebossis

beingcapriciousorarbitrary,andthatfeedsthecommonfeeling

thatmanagement’sdecisionsconcealanulteriormotive.

Forthosebeingmanagedthisway,theirincentivesareclear.If

thebosstendstosplitthedierence,thebestwaytoinuencethe

bossandgetwhatyouwantistotakethemostextremeposition

possible.Forexample,ifonegroupisadvocatingforanextremely

lengthyreleasecycle,say,anannualnewproductintroduction,you

mightchoosetoargueforanequalyextremelyshort

releasecycle

(perhapsweeklyorevendaily),knowingthatthetwoopinionswil

beaveragedout.Then,whenthedierenceissplit,you’relikelyto

getanoutcomeclosertowhatyouactualywantedintherst

place.Unfortunately,thiskindofarmsraceescalates.Rivalsin

anothercamparelikelytodothesamething.Overtime,everyone

wiltakethemostpolarizedpositionspossible,whichmakes

splitingthedierenceevermoredicultandeverless

successful.

Managershavetotakeresponsibilityforknowinglyorinadvertently

creatingsuchincentives.Althoughitwasnottheirintentionto

rewardextremepolarization,that’sexactlywhattheyaredoing.

rewardextremepolarization,that’sexactlywhattheyaredoing.

Getingoutofthistraprequiresasignificantshiftinthinking.

BUILDINGANADAPTIVEORGANIZATION

Shouldastartupinvestinatrainingprogramfornewemployees?If

youhadaskedmeafewyearsago,Iwouldhavelaughedandsaid,

“Absolutelynot.Trainingprogramsareforbigcompaniesthatcan

aordthem.”YetatIMVUwewoundupbuildingatraining

programthatwassogood,newhireswereproductiveontheirrst

dayofemployment.Withinjustafewweeks,thoseemployees

werecontributingatahighlevel.Itrequiredahugeeortto

standardizeourworkprocessesandprepareacurriculumofthe

conceptsthatnewemployeesshouldlearn.Everynew

engineer

wouldbeassignedamentor,whowouldhelpthenewemployee

workthroughacurriculumofsystems,concepts,andtechniqueshe

orshewouldneedtobecomeproductiveatIMVU.The

performanceofthementor

andmenteewerelinked,sothementors

tookthiseducationseriously.

Whatisinteresting,lookingbackatthisexample,isthatwenever

stoppedworkanddecidedthatweneededtobuildagreattraining

program.Instead,thetraining

programevolvedorganicalyoutofa

methodicalapproachtoevolvingourownprocess.Thisprocessof

orientationwassubjecttoconstantexperimentationandrevisionso

thatitgrewmoreefective—andlessburdensome—overtime.

Icalthisbuildinganadaptiveorganization,onethat

automaticalyadjustsitsprocessandperformancetocurrent

conditions.

CanYouGoTooFast?

Sofarthisbookhasemphasizedtheimportanceofspeed.Startups

areinalife-or-deathstruggletolearnhowtobuildasustainable

businessbeforetheyrunoutofresourcesanddie.However,

focusingonspeedalonewouldbedestructive.Towork,startups

focusingonspeedalonewouldbedestructive.To

work,startups

requirebuilt-inspeedregulatorsthathelpteamsndtheiroptimal

paceofwork.

WesawanexampleofspeedregulationinChapter9withthe

useoftheandoncordinsystemssuchascontinuous

deployment.It

isepitomizedintheparadoxicalToyotaproverb,“Stopproduction

sothatproductionneverhastostop.”Thekeytotheandoncordis

thatitbringsworktoastopassoonasanuncorrectablequality

problemsurfaces—whichforcesittobeinvestigated.Thisisoneof

themostimportantdiscoveriesoftheleanmanufacturing

movement:youcannottradequalityfortime.Ifyouarecausing(or

missing)qualityproblemsnow,theresultingdefectswil

slowyou

downlater.Defectscausealotofrework,lowmorale,and

customercomplaints,alofwhichslowprogressandeatawayat

valuableresources.

SofarIhaveusedthelanguageofphysical

productstodescribe

theseproblems,butthatissimplyamaterofconvenience.Service

businesseshavethesamechalenges.Justaskanymanagerofa

training,stang,orhospitalityrmtoshowyoutheplaybookthat

specieshowemployeesaresupposedtodelivertheserviceunder

variousconditions.Whatmighthavestartedoutasasimpleguide

tendstogrowinexorablyovertime.Pretysoon,orientationis

incrediblycomplexandemployeeshaveinvesteda

lotoftimeand

energyinlearningtherules.Nowconsideranentrepreneurial

managerinthatkindofcompanytryingtoexperimentwithnew

rulesorprocedures.Thehigher-qualitytheexistingplaybookis,the

easieritwilbeforittoevolveovertime.Bycontrast,alow-quality

playbookwilbeledwithcontradictoryorambiguousrulesthat

causeconfusionwhenanythingischanged.

WhenIteachtheLeanStartupapproachtoentrepreneurswithan

engineeringbackground,thisisoneofthehardestconceptsto

grasp.Ontheonehand,thelogicofvalidatedlearningandthe

minimumviableproductsaysthatweshouldgetaproductinto

customers’handsassoonaspossibleandthatanyextra

workwedo

beyondwhatisrequiredtolearnfromcustomersiswaste.Onthe

otherhand,theBuild-Measure-Learnfeedbackloopisacontinuous

process.Wedon’tstopafteroneminimumviableproductbutuse

process.Wedon’tstopafteroneminimumviableproductbutuse

whatwehavelearnedtogettoworkimmediatelyonthenext

iteration.

Therefore,shortcutstakeninproductquality,design,or

infrastructuretodaymay

windupslowingacompanydown

tomorrow.YoucanseethisparadoxinactionatIMVU.Chapter3

recountedhowwewoundupshippingaproducttocustomersthat

wasfulofbugs,missingfeatures,andbaddesign.Thecustomers

wouldn’teventrythatproduct,andsomostofthatworkhadtobe

thrownaway.It’sagoodthingwedidn’twastealotoftimexing

thosebugsandcleaningupthatearlyversion.

However,asourlearningalowedustobuildproductsthat

customersdidwant,wefacedslowdowns.Havingalow-quality

productcaninhibitlearningwhenthedefectspreventcustomers

fromexperiencing(andgivingfeedbackon)theproduct’sbenets.

InIMVU’scase,asweoeredtheproducttomore

mainstream

customers,theyweremuchlessforgivingthanearlyadoptershad

been.Similarly,themorefeaturesweaddedtotheproduct,the

harderitbecametoaddevenmorebecauseoftheriskthatanew

featurewouldinterferewithanexistingfeature.Thesamedynamics

happeninaservicebusiness,sinceanynewrulesmayconictwith

existingrules,andthemorerules,themorepossibilitiesforconflict.

IMVUusedthetechniquesofthischaptertoachievescale

and

qualityinajust-in-timefashion.

THEWISDOMOFTHEFIVEWHYS

Toaccelerate,LeanStartupsneedaprocessthatprovidesanatural

feedbackloop.Whenyou’regoingtoofast,youcause

more

problems.Adaptiveprocessesforceyoutoslowdownandinvestin

preventingthekindsofproblemsthatarecurrentlywastingtime.

Asthosepreventiveefortspayof,younaturalyspeedupagain.

Let’sreturntothequestionofhavingatrainingprogramfornew

employees.Withoutaprogram,newemployeeswilmakemistakes

whileintheirlearningcurvethatwilrequireassistanceand

interventionfromotherteammembers,slowingeveryone

down.

interventionfromotherteammembers,slowingeveryonedown.

Howdoyoudecideiftheinvestmentintrainingisworththe

benetofspeedduetoreducedinterruptions?Figuringthisout

fromatop-downperspectiveischalenging,becauseitrequires

estimatingtwocompletelyunknownquantities:howmuchitwil

costtobuildanunknownprogramagainstanunknownbenetyou

mightreap.Evenworse,thetraditionalwaytomakethese

kindsof

decisionsisdecidedlylarge-batchthinking.Acompanyeitherhas

anelaboratetrainingprogramoritdoesnot.Untiltheycanjustify

thereturnoninvestmentfrombuildingafulprogram,most

companiesgeneralydonothing.

ThealternativeistouseasystemcaledtheFiveWhystomake

incrementalinvestmentsandevolveastartup’sprocessesgradualy.

ThecoreideaofFiveWhysistotieinvestmentsdirectlytothe

preventionofthemostproblematicsymptoms.Thesystemtakesits

namefromtheinvestigativemethodofaskingthequestion“Why?”

vetimestounderstandwhathashappened(therootcause).If

you’veeverhadtoansweraprecociouschildwhowants

toknow

“Whyistheskyblue?”andkeepsasking“Why?”aftereachanswer,

you’refamiliarwithit.Thistechniquewasdevelopedasa

systematicproblem-solvingtoolbyTaichiOhno,thefatherofthe

ToyotaProductionSystem.I

haveadapteditforuseintheLean

Startupmodelwithafewchangesdesignedspecificalyforstartups.

Attherootofeveryseeminglytechnicalproblemisahuman

problem.FiveWhysprovidesanopportunitytodiscoverwhatthat

humanproblemmightbe.TaichiOhnogivesthefolowing

example:

Whenconfrontedwithaproblem,haveyoueverstopped

andaskedwhyvetimes?Itisdiculttodoeventhoughit

soundseasy.Forexample,supposeamachinestopped

functioning:

1.Whydidthemachinestop?(Therewasanoverloadandthe

fuseblew.)

2.Whywasthereanoverload?(Thebearingwasnotsuciently

lubricated.)

lubricated.)

3.Whywasitnotlubricatedsuciently?(Thelubricationpump

wasnotpumpingsuficiently.)

4.Whywasitnotpumpingsuciently?(Theshaftofthepump

waswornandratling.)

5.Whywastheshaftwornout?(Therewasnostraineratached

andmetalscrapgotin.)

Repeating“why”vetimes,likethis,canhelpuncover

therootproblemandcorrectit.Ifthisprocedurewerenot

carriedthrough,onemightsimplyreplacethefuseorthe

pumpshaft.Inthatcase,theproblemwouldrecurwithina

fewmonths.TheToyotaproductionsystemhasbeenbuilt

onthepracticeandevolutionofthisscienticapproach.By

askingandanswering“why”vetimes,wecangettothe

realcauseoftheproblem,

whichisoftenhiddenbehind

moreobvioussymptoms.1

NotethateveninOhno’srelativelysimpleexampletheroot

causemovesawayfromatechnicalfault(ablownfuse)andtoward

ahumanerror(someoneforgottoatachastrainer).

Thisis

completelytypicalofmostproblemsthatstartupsfacenomater

whatindustrytheyarein.Goingbacktoourservicebusiness

example,mostproblemsthatatrstappeartobeindividual

mistakescanbetracedback

toproblemsintrainingortheoriginal

playbookforhowtheserviceistobedelivered.

LetmedemonstratehowusingtheFiveWhysalowedustobuild

theemployeetrainingsystemthatwasmentionedearlier.Imagine

thatatIMVUwesuddenlystartreceivingcomplaintsfrom

customersaboutanewversionoftheproductthatwehavejust

released.

1.Anewreleasedisabledafeatureforcustomers.Why?Because

aparticularserverfailed.

2.Whydidtheserverfail?Becauseanobscuresubsystemwas

usedinthewrongway.

usedinthewrongway.

3.Whywasitusedinthewrongway?Theengineerwhousedit

didn’tknowhowtouseitproperly.

4.Whydidn’theknow?Becausehewasnevertrained.

5.Whywasn’thetrained?Becausehismanagerdoesn’tbelievein

trainingnewengineersbecauseheandhisteamare“toobusy.”

Whatbeganasapurelytechnicalfaultisrevealedquicklytobea

veryhumanmanagerialissue.

MakeaProportionalInvestment

Here’showtouseFiveWhysanalysistobuildanadaptive

organization:consistently

makeaproportionalinvestmentateach

ofthevelevelsofthehierarchy.Inotherwords,theinvestment

shouldbesmalerwhenthesymptomisminorandlargerwhenthe

symptomismorepainful.Wedon’tmakelargeinvestmentsin

preventionunlesswe’recopingwithlargeproblems.

Intheexampleabove,theansweristoxtheserver,changethe

subsystemtomakeitlesserror-prone,educatetheengineer,and,

yes,haveaconversationwiththeengineer’smanager.

Thislaterpiece,theconversationwiththemanager,isalways

hard,especialyinastartup.WhenIwasastartupmanager,ifyou

toldmeIneededtoinvestintrainingmypeople,Iwouldhavetold

youitwasawasteoftime.Therewerealwaystoomany

other

thingstodo.I’dprobablyhavesaidsomethingsarcasticlike“Sure,

I’dbehappytodothat—ifyoucansparemytimefortheeight

weeksit’ltaketosetup.”That’smanager-speakfor“Nowayin

hel.”

That’swhytheproportionalinvestmentapproachisso

important.Iftheoutageisaminorglitch,it’sessentialthatwe

makeonlyaminorinvestmentinxingit.Let’sdothersthourof

theeight-weekplan.That

maynotsoundlikemuch,butit’sastart.

Iftheproblemrecurs,askingtheFiveWhyswilrequirethatwe

continuetomakeprogressonit.Iftheproblemdoesnotoccur

again,anhourisn’tabigloss.

again,anhourisn’tabigloss.

Iusedtheexampleofengineeringtrainingbecausethatwas

somethingIwasreluctanttoinvestinatIMVU.Attheoutsetofour

venture,Ithoughtweneededtofocusalofourenergieson

buildingandmarketingourproduct.Yetonceweenteredaperiod

ofrapidhiring,repeatedFiveWhyssessionsrevealedthatproblems

causedbylackoftrainingwereslowingdownproduct

development.Atnopointdidwedropeverythingtofocussolelyon

training.Instead,wemadeincrementalimprovementstothe

processconstantly,eachtimereapingincrementalbenets.Over

time,thosechangescompounded,freeinguptimeandenergythat

previouslyhadbeenlosttofirefightingandcrisis

management.

AutomaticSpeedRegulator

TheFiveWhysapproachactsasanaturalspeedregulator.The

moreproblemsyouhave,themoreyouinvestinsolutionstothose

problems.Astheinvestmentsininfrastructureorprocess

payo,

theseverityandnumberofcrisesarereducedandtheteamspeeds

upagain.Withstartupsinparticular,thereisadangerthatteams

wilworktoofast,tradingqualityfortimeinawaythatcauses

sloppymistakes.FiveWhyspreventsthat,alowingteamstond

theiroptimalpace.

TheFiveWhystiestherateofprogresstolearning,notjust

execution.StartupteamsshouldgothroughtheFiveWhys

whenevertheyencounteranykindoffailure,includingtechnical

faults,failurestoachievebusinessresults,orunexpectedchangesin

customerbehavior.

FiveWhysisapowerfulorganizationaltechnique.Someofthe

engineersIhavetrainedtouseitbelievethatyoucanderivealthe

otherLeanStartuptechniquesfromtheFiveWhys.Coupledwith

workinginsmalbatches,itprovidesthefoundationacompany

needstorespondquicklytoproblemsastheyappear,

without

overinvestingoroverengineering.

THECURSEOFTHEFIVEBLAMES

WhenteamsrstadoptFiveWhysasaproblem-solvingtool,they

encountersomecommonpitfals.Weneedsystems

likeFiveWhys

toovercomeourpsychologicallimitationsbecausewetendto

overreacttowhat’shappeninginthemoment.Wealsotendtoget

frustratedifthingshappenthatwedidnotanticipate.

WhentheFiveWhys

approachgoesawry,IcalittheFive

Blames.Insteadofaskingwhyrepeatedlyinanatemptto

understandwhatwentwrong,frustratedteammatesstartpointing

ngersateachother,tryingtodecidewhoisatfault.Insteadof

usingtheFiveWhystondandxproblems,managersand

employeescanfalintothetrapofusingtheFiveBlamesasa

meansforventingtheirfrustrationsandcalingoutcoleaguesfor

systemicfailures.Althoughit’shumannaturetoassume

thatwhen

weseeamistake,it’sduetodefectsinsomeoneelse’sdepartment,

knowledge,orcharacter,thegoaloftheFiveWhysistohelpussee

theobjectivetruththatchronicproblemsarecausedbybadprocess,

notbadpeople,andremedythemaccordingly.

IrecommendseveraltacticsforescapingtheFiveBlames.The

rstistomakesurethateveryoneaectedbytheproblemisinthe

roomduringtheanalysisoftherootcause.Themeetingshould

includeanyonewhodiscoveredordiagnosedtheproblem,

includingcustomerservicerepresentativeswhoeldedthecals,if

possible.Itshouldincludeanyonewhotriedtoxthesymptomas

welasanyonewhoworkedonthesubsystemsorfeatures

involved.

Iftheproblemwasescalatedtoseniormanagement,thedecision

makerswhowereinvolvedintheescalationshouldbepresentas

wel.

Thismaymakeforacrowdedroom,butit’sessential.In

my

experience,whoeverisleftoutofthediscussionendsupbeingthe

targetforblame.Thisisjustasdamagingwhetherthescapegoatisa

junioremployeeortheCEO.Whenit’sajunioremployee,it’sal

tooeasytobelievethatthatpersonisreplaceable.IftheCEOisnot

present,it’saltooeasytoassumethathisorherbehavioris

unchangeable.Neitherpresumptionisusualycorrect.

unchangeable.Neitherpresumptionisusualy

correct.

Whenblameinevitablyarises,themostseniorpeopleinthe

roomshouldrepeatthismantra:ifamistakehappens,shameonus

formakingitsoeasytomakethatmistake.InaFiveWhysanalysis,

wewanttohaveasystems-levelviewasmuchaspossible.

Here’sasituationinwhichthismantracameinhandy.Becauseof

thetrainingprocesswehaddevelopedatIMVUthroughtheFive

Whys,weroutinelyaskednewengineerstomakea

changetothe

productionenvironmentontheirrstday.Forengineerstrainedin

traditionaldevelopmentmethods,thiswasoftenfrightening.They

wouldask,“WhatwilhappentomeifIaccidentalydisruptor

stoptheproductionprocess?”Intheirpreviousjobs,thatwasa

mistakethatcouldgetthemred.AtIMVUwetoldnewhires,“If

ourproductionprocessissofragilethatyoucanbreakitonyour

veryrstdayofwork,shameonusformakingitsoeasyto

doso.”

Iftheydidmanagetobreakit,weimmediatelywouldhavethem

leadtheeorttoxtheproblemaswelastheeorttopreventthe

nextpersonfromrepeatingtheirmistake.

Fornewhireswhocame

fromcompanieswithaverydierent

culture,thiswasoftenastressfulinitiation,buteveryonecame

throughitwithavisceralunderstandingofourvalues.Bitbybit,

systembysystem,thosesmalinvestmentsaddeduptoarobust

productdevelopmentprocessthatalowedalouremployeesto

workmorecreatively,withgreatlyreducedfear.

GetingStarted

HereareafewtipsonhowtogetstartedwiththeFiveWhysthat

arebasedonmyexperience

introducingthistechniqueatmany

othercompanies.

FortheFiveWhystoworkproperly,therearerulesthatmustbe

folowed.Forexample,theFiveWhysrequiresanenvironmentof

mutualtrustandempowerment.Insituationsinwhichthisis

lacking,thecomplexityofFiveWhyscanbeoverwhelming.Insuch

situations,I’veoftenusedasimplifiedversionthatstilalowsteams

tofocusonanalyzingrootcauseswhiledevelopingthe

muscles

tofocusonanalyzingrootcauseswhiledevelopingthemuscles

they’lneedlatertotackletheful-blownmethod.

Iaskteamstoadoptthesesimplerules:

1.Betolerantofalmistakesthefirsttime.

2.Neveralowthesamemistaketobemadetwice.

Therstruleencouragespeopletogetusedtobeing

compassionateaboutmistakes,especialythemistakesofothers.

Remember,mostmistakesarecausedbyawedsystems,notbad

people.Thesecondrulegetstheteamstartedmakingproportional

investmentsinprevention.

Thissimpliedsystemworkswel.Infact,weuseditatIMVUin

thedaysbeforeIdiscoveredtheFiveWhysandtheToyota

ProductionSystem.However,suchasimpliedsystemdoesnot

workeectivelyoverthelongterm,asIfoundoutrsthand.Infact,

thatwasoneofthethingsthatdrovemetorstlearnaboutlean

production.

Thestrengthandweaknessofthesimpliedsystemisthatit

invitesquestionssuchasWhatcountsasthesameproblem?What

kindsofmistakesshouldwefocuson?andShouldwexthis

individualproblemortrytopreventawholecategoryofrelated

problems?Forateamthatisjustgetingstarted,thesequestionsare

thought-provokingandcanlaythegroundworkformoreelaborate

methodstocome.Ultimately,though,theydoneedanswering.

Theyneedacompleteadaptiveprocesssuchasthe

FiveWhys.

FacingUnpleasantTruths

YouwilneedtobepreparedforthefactthatFiveWhysisgoingto

turnupunpleasantfactsaboutyourorganization,especialyatthe

beginning.Itisgoingtocalforinvestmentsinprevention

that

comeattheexpenseoftimeandmoneythatcouldbeinvestedin

newproductsorfeatures.Underpressure,teamsmayfeelthatthey

don’thavetimetowasteonanalyzingrootcauseseventhoughit

wouldgivethemmoretimeinthelongterm.Theprocess

wouldgivethemmoretimeinthelongterm.Theprocess

sometimeswildevolveintotheFiveBlames.Atalthesejunctures,

itisessentialthatsomeonewithsucientauthoritybepresentto

insistthattheprocessbefolowed,thatitsrecommendationsbe

implemented,andtoactasarefereeifdisagreementsareup.

Buildinganadaptiveorganization,inotherwords,requires

executiveleadershiptosponsorandsupportthe

process.

Often,individualcontributorsatstartupscometomyworkshops,

eagertogetstartedwiththeFiveWhys.Icautionagainstatempting

todothatiftheydonothavethebuy-inofthemanagerorteam

leader.Proceedcautiouslyifyoundyourselfinthissituation.It

maynotbepossibletogettheentireteamtogetherforatrueFive

Whysinquiry,butyoucanalwaysfolowthesimpletwo-rule

versioninyourownwork.Wheneversomethinggoes

wrong,ask

yourself:HowcouldIpreventmyselffrombeinginthissituation

everagain?

StartSmal,BeSpecific

Onceyouarereadytobegin,Irecommendstartingwithanarrowly

targetedclassofsymptoms.Forexample,thersttimeIusedthe

FiveWhyssuccessfuly,Iusedittodiagnoseproblemswithoneof

ourinternaltestingtoolsthatdidnotaectcustomersdirectly.It

maybetemptingtostartwithsomethinglargeand

important

becausethatiswheremostofthetimeisbeingwastedasaresultof

aawedprocess,butitisalsowherethepressurewilbegreatest.

Whenthestakesarehigh,theFiveWhyscandevolveintotheFive

Blamesquickly.It’sbetertogivetheteamachancetolearnhowto

dotheprocessfirstandthenexpandintohigher-stakesareaslater.

Themorespecicthesymptomsare,theeasieritwilbefor

everyonetorecognizewhenit’stimetoscheduleaFive

Whys

meeting.SayyouwanttousetheFiveWhystoaddressbiling

complaintsfromcustomers.Inthatcase,pickadateafterwhichal

bilingcomplaintswiltriggeraFiveWhysmeetingautomaticaly.

Notethatthisrequiresthattherebeasmalenoughvolumeof

complaintsthathavingthismeetingeverytimeonecomesinis

complaintsthathavingthismeetingeverytimeonecomesinis

practical.Iftherearealreadytoomanycomplaints,picka

subseton

whichyouwanttofocus.Makesurethattherulethatdetermines

whichkindsofcomplaintstriggeraFiveWhysmeetingissimple

andironclad.Forexample,youmightdecidethateverycomplaint

involvingacreditcardtransactionwilbeinvestigated.That’san

easyruletofolow.Don’tpickarulethatisambiguous.

Atrst,thetemptationmaybetomakeradicalanddeepchanges

toeverybilingsystemandprocess.Don’t.Instead,keepthe

meetingsshortandpickrelativelysimplechangesateachofthe

velevelsoftheinquiry.Overtime,astheteamgetsmore

comfortablewiththeprocess,youcanexpandittoincludemore

andmoretypesofbilingcomplaintsandthentootherkindsof

problems.

AppointaFiveWhysMaster

Tofacilitatelearning,IhavefoundithelpfultoappointaFive

Whysmasterforeachareainwhichthemethodisbeingused.This

individualistaskedwithbeingthemoderatorforeach

FiveWhys

meeting,makingdecisionsaboutwhichpreventionstepstotake,

andassigningthefolow-upworkfromthatmeeting.Themaster

mustbeseniorenoughtohavetheauthoritytoensurethatthose

assignmentsgetdonebutshouldnotbesoseniorthatheorshewil

notbeabletobepresentatthemeetingsbecauseofconicting

responsibilities.TheFiveWhysmasteristhepointpersoninterms

ofaccountability;heorsheistheprimarychangeagent.

Peoplein

thispositioncanassesshowwelthemeetingsaregoingand

whetherthepreventioninvestmentsthatarebeingmadearepaying

of.

THEFIVEWHYSINACTION

IGNEntertainment,adivisionofNewsCorporation,isanonline

videogamesmediacompanywiththebiggestaudienceofvideo

videogamesmediacompanywiththebiggestaudienceofvideo

gameplayersintheworld.Morethan45miliongamers

frequent

itsportfolioofmediaproperties.IGNwasfoundedinthelate

1990s,andNewsCorporationacquireditin2005.IGNhasgrown

toemployseveralhundredpeople,includingalmostahundred

engineers.

Recently,Ihadtheopportunitytospeaktotheproduct

developmentteamatIGN.Theyhadbeensuccessfulinrecentyears,

butlikealtheestablishedcompanieswe’veseenthroughoutthis

book,theywerelookingtoacceleratenewproductdevelopment

andndwaystobemoreinnovative.Theybroughttogethertheir

engineering,product,anddesignteamstotalkthroughwaysthey

couldapplytheLeanStartupmodel.

ThischangeinitiativehadthesupportofIGN’ssenior

management,includingtheCEO,theheadofproductdevelopment,

thevicepresidentofengineering,thepublisher,andtheheadof

product.TheirpreviousefortsatFiveWhyshadnotgonesmoothly.

Theyhadatemptedtotacklealaundrylistofproblemareas

nominatedbytheproductteam.Theissuesvariedfrom

discrepanciesinwebanalyticstopartnerdatafeedsthatwerenot

working.TheirrstFiveWhysmeetingtookanhour,andalthough

theycameupwithsomeinterestingtakeaways,asfarastheFive

Whysgoes,itwasadisaster.Noneofthepeoplewhowere

connectedtoandknewthemostabouttheissueswereatthe

meeting,andbecausethiswasthersttimetheyweredoingthe

FiveWhystogether,theydidn’tsticktotheformatandwentoon

manytangents.Itwasn’tacompletewasteoftime,butitdidn’t

haveanyofthebenetsoftheadaptivestyleofmanagement

discussedinthischapter.

Don’tSendYourBaggagethroughtheFiveWhysProcess

IGNhadtheexperienceoftryingtosolvealofits“baggage”issues

thathadbeencausingwastedtimeformanyyears.Becausethisis

anoverwhelmingsetofproblems,ndingxesquickly

proves

overwhelming.

overwhelming.

IntheirzealtogetstartedwiththeFiveWhys,IGNneglected

threeimportantthings:

1.TointroduceFiveWhystoanorganization,itis

necessaryto

holdFiveWhyssessionsasnewproblemscomeup.Since

baggageissuesareendemic,theynaturalycomeupaspartof

theFiveWhysanalysisandyoucantakethatopportunitytox

themincrementaly.Iftheydon’tcomeuporganicaly,maybe

they’renotasbigastheyseem.

2.Everyonewhoisconnectedtoaproblemneedstobeatthe

FiveWhyssession.Manyorganizationsfacethetemptationto

savetimebysparingbusypeoplefromtherootcauseanalysis.

Thisisafalseeconomy,asIGNdiscoveredthehardway.

3.AtthebeginningofeachFiveWhyssession,takeafewminutes

toexplainwhattheprocessisforandhowitworksforthe

benetofthosewhoarenewtoit.Ifpossible,useanexample

ofasuccessfulFiveWhyssessionfromthepast.Ifyou’rebrand

new,youcanusemyearlierexampleaboutthemanagerwho

doesn’tbelieveintraining.IGNlearnedthat,whenever

possible,ithelpstousesomethingthathaspersonalmeaning

fortheteam.

Afterourmeeting,theIGNleadershipdecidedtogiveFiveWhys

anothertry.Folowingtheadvicelaidoutinthischapter,they

appointedaFiveWhysmasternamedTonyFord,adirectorof

engineering.TonywasanentrepreneurwhohadcometoIGN

throughanacquisition.HegothisstartwithInternettechnology,

buildingwebsitesaboutvideogamesinthelate

1990s.Eventualy

thatledtoanopportunityatastartup,TeamXbox,whereheserved

astheleadsoftwaredeveloper.TeamXboxwasacquiredbyIGN

Entertainmentin2003,andsincethattimeTonyhasbeena

technologist,leaderofinnovation,andproponentofagileandlean

practicesthere.

Unfortunately,Tonystartedwithoutpickinganarrowproblem

areaonwhichtofocus.Thisledtoearlysetbacksandfrustration.

areaonwhichtofocus.Thisledtoearlysetbacksandfrustration.

Tonyrelates,“AsthenewmasterIwasn’tverygoodattraversing

throughtheFiveWhyseectively,andtheproblemsweweretrying

tosolvewerenotgreatcandidatesintherstplace.

Asyoucan

imagine,theseearlysessionswereawkwardandintheendnotvery

useful.Iwasgetingquitediscouragedandfrustrated.”Thisisa

commonproblemwhenonetriestotackletoomuchatonce,butit

isalsoaconsequenceofthefactthattheseskilstaketimeto

master.Luckily,Tonypersevered:“HavingaFiveWhysmasteris

criticalinmyopinion.FiveWhysiseasyintheorybutdicultin

practice,soyouneedsomeonewhoknowsitwelto

shapethe

sessionsforthosewhodon’t.”

TheturnaroundcamewhenTonyledaFiveWhyssession

involvingaprojectthathadbeenmissingitsdeadlines.Thesession

wasfascinatingand

insightfulandproducedmeaningful

proportionalinvestments.Tonyexplains:“Thesuccesshadtodo

withamoreexperiencedmasterandmoreexperiencedatendees.

WealknewwhattheFiveWhyswas,andIdidarealygoodjob

keepingusontrackandawayfromtangents.Thiswasapivotal

moment.RightthenIknewtheFiveWhyswasanewtoolthatwas

goingtohavearealimpactonouroveralsuccessasateamandas

abusiness.”

Onthesurface,FiveWhysseemstobeabouttechnicalproblems

andpreventingmistakes,butasteamsdriveoutthesesupercial

wastes,theydevelopanewunderstandingofhowtoworktogether.

Tonyputitthisway:“IdaresaythatIdiscoveredthat

theFiveWhys

transcendsrootcauseanalysisbyrevealinginformationthatbrings

yourteamcloserthroughacommonunderstandingandperspective.

Alotoftimesaproblemcanpulpeopleapart;FiveWhysdoesthe

opposite.”

IaskedTonytoprovideanexampleofarecentsuccessfulFive

WhysanalysisfromIGN.Hisaccountofitislistedinthesidebar.

Whycouldn’tyouaddoreditpostsontheblogs?

Answer:Anypostrequest

(write)tothearticlecontentapiwas

Answer:Anypostrequest(write)tothearticlecontentapiwas

returninga500error.

Proportionalinvestment:Jim—We’lworkontheAPI,butlet’s

makeourCMSmore

forgivingfortheuser.Alowuserstoadd

andeditdraftswithouterrorsforabeteruserexperience.

WhywasthecontentAPIreturning500errors?

Answer:Thebson_extgemwasincompatiblewithothergems

itdependsupon.

Proportionalinvestment:King—Removethegem(alreadydone

toresolvetheoutage).

Whywasthegemincompatible?

Answer:Weaddedanewversionofthegeminadditiontothe

existingversionandtheapp

startedusingitunexpectedly.

Proportionalinvestment:Bennet—Convertourrailsapptouse

bundlerforgemmanagement.

Whydidweaddanewversionofageminproductionwithout

testing?

Answer:Wedidn’tthinkweneededatestinthesecases.

Proportionalinvestment:BennetandJim—Writeaunitor

functionaltestintheAPIandCMSthatwilcatchthisinthe

future.

Whydoweaddadditional

gemsthatwedon’tintendtouse

rightaway?

Answer:Inpreparationforacodepushwewantedtogetal

newgemsreadyintheproductionenvironment.Eventhough

ourcodedeploymentsareful

yautomated,gemsarenot.

Proportionalinvestment:Bennet—Automategemmanagement

Proportionalinvestment:Bennet—Automategemmanagement

andinstalationintoContinuousIntegrationandContinuous

Deploymentprocess.

Bonus—WhyarewedoingthingsinproductiononFriday

nights?

Answer:Becausenoonesayswecan’tanditwasaconvenient

timeforthedevelopertoprepareforadeployment

we’dbe

doingonMonday.

Proportionalinvestment:Tony—Makeanannouncementtothe

team.TherewilbenoproductionchangesonFriday,Saturday,

orSundayunlessanexceptionhasbeenmadeand

approvedby

David(VPEngineering).Wewilreevaluatethispolicywhen

wehaveafulyautomatedcontinuousdeploymentprocessin

place.

AsaresultofthisFiveWhyssessionandtheproportional

investmentswemade,ourdeploymentsareeasier,quicker,and

neveragainwilourprocessalowadevelopertoplacegems

intoproductionsystemswithunintendedconsequences.Indeed,

wehavenothadanotherissuelikethis.We

strengthenedour

“clusterimmunesystem”asyouwouldsay.

WithouttheFiveWhys,wewouldhaveneverdiscoveredal

oftheinformationwedidhere.Myguessisthatwewould

havetoldthatonedeveloper

tonotdostupidthingsonFriday

nightsandmovedon.ThisiswhatIemphasizedearlier,where

agoodFiveWhyssessionhastwooutputs,learninganddoing.

Theproportionalinvestmentsthatcameoutofthissessionare

obviouslyvaluable,butthelearningsaremuchmoresubtle,but

amazingforgrowingasdevelopersandasateam.

ADAPTINGTOSMALLERBATCHES

Beforeleavingthetopicofbuildinganadaptiveorganization,I

wanttointroduceonemorestory.Thisoneconcernsaproductthat

you’veprobablyusedifyou’veeverrunyourownbusiness.It’s

caledQuickBooks,anditisoneofIntuit’sflagshipproducts.

QuickBookshasbeentheleadingproductinits

categoryformany

years.Asaresult,ithasalargeanddedicatedcustomerbase,and

Intuitexpectsittocontributesignicantlytoitsbotomline.Like

mostpersonalcomputer(PC)softwareofthelasttwodecades,

QuickBookshasbeenlaunchedonanannualcycle,inonegiant

batch.Thiswashowitworkedthreeyearsago,whenGregWright,

thedirectorofproductmarketingforQuickBooks,joinedtheteam.

Asyoucanimagine,therewerelotsofexisting

processesinplaceto

ensureaconsistentproductandanon-timerelease.Thetypical

releaseapproachwastospendsignicantup-fronttimetoidentify

thecustomers’need:

Typicalytherstthreetofourmonthsofeachannualcycle

wasspentstrategizingandplanning,withoutbuildingnew

features.Onceaplanandmilestoneswereestablished,the

teamwouldspendthenextsixtoninemonthsbuilding.

Thiswouldculminateinabiglaunch,andthentheteam

wouldgetitsrstfeedbackonwhetherithadsuccessfuly

deliveredoncustomers’needsattheendoftheprocess.

Soherewasthetimeline:startprocessinSeptember,first

betareleaseisinJune,secondbetaisinJuly.Thebetais

essentialytestingtomakesureitdoesn’tcrashpeople’s

computersorcausethemtolosetheirdata—bythattimein

theprocess,onlymajorbugscanbexed.Thedesignofthe

productitselfislocked.

Thisisthestandard“waterfal”developmentmethodology

that

productdevelopmentteamshaveusedforyears.Itisalinear,large-

batchsystemthatreliesforsuccessonproperforecastingand

planning.Inotherwords,itiscompletelymaladaptedfortoday’s

planning.Inotherwords,itiscompletelymaladaptedfortoday’s

rapidlychangingbusinessenvironment.

YearOne:AchievingFailure

Gregwitnessedthisbreakdownin2009,hisrstyearonthe

QuickBooksteam.Thatyear,

thecompanyshippedanentirelynew

systeminQuickBooksforonlinebanking,oneofitsmostimportant

features.Theteamwentthroughroundsofusabilitytestingusing

mock-upsandnonfunctionalprototypes,folowedbysignicant

betatestingusingsamplecustomerdata.Atthemomentofthe

launch,everythinglookedgood.

TherstbetareleasewasinJune,andcustomerfeedbackstarted

cominginnegative.Althoughcustomerswerecomplaining,there

wasn’tsucientcausetostopthereleasebecauseitwastechnicaly

awless—itdidn’tcrashcomputers.Atthatpoint,Gregwasina

bind.Hehadnowayofknowinghowthefeedbackwouldtranslate

torealcustomerbehaviorinthemarket.Werethesejust

isolated

complaints,orpartofawidespreadproblem?Hedidknowone

thingforsure,though:thathisteamcouldnotaordtomissthe

deadline.

Whentheproductnalyshipped,theresultswere

terrible.It

tookcustomersfourtovetimeslongertoreconciletheirbanking

transactionsthanithadwiththeolderversion.Intheend,Greg’s

teamhadfailedtodeliveronthecustomerneedtheyweretryingto

address(despitebuildingtheproducttospecication),andbecause

thenextreleasehadtogothroughthesamewaterfalprocess,it

tooktheteamninemonthstox.Thisisaclassiccaseof“achieving

failure”—successfulyexecutingaflawedplan.

IntuitusesatrackingsurveycaledtheNetPromoterScore2to

evaluatecustomersatisfactionwithitsmanyproducts.Thisisa

greatsourceofactionablemetricsaboutwhatcustomersrealythink

aboutaproduct.Infact,IuseditatIMVU,too.One

thingthatis

niceaboutNPSisthatitisverystableovertime.Sinceitis

measuringcorecustomersatisfaction,itisnotsubjecttominor

uctuations;itregistersonlymajorchangesincustomersentiment.

uctuations;itregistersonlymajorchangesincustomersentiment.

Thatyear,theQuickBooksscoredropped20points,thersttime

thecompanyhadevermovedtheneedlewiththeNetPromoter

Score.That20-pointdropresultedinsignificantlosses

forIntuitand

wasembarrassingforthecompany—albecausecustomerfeedback

cametoolateintheprocess,alowingnotimetoiterate.

Intuit’sseniormanagement,includingthegeneralmanagerofthe

smalbusinessdivisionand

theheadofsmalbusinessaccounting,

recognizedtheneedforchange.Totheircredit,theytaskedGreg

withdrivingthatchange.Hismission:toachievestartupspeedfor

thedevelopmentanddeploymentofQuickBooks.

YearTwo:MuscleMemory

Thenextchapterofthisstoryilustrateshowharditistobuildan

adaptiveorganization.GregsetouttochangetheQuickBooks

developmentprocessbyusingfourprinciples:

1.Smalerteams.Shiftfrom

largeteamswithuniformfunctional

rolestosmaler,fulyengagedteamswhosememberstakeon

diferentroles.

2.Achieveshortercycletimes.

3.Fastercustomerfeedback,testingbothwhetherit

crashes

customers’computersandtheperformanceofnew

features/customerexperience.

4.Enableandempowerteamstomakefastandcourageous

decisions.

Onthesurface,thesegoalsseemtobealignedwiththemethods

andprinciplesdescribedinpreviouschapters,butGreg’ssecond

yearwithQuickBookswasnotamarkedsuccess.Forexample,he

decreedthattheteamwouldmovetoamidyearrelease

milestone,

eectivelycutingthecycletimeandbatchsizeinhalf.However,

thiswasnotsuccessful.Throughsheerdetermination,theteamtried

valiantlytogetanalphareleaseoutinJanuary.However,the

problemsthataictlarge-batchdevelopmentwerestilpresent,

problemsthataictlarge-batchdevelopmentwerestilpresent,

andtheteamstruggledtocompletethealphabyApril.That

representedanimprovementoverthepastsystembecause

issues

couldbebroughttothesurfacetwomonthsearlierthanunderthe

oldway,butitdidnotproducethedramaticalybeterresultsGreg

waslookingfor.

Infact,overthecourseoftheyear,theteam’sprocesskept

lookingmoreandmorelikeithadinprioryears.AsGregputit,

“Organizationshavemusclememory,”anditishardforpeopleto

unlearnoldhabits.Gregwasrunningupagainstasystem,and

makingindividualchangessuchasarbitrarilychanging

therelease

datewerenomatchforit.

YearThree:Explosion

Frustratedbythelimitedprogressinthepreviousyear,Greg

teamedupwiththeproductdevelopmentleaderHimanshuBaxi.

Togethertheytossedoutaltheoldprocesses.Theymadeapublic

declarationthattheircombinedteamswouldbecreatingnew

processesandthattheywerenotgoingtogobacktotheoldway.

Insteadoffocusingonnewdeadlines,Gregand

Himanshu

investedinprocess,product,andtechnologychangesthatenabled

workinginsmalerbatches.Thosetechnicalinnovationshelped

themgetthedesktopproducttocustomersfasterforfeedback.

Insteadofbuildingacomprehensiveroadmapatthebeginningof

theyear,Gregkickedotheyearwithwhattheycaled

idea/code/solutionjamsthatbroughtengineers,productmanagers,

andcustomerstogethertocreateapipelineofideas.Itwasscaryfor

Gregasaproductmanagertostarttheyearwithoutadenedlistof

whatwouldbeintheproductrelease,buthehadcondenceinhis

teamandthenewprocess.

Therewerethreediferencesinyearthree:

•Teamswereinvolvedin

creatingnewtechnologies,processes,

andsystems.

•Cross-functionalteamswereformedaroundnewgreatideas.

•Cross-functionalteamswereformedaroundnewgreatideas.

•Customerswereinvolvedfromtheinceptionofeachfeature

concept.

It’simportanttounderstandthattheoldapproachdidnotlack

customerfeedbackorcustomerinvolvementintheplanning

process.Inthetruespiritofgenchigembutsu,Intuitproduct

managers(PMs)woulddo“folow-me-homes”withcustomersto

identifyproblemstosolveinthenextrelease.However,thePMs

wereresponsibleforalthecustomerresearch.They

wouldbringit

backtotheteamandsay,“Thisistheproblemwewanttosolve,

andhereareideasforhowwecouldsolveit.”

Changingtoacross-functionalwayofworkingwasnotsmooth

sailing.Someteammembers

wereskeptical.Forexample,some

productmanagersfeltthatitwasawasteoftimeforengineersto

spendtimeinfrontofcustomers.ThePMsthoughtthattheirjob

wastogureoutthecustomerissueanddenewhatneededtobe

built.Thus,thereactionofsomePMstothechangewas:“What’s

myjob?WhatamIsupposedtobedoing?”Similarly,someonthe

engineeringsidejustwantedtobetoldwhattodo;theydidn’twant

totalktocustomers.Asistypicalythecaseinlarge-

batch

development,bothgroupshadbeenwilingtosacricetheteam’s

abilitytolearninordertoworkmore“eficiently.”

Communicationwascriticalforthischangeprocesstosucceed.

Altheteamleaderswere

openaboutthechangetheyweredriving

andwhytheyweredrivingit.Muchoftheskepticismtheyfaced

wasbasedonthefactthattheydidnothaveconcreteexamplesof

wherethishadworkedinthepast;itwasanentirelynewprocess

forIntuit.Theyhadtoexplainclearlywhytheoldprocessdidn’t

workandwhytheannualrelease“train”wasnotsetingthemup

forsuccess.Throughoutthechangetheycommunicatedtheprocess

outcomestheywereshootingfor:earliercustomer

feedbackanda

fasterdevelopmentcyclethatwasdecoupledfromtheannual

releasetimeline.Theyrepeatedlyemphasizedthatthenew

approachwashowstartupcompetitorswereworkinganditerating.

Theyhadtofolowsuitorriskbecomingirrelevant.

Historicaly,QuickBookshadbeenbuiltwithlargeteamsandlong

cycletimes.Forexample,inearlieryearstheil-fatedonline

bankingteamhadbeencomposedoffteenengineers,seven

qualityassurancespecialists,aproductmanager,andattimesmore

thanonedesigner.Nownoteamisbiggerthanvepeople.The

focusofeachteamisiteratingwithcustomersasrapidlyaspossible,

runningexperiments,andthenusingvalidatedlearning

tomake

real-timeinvestmentdecisionsaboutwhattoworkon.Asaresult,

whereastheyusedtohavevemajor“branches”ofQuickBooks

thatmergedfeaturesatthetimeofthelaunch,nowthereare

twentytotwenty-vebranches.Thisalowsforamuchlargersetof

experiments.Eachteamworksonanewfeatureforapproximately

sixweeksendtoend,testingitwithrealcustomersthroughoutthe

process.

Althoughtheprimarychangesthatarerequiredinanadaptive

organizationareinthemind-setofitsemployees,changingthe

cultureisnotsucient.AswesawinChapter9,leanmanagement

requirestreatingworkasasystemandthendealingwith

thebatch

sizeandcycletimeofthewholeprocess.Thus,toachievelasting

change,theQuickBooksteamhadtoinvestintoolsandplatform

changesthatwouldenablethenew,fasterwayofworking.

Forexample,oneofthemajorstresspointsintheatemptto

releaseanearlyalphaversionthepreviousyearwasthat

QuickBooksisamission-criticalproduct.Manysmalbusinessesuse

itastheirprimaryrepositoryforcriticalnancialdata.Theteam

wasextremelywaryofreleasingaminimumviableproductthat

hadanyriskofcorruptingcustomerdata.Therefore,evenifthey

workedinsmalerteamswithasmalerscope,theburdenofal

thatriskwouldhavemadeithardtoworkinsmaler

batches.

Togetthebatchsizedown,theQuickBooksteamhadtoinvestin

newtechnology.Theybuiltavirtualizationsystemthatalowed

themtorunmultipleversionsofQuickBooksonacustomer’s

computer.Thesecondversioncouldaccessalthecustomer’sdata

butcouldnotmakepermanentchangestoit.Thus,therewasno

riskofthenewversioncorruptingthecustomer’sdatabyaccident.

riskofthenewversion

corruptingthecustomer’sdatabyaccident.

Thisalowedthemtoisolatenewreleasestoalowselectedreal

customerstotestthemandprovidefeedback.

Theresultsinyearthreewerepromising.Theversionof

QuickBooksthatshippedthat

yearhadsignicantlyhigher

customersatisfactionratingsandsoldmoreunits.Ifyou’reusing

QuickBooksrightnow,oddsareyouareusingaversionthatwas

builtinsmalbatches.AsGregheadsintohisfourthyearwiththe

QuickBooksteam,theyareexploringevenmorewaystodrive

downbatchsizeandcycletime.Asusual,therearepossibilitiesthat

gobeyondtechnicalsolutions.Forexample,theannualsalescycle

ofboxeddesktopsoftwareisasignicantbarriertotruly

rapid

learning,andsotheteamhasbegunexperimentingwith

subscription-basedproductsforthemostactivecustomers.With

customersdownloadingupdatesonline,Intuitcanreleasesoftware

onamorefrequentbasis.

Soonthisprogramwilseethe

QuickBooksteamreleasingtocustomersquarterly.3

AsLeanStartupsgrow,theycanuseadaptivetechniquestodevelop

morecomplexprocesseswithoutgivinguptheircoreadvantage:

speedthroughtheBuild-

Measure-Learnfeedbackloop.Infact,one

oftheprimarybenetsofusingtechniquesthatarederivedfrom

leanmanufacturingisthatLeanStartups,whentheygrowup,are

welpositionedtodevelopoperationalexcelencebasedonlean

principles.Theyalreadyknowhowtooperatewithdiscipline,

developprocessesthataretailor-madetotheirsituation,anduse

leantechniquessuchastheFiveWhysandsmalbatches.Asa

successfulstartupmakesthetransitiontoanestablished

company,it

wilbewelpoisedtodevelopthekindofcultureofdisciplined

executionthatcharacterizestheworld’sbestfirms,suchasToyota.

However,successfulygrowingintoanestablishedcompanyisnot

theendofthestory.Astartup’sworkisneverdone,becauseaswas

discussedinChapter2,evenestablishedcompaniesmuststruggleto

ndnewsourcesofgrowththroughdisruptiveinnovation.This

imperativeiscomingearlierincompanies’lives.No

longercana

imperativeiscomingearlierincompanies’lives.Nolongercana

successfulstartupexpecttohaveyearsafteritsinitialpublic

oeringtobaskinmarket-leadingsuccess.Todaysuccessful

companiesfaceimmediatepressurefromnewcompetitors,fast

folowers,andscrappystartups.Asaresult,itnolongermakes

sensetothinkofstartupsasgoingthroughdiscretephaseslikethe

proverbialmetamorphosisofacaterpilartoabutery.

Both

successfulstartupsandestablishedcompaniesalikemustlearnto

jugglemultiplekindsofworkatthesametime,pursuing

operationalexcelenceanddisruptiveinnovation.Thisrequiresa

newkindofportfolio

thinking,whichisthesubjectofChapter12.

12

INNOVATE

Conventionalwisdomholdsthatwhencompaniesbecomelarger,

theyinevitablylosethecapacityforinnovation,creativity,and

growth.Ibelievethisiswrong.Asstartupsgrow,entrepreneurs

canbuildorganizationsthatlearnhowtobalancetheneedsof

existingcustomerswiththechalengesofndingnewcustomersto

serve,managingexistinglinesofbusiness,and

exploringnew

businessmodels—alatthesametime.And,iftheyarewilingto

changetheirmanagementphilosophy,Ibelieveevenlarge,

establishedcompaniescanmakethisshifttowhatIcalportfolio

thinking.

HOWTONURTUREDISRUPTIVEINNOVATION

Successfulinnovationteamsmustbestructuredcorrectlyinorderto

succeed.Venture-backedandbootstrappedstartupsnaturalyhave

someofthesestructuralatributesasaconsequenceofbeingsmal,

independentcompanies.Internalstartupteamsrequiresupport

fromseniormanagementtocreatethesestructures.Internalor

external,inmyexperiencestartupteamsrequirethree

structural

atributes:scarcebutsecureresources,independentauthorityto

developtheirbusiness,andapersonalstakeintheoutcome.Each

oftheserequirementsisdierentfromthoseofestablished

companydivisions.Keepinmindthatstructureismerelya

prerequisite—itdoesnotguaranteesuccess.Butgetingthestructure

wrongcanleadtoalmostcertainfailure.

ScarcebutSecureResources

Divisionleadersinlarge,

establishedorganizationsareadeptat

usingpoliticstoenlargetheirbudgetsbutknowthatthosebudgets

aresomewhatloose.Theyoftenacquireaslargeabudgetas

possibleandpreparetodefenditagainstincursionsfromother

departments.Politicsmeansthattheysometimeswinand

sometimeslose:ifacrisisemergeselsewhereintheorganization,

theirbudgetmightsuddenlybereducedby10percent.Thisisnota

catastrophe;teamswilhavetoworkharderanddomorewithless.

Mostlikely,thebudgethassomepaddinginanticipationofthis

kindofeventuality.

Startupsaredierent:toomuchbudgetisasharmfulastoolitle

—ascountlessdot-comfailurescanatest—andstartupsare

extremelysensitivetomidcoursebudgetarychanges.Itisextremely

rareforastand-alonestartupcompanytolose10percentofitscash

onhandsuddenly.Inalargenumberofcases,thiswouldbeafatal

blow,asindependentstartupsarerunwithlitlemarginfor

error.

Thus,startupsarebotheasierandmoredemandingtorunthan

traditionaldivisions:theyrequiremuchlesscapitaloveral,butthat

capitalmustbeabsolutelysecurefromtampering.

IndependentDevelopment

Authority

Startupteamsneedcompleteautonomytodevelopandmarketnew

productswithintheirlimitedmandate.Theyhavetobeableto

conceiveandexecuteexperimentswithouthavingtogainan

excessivenumberofapprovals.

Istronglyrecommendthatstartupteamsbecompletelycross-

functional,thatis,haveful-timerepresentationfromevery

functionaldepartmentinthecompanythatwilbeinvolvedinthe

creationorlaunchoftheirearlyproducts.Theyhavetobeableto

buildandshipactualfunctioningproductsandservices,notjust

prototypes.HandosandapprovalsslowdowntheBuild-Measure-

prototypes.Handosandapprovalsslowdownthe

Build-Measure-

Learnfeedbackloopandinhibitbothlearningandaccountability.

Startupsrequirethattheybekepttoanabsoluteminimum.

Ofcourse,thislevelofdevelopmentautonomyisliabletoraise

fearsinaparentorganization.Aleviatingthosefearsisamajor

goalofthemethodrecommendedbelow.

APersonalStakeintheOutcome

Third,entrepreneursneedapersonalstakeintheoutcomeoftheir

creations.Instand-alonenewventures,thisusualyisachieved

throughstockoptionsorotherformsofequityownership.Wherea

bonussystemmustbeusedinstead,thebestincentivesaretiedto

thelong-termperformanceofthenewinnovation.

However,Idonotbelievethatapersonalstakehastobe

nancial.Thisisespecialyimportantinorganizations,suchas

nonprotsandgovernment,inwhichtheinnovationisnottiedto

nancialobjectives.Inthesecases,itisstilpossiblefor

teamsto

haveapersonalstake.Theparentorganizationhastomakeitclear

whotheinnovatorisandmakesuretheinnovatorreceivescredit

forhavingbroughtthenewproducttolife—ifitissuccessful.As

oneentrepreneurwhoranherowndivisionatamajormedia

companytoldme,“Financialincentivesaside,Ialwaysfeltthat

becausemynamewasonthedoor,Ihadmoretoloseandmoreto

provethansomeoneelse.Thatsenseofownershipis

not

insignificant.”

Thisformulaiseectiveinfor-protcompaniesaswel.At

Toyota,themanagerinchargeofdevelopinganewvehiclefrom

starttofinishiscaledtheshusa,orchiefengineer:

Shusaareoftencaledheavy-weightprojectmanagersinthe

U.S.literature,butthisnameunderstatestheirrealrolesas

designleaders.Toyotaemployeestranslatethetermaschief

engineer,andtheyrefertothevehicleunderdevelopment

astheshusa’scar.Theyassuredusthattheshusahasnal,

absoluteauthorityovereveryaspectofvehicle

absoluteauthorityovereveryaspectofvehicle

development.1

Ontheipside,Iknowanextremelyhigh-prole

technology

companythathasareputationforhavinganinnovativeculture,yet

itstrackrecordofproducingnewproductsisdisappointing.The

companyboastsaninternalrewardsystemthatisbasedonlarge

nancialandstatusawardstoteamsthatdosomething

extraordinary,butthoseawardsarehandedoutbysenior

managementonthebasisof—nooneknowswhat.Thereareno

objectivecriteriabywhichateamcangaugewhetheritwilwin

thiscovetedlotery.Teamshavelitlecondencethattheywil

receiveanylong-termownershipoftheirinnovations.Thus,teams

rarelyaremotivatedtotakerealrisks,insteadfocusingtheir

energiesonprojectsthatareexpectedtowintheapproval

ofsenior

management.

CREATINGAPLATFORMFOREXPERIMENTATION

Next,itisimportanttofocusonestablishingthegroundrulesunder

whichautonomousstartupteamsoperate:howtoprotectthe

parentorganization,howtoholdentrepreneurialmanagers

accountable,andhowtoreintegrateaninnovationbackintothe

parentorganizationifitissuccessful.Recalthe“islandoffreedom”

thatenabledtheSnapTaxteam—inChapter2—to

successfuly

createastartupwithinIntuit.That’swhataplatformfor

experimentationcando.

ProtectingtheParentOrganization

Conventionaly,adviceaboutinternalinnovatorsfocuseson

protectingthestartupfromtheparentorganization.Ibelieveitis

necessarytoturnthismodelonitshead.

Letmebeginbydescribingafairlytypicalmeetingfromoneof

myconsultingclients,alargecompany.Seniormanagementhad

gatheredtomakedecisionsaboutwhattoincludeinthenext

gatheredtomakedecisionsaboutwhattoincludeinthenext

versionofitsproduct.Aspartofthecompany’scommitmentto

beingdata-driven,ithadtriedtoconductanexperimenton

pricing.

Therstpartofthemeetingwastakenupwithinterpretingthe

datafromtheexperiment.

Oneproblemwasthatnobodycouldagreeonwhatthedata

meant.Manycustomreportshadbeencreatedforthe

meeting;the

datawarehouseteamwasatthemeetingtoo.Themoretheywere

askedtoexplainthedetailsofeachrowonthespreadsheet,the

moreevidentitbecamethatnobodyunderstoodhowthose

numbershadbeenderived.

Whatwewereleftlookingatwasthe

numberofgrosssalesoftheproductatavarietyofdierentprice

points,brokendownbyquarterandbycustomersegment.Itwasa

lotofdatatotrytocomprehend.

Worse,nobodywassurewhichcustomershadbeenexposedto

theexperiment.Dierentteamshadbeenresponsiblefor

implementingit,andsodierentpartsoftheproducthadbeen

updatedatdierenttimes.Thewholeprocesshadtaken

many

months,andbythispoint,thepeoplewhohadconceivedthe

experimenthadbeenmovedtoadivisionseparatefromthatofthe

peoplewhohadexecutedit.

Youshouldbeabletospotthemanyproblemswiththis

situation:theuseofvanitymetricsinsteadofactionablemetrics,an

overlylongcycletime,theuseoflargebatchsizes,anunclear

growthhypothesis,aweakexperimentaldesign,alackofteam

ownership,andthereforeverylitlelearning.

Listeningin,Iassumedthiswouldbetheendofthemeeting.

Withnoagreed-onfactstohelpmakethedecision,Ithought

nobodywouldhaveanybasisformakingthecaseforaparticular

action.Iwaswrong.Eachdepartmentsimplytook

whatever

interpretationofthedatasupporteditspositionbestandstarted

advocatingonitsownbehalf.Otherdepartmentswouldchimein

withalternativeinterpretationsthatsupportedtheirpositions,and

soon.Intheend,decisionswerenotmadebasedondata.Instead,

theexecutiverunningthemeetingwasforcedtobasedecisionson

themostplausible-soundingarguments.

Itseemedwastefultomehowmuchofthemeetinghadbeen

Itseemedwastefultomehowmuchofthemeetinghadbeen

spentdebatingthedatabecause,intheend,theargumentsthat

carriedthedaycouldhavebeenmaderightatthestart.Itwasasif

eachadvocatesensedthatheorshewasabouttobe

ambushed;if

anotherteammanagedtobringclaritytothesituation,itmight

underminethatperson,andsotherationalresponsewasto

obfuscateasmuchaspossible.Whatawaste.

Ironicaly,meetingslikethis

hadgivendata-drivendecision

makingandexperimentationabadnameinsidethecompany,and

forgoodreason.Thedatawarehousingteamwasproducingreports

thatnobodyreadorunderstood.Theprojectteamsfeltthe

experimentswereawasteoftime,sincetheyinvolvedbuilding

featureshalfway,whichmeanttheywereneveranygood.“Running

anexperiment”seemedtothemtobecodeforpostponingahard

decision.Worstofal,theexecutiveteamexperienced

themeetings

aschronicheadaches.Theiroldproductprioritizationmeetings

mighthavebeenlitlemorethanabatleofopinions,butatleast

theexecutivesunderstoodwhatwasgoingon.Nowtheyhadtogo

througharitualthatinvolvedcomplexmathandreachedno

deniteoutcome,andthentheyendeduphavingabatleof

opinionsanyway.

RationalFears

However,attheheartofthisdepartmentalfeudwasavery

rational

fear.Thiscompanyservedtwocustomersegments:abusiness-to-

businessenterprisesegmentandaconsumersegment.IntheB2B

segment,thecompanyemployedsalesstatosellargevolumesof

theproducttoothercompanies,whereastheconsumersegment

wasdrivenmostlybyone-opurchasesmadebyindividuals.The

bulkofthecompany’scurrentrevenuecamefromB2Bsales,but

growthinthatsegmenthadbeenslowing.Everyone

agreedthere

wastremendouspotentialforgrowthintheconsumersegment,but

sofarlitlehadmaterialized.

Partofthecauseofthislackofgrowthwasthecurrentpricing

structure.Likemanycompaniesthatseltolarge

enterprises,this

structure.Likemanycompaniesthatseltolargeenterprises,this

onepublishedahighlistpriceandthenprovidedheavydiscounts

to“favored”corporateclientswhoboughtinbulk.Naturaly,every

salespersonwasencouragedtomakealofhisorherclientsfeel

favored.Unfortunately,thepublishedlistpricewasmuchtoohigh

fortheconsumersegment.

Theteaminchargeofgrowingtheconsumersegmentwantedto

runexperimentswithalowerpricestructure.Theteaminchargeof

theenterprisesegmentwasnervousthatthiswouldcannibalizeor

otherwisediminishitsexistingrelationshipswithitscustomers.

Whatifthosecustomersdiscoveredthatindividuals

weregetinga

lowerpricethantheywere?

Anyonewhohasbeeninamultisegmentbusinesswilrecognize

thattherearemanypossiblesolutionstothisproblem,suchas

creatingtieredfeaturesetssothatdierentcustomersare

ableto

purchasedierent“levels”oftheproduct(asinairlineseating)or

evensupportingdiferentproductsunderseparatebrandnames.Yet

thecompanywasstrugglingtoimplementanyofthosesolutions.

Why?Outoffearofendangeringthecurrentbusiness,each

proposedexperimentwouldbedelayed,sabotaged,andobfuscated.

It’simportanttoemphasizethatthisfeariswelfounded.

Sabotageisarationalresponsefrommanagerswhoseterritoryis

threatened.Thiscompanyisnotarandom,tinystartupwith

nothingtolose.Anestablishedcompanyhasalottolose.Ifthe

revenuefromthecorebusinessgoesdown,headswilrol.Thisis

notsomethingtobetakenlightly.

TheDangersofHidingInnovationinsidetheBlackBox

Theimperativetoinnovateisunrelenting.Withouttheabilityto

experimentinamoreagilemanner,thiscompanyeventualywould

suerthefatedescribedinTheInnovator’sDilemma:

ever-higher

protsandmarginsyearafteryearuntilthebusinesssuddenly

colapsed.

Weoftenframeinternalinnovationchalengesbyasking,How

canweprotecttheinternalstartupfromtheparent

organization?I

canweprotecttheinternalstartupfromtheparentorganization?I

wouldliketoreframeandreversethequestion:Howcanwe

protecttheparentorganizationfromthestartup?Inmyexperience,

peopledefendthemselveswhentheyfeelthreatened,andno

innovationcanourishifdefensivenessisgivenfreerein.Infact,

thisiswhythecommonsuggestiontohidetheinnovationteamis

misguided.Thereareexamplesofone-time

successesusingasecret

skunkworksoro-siteinnovationteam,suchasthebuildingofthe

originalIBMPCinBocaRaton,Florida,completelyseparatefrom

mainlineIBM.Buttheseexamplesshouldservemostlyas

cautionarytales,becausetheyhaverarelyledtosustainable

innovation.2Hidingfromtheparentorganizationcanhavelong-

termnegativeconsequences.

Consideritfromthepointofviewofthemanagerswhohavethe

innovationsprungonthem.Theyarelikelytofeelbetrayedand

morethanalitleparanoid.Afteral,ifsomethingofthis

magnitudecouldbehidden,whatelseiswaitingintheshadows?

Overtime,thisleadstomorepoliticsasmanagersareincentivized

toferretoutthreatstotheirpower,inuence,andcareers.Thefact

thattheinnovationwasasuccessisnojusticationforthis

dishonestbehavior.Fromthepointofviewofestablished

managers,themessageisclear:ifyouarenotontheinside,youare

liabletobeblindsidedbythistypeofsecret.

Itisunfairtocriticizethesemanagersfortheirresponse;the

criticismshouldbeaimedatseniorexecutiveswhofailedtodesign

asupportivesysteminwhichtooperateandinnovate.Ibelievethis

isonereasonwhycompaniessuchasIBMlosttheirleadership

positioninthenewmarketsthattheydevelopedusingablackbox

suchasthePCbusiness;theyareunabletore-createandsustainthe

culturethatledtotheinnovationinthefirstplace.

CreatinganInnovationSandbox

Thechalengehereistocreateamechanismforempowering

innovationteamsoutintheopen.Thisisthepathtowarda

sustainablecultureofinnovationovertimeascompaniesface

sustainablecultureofinnovationovertimeascompaniesface

repeatedexistentialthreats.Mysuggestedsolutionistocreatea

sandboxforinnovationthatwilcontaintheimpactofthenew

innovationbutnotconstrainthemethodsofthestartup

team.It

worksasfolows:

1.Anyteamcancreateatruesplit-testexperimentthataects

onlythesandboxedpartsoftheproductorservice(fora

multipartproduct)oronlycertaincustomersegmentsor

territories(foranewproduct).However:

2.Oneteammustseethewholeexperimentthroughfromendto

end.

3.Noexperimentcanrunlongerthanaspeciedamountoftime

(usualyafewweeksfor

simplefeatureexperiments,longerfor

moredisruptiveinnovations).

4.Noexperimentcanaectmorethanaspeciednumberof

customers(usualyexpressedasapercentageofthecompany’s

totalmainstreamcustomer

base).

5.Everyexperimenthastobeevaluatedonthebasisofasingle

standardreportoffivetoten(nomore)actionablemetrics.

6.Everyteamthatworksinsidethesandboxandeveryproduct

thatisbuiltmustusethe

samemetricstoevaluatesuccess.

7.Anyteamthatcreatesanexperimentmustmonitorthemetrics

andcustomerreactions(supportcals,socialmediareaction,

forumthreads,etc.)whiletheexperimentisinprogressand

abortitifsomethingcatastrophichappens.

Atthebeginning,thesandboxhastobequitesmal.Inthe

companyabove,thesandboxinitialycontainedonlythepricing

page.Dependingonthetypesofproductsthecompanymakes,the

sizeofthesandboxcanbedenedindierentways.Forexample,

anonlineservicemightrestrictittocertainpagesoruserows.A

retailoperationmightrestrictittocertainstoresorgeographic

areas.Companiestryingtobringanentirelynewproduct

tomarket

mightbuildtherestrictionaroundcustomersincertainsegments.

Unlikeinaconcepttestormarkettest,customersinthesandbox

Unlikeinaconcepttestormarkettest,customersinthesandbox

areconsideredrealandtheinnovationteamisalowedtoatempt

toestablishalong-termrelationshipwiththem.Afteral,theymay

beexperimentingwiththoseearlyadoptersforalongtimebefore

theirlearningmilestonesareaccomplished.

Wheneverpossible,theinnovationteamshouldbecross-

functionalandhaveaclearteamleader,liketheToyotashusa.It

shouldbeempoweredtobuild,market,anddeployproductsor

featuresinthesandboxwithoutpriorapproval.It

shouldbe

requiredtoreportonthesuccessorfailureofthoseeortsbyusing

standardactionablemetricsandinnovationaccounting.

Thisapproachcanworkevenforteamsthathaveneverbefore

workedcross-functionaly.

Therstfewchanges,suchasaprice

change,maynotrequiregreatengineeringeort,buttheyrequire

coordinationacrossdepartments:engineering,marketing,customer

service.Teamsthatworkthiswayaremoreproductiveaslongas

productivityismeasuredbytheirabilitytocreatecustomervalue

andnotjuststaybusy.

Trueexperimentsareeasytoclassifyassuccessesorfailures

becausetop-levelmetricseithermoveortheydon’t.Eitherway,the

teamlearnsimmediatelywhetheritsassumptionsabouthow

customerswilbehavearecorrect.Byusingthesamemetricseach

time,theteambuildsliteracyaboutthosemetricsacrossthe

company.Becausetheinnovationteamisreporting

onitsprogress

byusingthesystemofinnovationaccountingdescribedinPartTwo,

anyonewhoreadsthosereportsisgetinganimplicitlessoninthe

powerofactionablemetrics.Thisefectisextremelypowerful.Even

ifsomeonewantstosabotagetheinnovationteam,heorshewil

havetolearnalaboutactionablemetricsandlearningmilestones

todoit.

Thesandboxalsopromotesrapiditeration.Whenpeoplehavea

chancetoseeaprojectthroughfromendtoendandtheworkis

doneinsmalbatchesanddeliversaclearverdictquickly,they

benefitfromthepoweroffeedback.Eachtimetheyfailtomovethe

numbers,theyhavearealopportunitytoactontheir

ndings

immediately.Thus,theseteamstendtoconvergeonoptimal

solutionsrapidlyeveniftheystartoutwithrealybadideas.

solutionsrapidlyeveniftheystartoutwithrealybadideas.

Aswesawearlier,thisisamanifestationoftheprincipleofsmal

batches.Functionalspecialists,especialythosesteepedinwaterfal

orstage-gatedevelopment,havebeentrainedtoworkinextremely

largebatches.Thiscausesevengoodideastoget

boggeddownby

waste.Bymakingthebatchsizesmal,thesandboxmethodalows

teamstomakecheapmistakesquicklyandstartlearning.Aswe’l

seebelow,thesesmalinitialexperimentscandemonstratethata

teamhasaviablenewbusinessthatcanbeintegratedbackintothe

parentcompany.

HoldingInternalTeamsAccountable

WealreadydiscussedlearningmilestonesindetailinChapter7.

Withaninternalstartup

team,thesequenceofaccountabilityisthe

same:buildanidealmodelofthedesireddisruptionthatisbased

oncustomerarchetypes,launchaminimumviableproductto

establishabaseline,andthenatempttotunetheenginetogetit

closertotheideal.

Operatinginthisframework,internalteamsessentialyactas

startups.Astheydemonstratesuccess,theyneedtobecome

integratedintothecompany’soveralportfolioofproductsand

services.

CULTIVATINGTHEMANAGEMENTPORTFOLIO

Therearefourmajorkindsofworkthatcompaniesmustmanage.3

Asaninternalstartupgrows,theentrepreneurswhocreatedthe

originalconceptmusttacklethechalengeofscale.As

new

mainstreamcustomersareacquiredandnewmarketsare

conquered,theproductbecomespartofthepublicfaceofthe

company,withimportantimplicationsforPR,marketing,sales,and

businessdevelopment.In

mostcases,theproductwilatract

competitors:copycats,fastfolowers,andimitatorsofalstripes.

Oncethemarketforthenewproductiswelestablished,

Oncethemarketforthenewproductiswelestablished,

proceduresbecomemore

routine.Tocombattheinevitable

commoditizationoftheproductinitsmarket,lineextensions,

incrementalupgrades,andnewformsofmarketingareessential.In

thisphase,operationalexcelencetakesonagreaterrole,asan

importantwaytoincreasemarginsistolowercosts.Thismay

requireadierenttypeofmanager:onewhoexcelsin

optimization,delegation,control,andexecution.Companystock

pricesdependonthiskindofpredictablegrowth.

Thereisafourthphaseaswel,onedominatedbyoperatingcosts

andlegacyproducts.Thisisthedomainofoutsourcing,automation,

andcostreduction.Nonetheless,infrastructureisstilmission-

critical.Failureoffacilitiesorimportantinfrastructureor

the

abandonmentofloyalcustomerscouldderailthewholecompany.

However,unlikethegrowthandoptimizationphase,investmentsin

thisareawilnothelpthecompanyachievetop-linegrowth.

Managersofthiskindoforganizationsuerthefateofbasebal

umpires:criticizedwhensomethinggoeswrong,unappreciated

whenthingsaregoingwel.

Wetendtospeakofthesefourphasesofbusinessesfromthe

perspectiveoflargecompanies,inwhichtheymayrepresententire

divisionsandhundredsoreventhousandsofpeople.That’slogical,

astheevolutionofthebusinessinthesekindsofextremecasesis

theeasiesttoobserve.However,alcompanies

engageinalfour

phasesofworkalthetime.Assoonasaproducthitsthe

marketplace,teamsofpeopleworkhardtoadvanceittothenext

phase.Everysuccessfulproductorfeaturebeganlifeinresearchand

development(R&D),

eventualybecameapartofthecompany’s

strategy,wassubjecttooptimization,andintimebecameoldnews.

Theproblemforstartupsandlargecompaniesalikeisthat

employeesoftenfolowtheproductstheydevelopastheymove

fromphasetophase.Acommonpracticeisfortheinventorofa

newproductorfeaturetomanagethesubsequentresources,team,

ordivisionthatultimatelycommercializesit.Asaresult,strong

creativemanagerswindupgetingstuckworkingonthe

growth

andoptimizationofproductsratherthancreatingnewones.

Thistendencyisoneofthereasonsestablishedcompanies

Thistendencyisoneofthereasonsestablishedcompanies

struggletondcreativemanagerstofosterinnovationintherst

place.Everynewinnovationcompetesforresourceswith

establishedprojects,andoneofthescarcestresourcesistalent.

EntrepreneurIsaJobTitle

Thewayoutofthisdilemma

istomanagethefourkindsofwork

dierently,alowingstrongcross-functionalteamstodevelop

aroundeacharea.Whenproductsmovefromphasetophase,they

arehandedobetweenteams.Employeescanchoosetomovewith

theproductaspartofthehandoorstaybehindandbeginwork

onsomethingnew.Neitherchoiceisnecessarilyrightorwrong;it

dependsonthetemperamentandskilsofthepersoninquestion.

Somepeoplearenaturalinventorswhoprefertowork

without

thepressureandexpectationsofthelaterbusinessphases.Others

areambitiousandseeinnovationasapathtowardsenior

management.Stilothersareparticularlyskiledatthemanagement

ofrunninganestablishedbusiness,outsourcing,andbolstering

ecienciesandwringingoutcostreductions.Peopleshouldbe

alowedtofindthekindsofjobsthatsuitthembest.

Infact,entrepreneurshipshouldbeconsideredaviablecareer

pathforinnovatorsinsidelargeorganizations.Managerswhocan

leadteamsbyusingtheLeanStartupmethodologyshouldnothave

toleavethecompanytoreaptherewardsoftheirskilsorhaveto

pretendtotintotherigidhierarchiesofestablished

functional

departments.Instead,theyshouldhaveabusinesscardthatsays

simply“Entrepreneur”underthename.Theyshouldbeheld

accountableviathesystemofinnovationaccountingandpromoted

andrewardedaccordingly.

Afteranentrepreneurhasincubatedaproductintheinnovation

sandbox,ithastobereintegratedintotheparentorganization.A

largerteameventualywilbeneededtogrowit,commercializeit,

andscaleit.Atrst,thisteamwilrequirethecontinuedleadership

oftheinnovatorswhoworkedinthesandbox.Infact,thisisa

positivepartoftheprocessinthatitgivestheinnovatorsachance

positivepartoftheprocessinthatitgivestheinnovatorsa

chance

totrainnewteammembersinthenewstyleofworkingthatthey

masteredintheoriginalsandbox.

Idealy,thesandboxwilgrowovertime;thatis,ratherthan

movetheteamoutofthesandboxandintothe

company’sstandard

routines,theremaybeopportunitiestoenlargethescopeofthe

sandbox.Forexample,ifonlycertainaspectsoftheproductwere

subjecttoexperimentationinthesandbox,newfeaturescanbe

added.Intheonlineservicedescribedearlier,thiscouldbe

accomplishedbystartingwithasandboxthatencompassedthe

productpricingpage.Whenthoseexperimentssucceeded,the

companycouldaddthewebsite’shomepagetothe

sandbox.It

subsequentlymightaddthesearchfunctionalityortheoveralweb

design.Ifonlycertaincustomersorcertainnumbersofcustomers

weretargetedinitialy,theproduct’sreachcouldbeincreased.

Whensuchchangesarecontemplated,it’simportantthatsenior

managementconsiderwhethertheteamsworkinginthesandbox

canfendforthemselvespoliticalyintheparentorganization.The

sandboxwasdesignedtoprotectthemandtheparent

organization,

andanyexpansionneedstotakethisintoaccount.

Workingintheinnovationsandboxislikedevelopingstartup

muscles.Atrst,theteamwilbeabletotakeononlymodest

experiments.Theearliest

experimentsmayfailtoproducemuch

learningandmaynotleadtoscalablesuccess.Overtime,those

teamsarealmostguaranteedtoimproveaslongastheygetthe

constantfeedbackofsmal-batchdevelopmentandactionable

metricsandareheldaccountabletolearningmilestones.

Ofcourse,anyinnovationsystemeventualywilbecomethe

victimofitsownsuccess.Asthesandboxexpandsandthe

company’srevenuegrowsasaresultofthesandbox’sinnovations,

thecyclewilhavetobeginagain.Theformerinnovatorswil

becomeguardiansofthestatusquo.Whentheproductmakesup

thewholesandbox,itinevitablywilbecomeencumberedwiththe

additionalrulesandcontrolsneededformission-critical

operation.

Newinnovationteamswilneedanewsandboxwithinwhichto

play.

BecomingtheStatusQuo

Thislasttransitionisespecialyhardforinnovatorstoaccept:their

transformationfromradicaloutsiderstotheembodimentofthe

statusquo.Ihavefounditdisturbinginmycareer.Asyoucanguess

fromthetechniquesIadvocateaspartoftheLeanStartup,Ihave

alwaysbeenabitofatroublemakeratthe

companiesatwhichI

haveworked,pushingforrapiditeration,data-drivendecision

making,andearlycustomerinvolvement.Whentheseideaswere

notpartofthedominantculture,itwassimple(iffrustrating)tobe

anadvocate.AlIhadtodowaspushashardashumanlypossible

formyideas.Sincethedominantculturefoundthemheretical,they

wouldcompromisewithmea“reasonable”amount.Thankstothe

psychologicalphenomenonofanchoring,thisledtoa

perverse

incentive:themoreradicalmysuggestionwas,themorelikelyit

wasthatthereasonablecompromisewouldbeclosertomytrue

goal.

Fast-forwardseveralyearstowhenIwasrunningproduct

development.Whenwe’dhirenewpeople,theyhadtobe

indoctrinatedintotheLeanStartupculture.Splittesting,continuous

deployment,andcustomertestingwerealstandardpractice.I

neededtocontinuetobeastrongadvocateformyideas,

making

sureeachnewemployeewasreadytogivethematry.Butforthe

peoplewhohadbeenworkingthereawhile,thoseideashad

becomepartofthestatusquo.

Likemanyentrepreneurs,Iwascaughtbetweenconstant

evangelizingformyideasandconstantlyentertainingsuggestions

forwaystheycouldbeimproved.Myemployeesfacedthesame

incentiveIhadexploitedyearsbefore:themoreradicalthe

suggestionis,themorelikelyitisthatthecompromisewil

move

inthedirectiontheydesire.Iheardital:suggestionsthatwego

backtowaterfaldevelopment,usemorequalityassurance(QA),

uselessQA,havemoreorlesscustomerinvolvement,usemore

visionandlessdata,orinterpretdatainamorestatisticalyrigorous

way.

way.

Ittookaconstanteorttoconsiderthesesuggestionsseriously.

However,respondingdogmaticalyisunhelpful.

Compromisingby

automaticalysplitingthediferencedoesn’tworkeither.

I’vefoundthateverysuggestionshouldbesubjectedtothesame

rigorousscienticinquirythatledtothecreationoftheLean

Startupintherstplace.Can

weusethetheorytopredictthe

resultsoftheproposedchange?Canweincubatethechangeina

smalteamandseewhathappens?Canwemeasureitsimpact?

Whenevertheycouldbeimplemented,theseapproacheshave

alowedmetoincreasemyownlearningand,moreimportant,the

productivityofthecompaniesIhaveworkedwith.Manyofthe

LeanStartuptechniquesthatwepioneeredatIMVUarenotmy

originalcontributions.Rather,theywereconceived,

incubated,and

executedbyemployeeswhobroughttheirowncreativityandtalent

tothetask.

Aboveal,Ifacedthiscommonquestion:Howdoweknowthat

“yourway”ofbuildingacompanywilwork?What

other

companiesareusingit?Whohasbecomerichandfamousasa

result?Thesequestionsaresensible.Thetitansofourindustryare

alworkinginaslower,morelinearway.Whyarewedoing

somethingdiferent?

Itisthesequestionsthatrequiretheuseoftheorytoanswer.

ThosewholooktoadopttheLeanStartupasadenedsetofsteps

ortacticswilnotsucceed.Ihadtolearnthisthehardway.Ina

startupsituation,thingsconstantlygowrong.Whenthathappens,

wefacetheage-olddilemmasummarizedbyDeming:Howdowe

knowthattheproblemisduetoaspecialcauseversusasystemic

cause?Ifwe’reinthemiddleofadoptinganewwayof

working,

thetemptationwilalwaysbetoblamethenewsystemforthe

problemsthatarise.Sometimesthattendencyiscorrect,sometimes

not.Learningtotelthedierencerequirestheory.Youhavetobe

abletopredicttheoutcomeofthechangesyoumaketotelifthe

problemsthatresultarerealyproblems.

Forexample,changingthedenitionofproductivityforateam

fromfunctionalexcelence—excelenceinmarketing,sales,or

productdevelopment—tovalidatedlearningwilcauseproblems.

productdevelopment—tovalidatedlearningwilcauseproblems.

Aswasindicatedearlier,functionalspecialistsareaccustomedto

measuringtheireciencybylookingattheproportionof

timethey

arebusydoingtheirwork.Aprogrammerexpectstobecodingal

daylong,forexample.Thatiswhymanytraditionalwork

environmentsfrustratetheseexperts:theconstantinterruptionof

meetings,cross-functional

handos,andexplanationsforendless

numbersofbossesalactasadragoneciency.However,the

individualeciencyofthesespecialistsisnotthegoalinaLean

Startup.Instead,wewanttoforceteamstoworkcross-functionaly

toachievevalidatedlearning.Manyofthetechniquesfordoingthis

—actionablemetrics,continuousdeployment,andtheoveralBuild-

Measure-Learnfeedbackloop—necessarilycauseteamsto

suboptimizefortheirindividualfunctions.Itdoes

notmaterhow

fastwecanbuild.Itdoesnotmaterhowfastwecanmeasure.

Whatmatersishowfastwecangetthroughtheentireloop.

Inmyyearsteachingthissystem,Ihavenoticedthispaternevery

time:switchingtovalidatedlearningfeelsworsebeforeitfeels

beter.That’sthecasebecausetheproblemscausedbytheold

systemtendtobeintangible,whereastheproblemsofthenew

systemarealtootangible.Havingthebenetoftheoryis

the

antidotetothesechalenges.Ifitisknownthatthislossof

productivityisaninevitablepartofthetransition,itcanbe

managedactively.Expectationscanbesetupfront.Inmy

consultingpractice,for

example,Ihavelearnedtoraisetheseissues

fromdayone;otherwise,theyareliabletoderailthewholeeort

onceitisunderway.Asthechangeprogresses,wecanusetheroot

causeanalysisandfastresponsetechniquestogureoutwhich

problemsneedprevention.Ultimately,theLeanStartupisa

framework,notablueprintofstepstofolow.Itisdesignedtobe

adaptedtotheconditionsofeachspeciccompany.Ratherthan

copywhatothershavedone,techniquessuchastheFive

Whys

alowyoutobuildsomethingthatisperfectlysuitedtoyour

company.

Thebestwaytoachievemasteryofandexploretheseideasisto

embedoneselfinacommunityofpractice.There

isathriving

communityofLeanStartupmeetupsaroundtheworldaswelas

communityofLeanStartupmeetupsaroundtheworldaswelas

online,andsuggestionsforhowyoucantakeadvantageofthese

resourceslistedinthelastchapterofthisbook,“Jointhe

Movement.”

13

EPILOGUE:WASTENOT

ThisyearmarkstheonehundredthanniversaryofFrederick

WinslowTaylor’sThePrinciplesofScienticManagement,rst

publishedin1911.Themovementforscienticmanagement

changedthecourseofthetwentiethcenturybymakingpossiblethe

tremendousprosperitythatwetakeforgrantedtoday.

Taylor

eectivelyinventedwhatwenowconsidersimplymanagement:

improvingtheeciencyofindividualworkers,managementby

exception(focusingonlyonunexpectedlygoodorbadresults),

standardizingworkintotasks,thetask-plus-bonussystemof

compensation,and—aboveal—theideathatworkcanbestudied

andimprovedthroughconsciouseort.Taylorinventedmodern

white-colarworkthatseescompaniesassystemsthat

mustbe

managedatmorethantheleveloftheindividual.Thereisareason

alpastmanagementrevolutionshavebeenledbyengineers:

managementishumansystemsengineering.

In1911Taylorwrote:“Inthe

past,themanhasbeenrst;inthe

future,thesystemmustberst.”Taylor’spredictionhascometo

pass.Wearelivingintheworldheimagined.Andyet,the

revolutionthatheunleashedhasbeen—inmanyways—too

successful.WhereasTaylorpreachedscienceasawayofthinking,

manypeopleconfusedhismessagewiththerigidtechniqueshe

advocated:timeandmotionstudies,thedierentialpiece-rate

system,and—mostgalingofal—theideathatworkers

shouldbe

treatedaslitlemorethanautomatons.Manyoftheseideasproved

extremelyharmfulandrequiredtheeortsoflatertheoristsand

extremelyharmfulandrequiredtheeortsoflatertheoristsand

managerstoundo.Criticaly,leanmanufacturingrediscoveredthe

wisdomandinitiativehiddenineveryfactoryworkerand

redirectedTaylor’snotionofeciencyawayfromtheindividual

taskandtowardthecorporateorganismasawhole.Buteachof

thesesubsequentrevolutionshasembracedTaylor’scoreideathat

workcanbestudiedscienticalyandcanbeimprovedthrougha

rigorousexperimentalapproach.

Inthetwenty-rstcentury,wefaceanewsetofproblemsthat

Taylorcouldnothaveimagined.Ourproductivecapacitygreatly

exceedsourabilitytoknowwhattobuild.Althoughtherewasa

tremendousamountofinventionandinnovationintheearly

twentiethcentury,mostofitwasdevotedtoincreasingthe

productivityofworkersandmachinesinordertofeed,clothe,and

housetheworld’spopulation.Althoughthatprojectisstil

incomplete,asthemilionswholiveinpovertycanatest,the

solutiontothatproblemisnowstrictlyapoliticalone.Wehavethe

capacitytobuildalmostanythingwecanimagine.Thebigquestion

ofourtimeisnotCanitbebuilt?butShoulditbebuilt?This

placesusinanunusualhistoricalmoment:ourfutureprosperity

dependsonthequalityofourcolectiveimaginations.

In1911,Taylorwrote:

Wecanseeourforestsvanishing,ourwater-powersgoingto

waste,oursoilbeingcarriedbyoodsintothesea;andthe

endofourcoalandourironisinsight.Butourlarger

wastesofhumaneort,whichgooneverydaythroughsuch

ofouractsasareblundering,il-directed,or

inecient…arelessvisible,lesstangible,andarebut

vaguelyappreciated.

Wecanseeandfeelthewasteofmaterialthings.

Awkward,inecient,oril-directedmovementsofmen,

however,leavenothingvisibleortangiblebehindthem.

Theirappreciationcalsforanactofmemory,aneortof

theimagination.Andforthisreason,eventhoughourdaily

lossfromthissourceisgreaterthanfromourwasteof

materialthings,theonehasstirredusdeeply,whilethe

materialthings,theonehasstirredusdeeply,whilethe

otherhasmovedusbutlitle.1

Acenturyon,whatcanwesayaboutthosewords?Ontheone

hand,theyfeelarchaic.We

ofthetwenty-rstcenturyare

hyperawareoftheimportanceofeciencyandtheeconomicvalue

ofproductivitygains.Ourworkplacesare—atleastwhenitcomes

tothebuildingofmaterialobjects—incrediblywelorganized

comparedwiththoseofTaylor’sday.

Ontheotherhand,Taylor’swordsstrikemeascompletely

contemporary.Foralofourvauntedeciencyinthemakingof

things,oureconomyisstilincrediblywasteful.Thiswastecomes

notfromtheinecientorganizationofworkbutratherfrom

workingonthewrongthings—andonanindustrialscale.AsPeter

Druckersaid,“Thereissurelynothingquitesouselessasdoingwith

greateficiencywhatshouldnotbedoneatal.”2

Andyetwearedoingthewrongthingsecientlyalthetime.It

ishardtocomebyasolidestimateofjusthowwastefulmodern

workis,butthereisnoshortageofanecdotes.Inmyconsultingand

travelstalkingabouttheLeanStartup,Ihearthesame

message

consistentlyfromemployeesofcompaniesbigandsmal.Inevery

industryweseeendlessstoriesoffailedlaunches,il-conceived

projects,andlarge-batchdeathspirals.Iconsiderthismisuseof

people’stimeacriminalynegligentwasteofhumancreativityand

potential.

Whatpercentageofalthiswasteispreventable?Ithinkamuch

largerproportionthanwecurrentlyrealize.MostpeopleImeet

believethatintheirindustryatleast,projectsfailforgoodreasons:

projectsareinherentlyrisky,marketconditionsareunpredictable,

“bigcompanypeople”areintrinsicalyuncreative.Somebelieve

thatifwejustslowedeverythingdownanduseda

morecareful

process,wecouldreducethefailureratebydoingfewerprojectsof

higherquality.Othersbelievethatcertainpeoplehaveaninnate

giftofknowingtherightthingtobuild.Ifwecanndenoughof

thesevisionariesandvirtuosos,ourproblemswilbesolved.These

“solutions”wereonceconsideredstateoftheartinthenineteenth

century,too,beforepeopleknewaboutmodernmanagement.

century,too,beforepeopleknewaboutmodern

management.

Therequirementsofanever-fasterworldmaketheseantique

approachesunworkable,andsotheblameforfailedprojectsand

businessesoftenisheapedonseniormanagement,whichisaskedto

dotheimpossible.Alternatively,thengerofblameispointedat

nancialinvestorsorthepublicmarketsforoveremphasizingquick

xesandshort-termresults.Wehaveplentyofblametogoaround,

butfartoolitletheorytoguidetheactionsofleaders

andinvestors

alike.

TheLeanStartupmovementstandsincontrasttothishand-

wringing.Webelievethatmostformsofwasteininnovationare

preventableoncetheircausesareunderstood.Althatis

requiredis

thatwechangeourcolectivemind-setconcerninghowthisworkis

tobedone.

Itisinsucienttoexhortworkerstotryharder.Ourcurrent

problemsarecausedbytryingtoohard—atthewrong

things.By

focusingonfunctionaleciency,welosesightoftherealgoalof

innovation:tolearnthatwhichiscurrentlyunknown.AsDeming

taught,whatmatersisnotsetingquantitativegoalsbutxingthe

methodbywhichthosegoalsareatained.TheLeanStartup

movementstandsfortheprinciplethatthescienticmethodcanbe

broughttobeartoanswerthemostpressinginnovationquestion:

Howcanwebuildasustainableorganization

aroundanewsetof

productsorservices?

ORGANIZATIONALSUPERPOWERS

Aparticipantatoneofmyworkshopscameuptomeafewmonths

afterwardtorelatethefolowingstory,whichIamparaphrasing:

“KnowingLeanStartupprinciplesmakesmefeellikeIhave

superpowers.EventhoughI’mjustajunioremployee,whenImeet

withcorporateVPsandGMsinmylargecompany,Iaskthem

simplequestionsandveryquicklyhelpthemseehow

theirprojects

arebasedonfundamentalhypothesesthataretestable.Inminutes,I

canlayoutaplantheycouldfolowtoscienticalyvalidatetheir

plansbeforeit’stoolate.Theyconsistentlyrespondwith‘Wow,you

plansbeforeit’stoolate.Theyconsistentlyrespondwith‘Wow,you

arebriliant.We’veneverthoughttoapplythatlevelofrigortoour

thinkingaboutnewproductsbefore.’”

Asaresultoftheseinteractions,hehasdevelopedareputation

withinhislargecompanyasabriliantemployee.Thishasbeen

goodforhiscareerbutveryfrustratingforhimpersonaly.Why?

Becausealthoughheisquitebriliant,hisinsightsintoawed

productplansareduenottohisspecialinteligencebutto

havinga

theorythatalowshimtopredictwhatwilhappenandpropose

alternatives.Heisfrustratedbecausethemanagersheispitchinghis

ideastodonotseethesystem.Theywronglyconcludethatthekey

tosuccessisndingbriliantpeoplelikehimtoputontheirteams.

Theyarefailingtoseetheopportunityheisrealypresentingthem:

toachievebeterresultssystematicalybychangingtheirbeliefs

abouthowinnovationhappens.

PutingtheSystemFirst:SomeDangers

LikeTaylorbeforeus,ourchalengeistopersuadethemanagersof

moderncorporationstoputthesystemrst.However,Taylorism

shouldactasacautionarytale,anditisimportanttolearnthe

lessonsofhistoryaswebringthesenewideastoamore

mainstreamaudience.

Taylorisrememberedforhisfocusonsystematicpracticerather

thanindividualbriliance.HereisthefulquotefromThe

PrinciplesofScientic

Managementthatincludesthefamousline

aboutputingthesystemfirst:

Inthefutureitwilbeappreciatedthatourleadersmustbe

trainedrightaswelasbornright,andthatnogreatman

can(withtheoldsystemof

personalmanagement)hopeto

competewithanumberofordinarymenwhohavebeen

properlyorganizedsoaseficientlytocooperate.

Inthepastthemanhasbeenfirst;inthefuturethesystem

mustberst.Thisinnosense,however,impliesthatgreat

menarenotneeded.Onthecontrary,therstobjectofany

menarenotneeded.Onthecontrary,therstobjectofany

goodsystemmustbethatofdevelopingrst-classmen;and

undersystematicmanagementthebestmanrisestothetop

morecertainlyandmorerapidlythaneverbefore.3

Unfortunately,Taylor’sinsistencethatscientificmanagementdoes

notstandinoppositiontondingandpromotingthebest

individualswasquicklyforgoten.Infact,theproductivitygainsto

behadthroughtheearlyscienticmanagementtactics,suchastime

andmotionstudy,task-plus-bonus,andespecialyfunctional

foremanship(theforerunneroftoday’sfunctionaldepartments),

weresosignicantthatsubsequentgenerationsof

managerslost

sightoftheimportanceofthepeoplewhowereimplementing

them.

Thishasledtotwoproblems:(1)businesssystemsbecameoverly

rigidandtherebyfailedtotakeadvantageofthe

adaptability,

creativity,andwisdomofindividualworkers,and(2)therehas

beenanoveremphasisonplanning,prevention,andprocedure,

whichenableorganizationstoachieveconsistentresultsinamostly

staticworld.Onthefactoryoor,theseproblemshavebeentackled

headonbytheleanmanufacturingmovement,andthoselessons

havespreadthroughoutmanymoderncorporations.Andyetinnew

productdevelopment,entrepreneurship,and

innovationworkin

generalwearestilusinganoutdatedframework.

MyhopeisthattheLeanStartupmovementwilnotfalintothe

samereductionisttrap.Wearejustbeginningtouncovertherules

thatgovernentrepreneurship,

amethodthatcanimprovetheodds

ofstartupsuccess,andasystematicapproachtobuildingnewand

innovativeproducts.Thisinnowaydiminishesthetraditional

entrepreneurialvirtues:theprimacyofvision,thewilingnessto

takeboldrisks,andthecouragerequiredinthefaceof

overwhelmingodds.Oursocietyneedsthecreativityandvisionof

entrepreneursmorethanever.Infact,itispreciselybecausethese

aresuchpreciousresourcesthatwecannotafordto

wastethem.

ProductDevelopmentPseudoscience

IbelievethatifTaylorwerealivetoday,hewouldchuckleatwhat

constitutesthemanagementofentrepreneursandinnovators.

Althoughweharnessthe

laborofscientistsandengineerswho

wouldhavedazzledanyearly-twentieth-centurypersonwiththeir

featsoftechnicalwizardry,themanagementpracticesweuseto

organizethemaregeneralydevoidofscienticrigor.Infact,I

wouldgosofarastocalthempseudoscience.

Weroutinelygreen-lightnewprojectsmoreonthebasisof

intuitionthanfacts.Aswe’veseenthroughoutthisbook,thatisnot

therootcauseoftheproblem.Alinnovationbeginswithvision.It’s

whathappensnextthatiscritical.Aswe’veseen,toomany

innovationteamsengageinsuccesstheater,selectivelyndingdata

thatsupporttheirvisionratherthanexposingtheelementsofthe

visiontotrueexperiments,or,evenworse,stayingin

stealthmode

tocreateadata-freezoneforunlimited“experimentation”thatis

devoidofcustomerfeedbackorexternalaccountabilityofanykind.

Anytimeateamatemptstodemonstratecauseandeectby

placinghighlightsonagraphofgrossmetrics,itisengagingin

pseudoscience.Howdoweknowthattheproposedcauseand

eectistrue?Anytimeateamatemptstojustifyitsfailuresby

resortingtolearningasanexcuse,itisengagedin

pseudoscienceas

wel.

Iflearninghastakenplaceinoneiterationcycle,letus

demonstrateitbyturningitintovalidatedlearninginthenext

cycle.Onlybybuildingamodelofcustomerbehaviorandthen

showingourabilitytouseourproductorservicetochangeitover

timecanweestablishrealfactsaboutthevalidityofourvision.

ThroughoutourcelebrationofthesuccessoftheLeanStartup

movement,anoteofcautionisessential.Wecannotaord

tohave

oursuccessbreedanewpseudosciencearoundpivots,MVPs,and

thelike.Thiswasthefateofscienticmanagement,andintheend,

Ibelieve,thatsetbackitscausebydecades.Sciencecametostand

forthevictoryofroutineworkovercreativework,mechanization

overhumanity,andplansoveragility.Latermovementshadtobe

spawnedtocorrectthosedeficiencies.

spawnedtocorrectthosedeficiencies.

Taylorbelievedinmanythingsthathedubbedscienticbutthat

ourmoderneyesperceiveasmereprejudice.Hebelievedinthe

inherentsuperiorityinbothinteligenceandcharacterofaristocratic

menovertheworkingclassesandthesuperiorityofmen

over

women;healsothoughtthatlower-statuspeopleshouldbe

supervisedstrictlybytheirbeters.Thesebeliefsarepartandparcel

ofTaylor’stime,anditistemptingtoforgivehimforhavingbeen

blindtothem.

Yetwhenourtimeisviewedthroughthelensoffuturepractice,

whatprejudiceswilberevealed?Inwhatforcesdoweplace

unduefaith?Whatmightwerisklosingsightofwiththisinitial

successofourmovement?

ItiswiththesequestionsthatIwishtoclose.Asgratifyingasitis

formetoseetheLeanStartupmovementgainfameand

recognition,itisfarmoreimportantthatweberightinour

prescriptions.Whatisknownsofarisjustthetipofthe

iceberg.

Whatisneededisamassiveprojecttodiscoverhowtounlockthe

vaststoresofpotentialthatarehiddeninplainsightinourmodern

workforce.Ifwestoppedwastingpeople’stime,whatwouldthey

dowithit?Wehavenorealconceptofwhatispossible.

Startinginthelate1880s,Taylorbeganaprogramof

experimentationtodiscovertheoptimalwaytocutsteel.Inthe

courseofthatresearch,whichlastedmorethantwenty-veyears,

heandhiscoleaguesperformedmorethantwentythousand

individualexperiments.Whatisremarkableaboutthisprojectis

thatithadnoacademicbacking,nogovernmentR&Dbudget.Its

entirecostwaspaidbyindustryoutoftheimmediate

prots

generatedfromthehigherproductivitytheexperimentsenabled.

Thiswasonlyoneexperimentalprogramtouncoverthehidden

productivityinjustonekindofwork.Otherscienticmanagement

disciplesspentyearsinvestigatingbricklaying,farming,andeven

shoveling.Theywereobsessedwithlearningthetruthandwerenot

satisedwiththefolkwisdomofcraftspersonsortheparablesof

experts.

Cananyofusimagineamodernknowledge-workmanagerwith

thesamelevelofinterestinthemethodshisorheremployeesuse?

thesamelevelofinterestinthemethodshisorheremployeesuse?

Howmuchofourcurrentinnovationworkisguidedby

catchphrasesthatlackascientificfoundation?

ANewResearchProgram

Whatcomparableresearchprogramscouldwebeengagedinto

discoverhowtoworkmoreefectively?

Foronething,wehaveverylitleunderstandingofwhat

stimulatesproductivityunderconditionsofextremeuncertainty.

Luckily,withcycletimesfalingeverywhere,wehavemany

opportunitiestotestnewapproaches.Thus,Iproposethatwe

createstartuptestinglabsthatcouldputalmannerof

product

developmentmethodologiestothetest.

Howmightthosetestsbeconducted?Wecouldbringinsmal

cross-functionalteams,perhapsbeginningwithproductand

engineering,andhavethem

worktosolveproblemsbyusing

dierentdevelopmentmethodologies.Wecouldbeginwith

problemswithclearrightanswers,perhapsdrawnfromthemany

internationalprogrammingcompetitionsthathavedeveloped

databasesofwel-denedproblemswithclearsolutions.These

competitionsalsoprovideaclearbaselineofhowlongitshould

takeforvariousproblemstobesolvedsothatwecouldestablish

clearlytheindividualproblem-solvingprowessof

theexperimental

subjects.

Usingthiskindofsetupforcalibration,wecouldbegintovary

theconditionsoftheexperiments.Thechalengewilbetoincrease

thelevelofuncertaintyaboutwhattherightansweris

whilestil

beingabletomeasurethequalityoftheoutcomeobjectively.

Perhapswecouldusereal-worldcustomerproblemsandthenhave

realconsumerstesttheoutputoftheteams’work.Orperhapswe

couldgosofarastobuildminimumviableproductsforsolvingthe

samesetofproblemsoverandoveragaintoquantifywhich

producesthebestcustomerconversionrates.

Wealsocouldvarytheal-importantcycletimebychoosingmore

orlesscomplexdevelopmentplatformsanddistributionchannelsto

orlesscomplexdevelopmentplatformsanddistributionchannelsto

testtheimpactofthosefactorsonthetrueproductivityofthe

teams.

Mostofal,weneedtodevelopclearmethodsforholdingteams

accountableforvalidatedlearning.Ihaveproposedonemethodin

thisbook:innovationaccountingusingawel-denedfinancial

modelandengineofgrowth.However,itisnaiveto

assumethat

thisisthebestpossiblemethod.Asitisadoptedinmoreandmore

companies,undoubtedlynewtechniqueswilbesuggested,andwe

needtobeabletoevaluatethenewideasasrigorouslyaspossible.

Althesequestionsraisethepossibilitiesofpublic-private

partnershipsbetweenresearchuniversitiesandtheentrepreneurial

communitiestheyseektofoster.Italsosuggeststhatuniversities

maybeabletoaddvalueinmorewaysthanbybeingsimply

nancialinvestorsorcreatorsofstartupincubators,asisthecurrent

trend.Mypredictionisthatwhereverthisresearchisconductedwil

becomeanepicenterofnewentrepreneurialpractice,and

universitiesconductingthisresearchthereforemaybeableto

achieveamuchhigherlevelofcommercializationoftheirbasic

researchactivities.4

THELONG-TERMSTOCKEXCHANGE

Beyondsimpleresearch,Ibelieveourgoalshouldbetochangethe

entireecosystemof

entrepreneurship.Toomuchofourstartup

industryhasdevolvedintoafeedersystemforgiantmedia

companiesandinvestmentbanks.Partofthereasonestablished

companiesstruggletoinvestconsistentlyininnovationisintense

pressurefrompublicmarketstohitshort-termprotabilityand

growthtargets.Mostly,thisisaconsequenceoftheaccounting

methodswehavedevelopedforevaluatingmanagers,whichfocus

onthekindsofgross“vanity”metricsdiscussedin

Chapter7.What

isneededisanewkindofstockexchange,designedtotradeinthe

stocksofcompaniesthatareorganizedtosustainlong-term

thinking.IproposethatwecreateaLong-TermStockExchange

(LTSE).

(LTSE).

Inadditiontoquarterlyreportsonprotsandmargins,

companiesontheLTSEwouldreportusinginnovationaccounting

ontheirinternalentrepreneurshipeorts.Like

Intuit,theywould

reportontherevenuetheyweregeneratingfromproductsthatdid

notexistafewyearsearlier.ExecutivecompensationinLTSE

companieswouldbetiedtothecompany’slong-termperformance.

TradingontheLTSEwouldhavemuchhighertransactioncostsand

feestominimizedaytradingandmassivepriceswings.Inexchange,

LTSEcompanieswouldbealowedtostructuretheircorporate

governancetofacilitategreaterfreedomfor

managementtopursue

long-terminvestments.Inadditiontosupportforlong-term

thinking,thetransparencyoftheLTSEwilprovidevaluabledata

abouthowtonurtureinnovationintherealworld.Somethinglike

theLTSEwouldacceleratethecreationofthenextgenerationof

greatcompanies,builtfromthegroundupforcontinuous

innovation.

INCONCLUSION

Asamovement,theLeanStartupmustavoiddoctrinesandrigid

ideology.Wemustavoidthecaricaturethatsciencemeansformula

oralackofhumanityinwork.Infact,scienceisoneofhumanity’s

mostcreativepursuits.Ibelievethatapplyingitto

entrepreneurshipwilunlockavaststorehouseofhumanpotential.

Whatwouldanorganizationlooklikeifalofitsemployees

werearmedwithLeanStartuporganizationalsuperpowers?

Foronething,everyonewouldinsistthatassumptionsbestated

explicitlyandtestedrigorouslynotasastaling

tacticoraformof

make-workbutoutofagenuinedesiretodiscoverthetruththat

underlieseveryproject’svision.

Wewouldnotwastetimeonendlessargumentsbetweenthe

defendersofqualityandthe

cowboysofrecklessadvance;instead,

wewouldrecognizethatspeedandqualityarealiesinthepursuit

ofthecustomer’slong-termbenet.Wewouldracetotestour

visionbutnottoabandonit.Wewouldlooktoeliminatewastenot

visionbutnottoabandonit.Wewouldlooktoeliminatewastenot

tobuildqualitycastlesintheskybutintheserviceofagilityand

breakthroughbusinessresults.

Wewouldrespondtofailuresandsetbackswithhonestyand

learning,notwithrecriminationsandblame.Morethanthat,we

wouldshuntheimpulsetoslowdown,increasebatchsize,and

indulgeinthecurseofprevention.Instead,wewouldachievespeed

bybypassingtheexcessworkthatdoesnotleadtolearning.

We

woulddedicateourselvestothecreationofnewinstitutionswitha

long-termmissiontobuildsustainablevalueandchangetheworld

forthebeter.

Mostofal,wewouldstopwastingpeople’stime.

14

JOINTHEMOVEMENT

Inthepastfewyears,theLeanStartupmovementhasgoneglobal.

Thenumberofresourcesavailableforaspiringentrepreneursis

incredible.Here,I’ldomybesttolistjustafewofthe

best

events,books,andblogsforfurtherreadingandfurtherpractice.

Therestisuptoyou.Readingisgood,actionisbeter.

Themostimportantresourcesarelocal.Gonearethedayswhere

youhadtobeinSiliconValeytondotherentrepreneurstoshare

ideasandstruggleswith.However,beingembeddedinastartup

ecosystemisstilanimportantpartofentrepreneurship.What’s

changedisthattheseecosystemsarespringingup

inmoreandmore

startuphubsaroundtheworld.

ImaintainanocialwebsiteforTheLeanStartupat

htp://theleanstartup.com,whereyoucanndadditionalresources,

includingcasestudiesandlinkstofurtherreading.You

wilalso

ndlinkstheretomyblog,StartupLessonsLearned,aswelas

videos,slides,andaudiofrommypastpresentations.

LeanStartupMeetups

ChancesarethereisaLeanStartupmeetupgroupnearyou.Asof

thiswriting,thereareoverahundred,withthelargestinSan

Francisco,Boston,NewYork,Chicago,andLosAngeles.Youcan

ndareal-timemapofgroupshere:htp://lean-

startup.meetup.com/.Youcanalsondalistofcitieswherepeople

areinterestedinstartinganewgroup,andtoolstosetoneup

areinterestedinstartinganewgroup,andtoolstosetoneup

yourself.

TheLeanStartupWiki

NoteveryLeanStartupgroupusesMeetup.comto

organize,anda

comprehensivelistofeventsandotherresourcesismaintainedby

volunteers

on

the

Lean

Startup

Wiki:

htp://leanstartup.pbworks.com/

TheLeanStartupCircle

ThelargestcommunityofpracticearoundtheLeanStartupis

happeningonline,rightnow,

ontheLeanStartupCirclemailing

list.FoundedbyRichColins,thelisthasthousandsof

entrepreneurssharingtips,resources,andstorieseveryday.Ifyou

haveaquestionabouthowLeanStartupmightapplytoyour

businessorindustry,it’sagreatplacetostart:

htp://leanstartupcircle.com/

TheStartupLessonsLearnedConference

Forthepasttwoyears,IhaverunaconferencecaledStartup

LessonsLearned.Moredetailsareavailablehere:ht

p://slconf.com

REQUIREDREADING

SteveBlank’sbookTheFourStepstotheEpiphanyistheoriginal

bookaboutcustomerdevelopment.WhenIwasbuildingIMVU,a

dog-earedcopyofthisbookfolowedmeeverywhere.Itis

an

indispensableguide.Youcangetacopyhere:

htp://ericri.es/FourStepsorreadmyreviewofithere:

htp://www.startuplessonslearned.com/2008/11/what-is-customer-

development.html.Stevealsomaintainsanactiveandexcel

ent

development.html.Stevealsomaintainsanactiveandexcelent

blogathtp://steveblank.com/

BrantCooperandPatrickVlaskovitshavecreatedashortbut

excelentbookcaledThe

Entrepreneur’sGuidetoCustomer

Development,whichprovidesagentleintroductiontothetopic.

Youcanbuyithere:htp://custdev.comorreadmyreviewhere:

htp://www.startuplessonslearned.com/2010/07/entrepreneurs-

guide-to-customer.html

WhenIrstbeganbloggingaboutentrepreneurship,itwasnot

nearlyascommonanoccupationasitisnow.Veryfewbloggers

wereactivelyworkingonnewideasaboutentrepreneurship,and

togetherwedebatedandrefinedtheseideasonline.

DaveMcClure,founderoftheventurerm500Startups,writesa

blogathtp://500hats.typepad.com/.500Startupshasanexcelent

blogaswel:htp://blog.500startups.com/.Dave’s“StartupMetrics

forPirates”presentationlaidoutaframeworkforthinkingabout

andmeasuringonlineservicesthatgreatlyinuencedtheconceptof

“enginesofgrowth.”Youcanseetheoriginalpresentationhere:

htp://500hats.typepad.com/500blogs/2008/09/startup-

metri-

2.htmlaswelasmyoriginalreactionhere:

htp://www.startuplessonslearned.com/2008/09/three-drivers-of-

growth-for-your.html

SeanEliswritestheStartupMarketingBlog,whichhasbeen

inuentialinmythinkingabouthowtointegratemarketinginto

startups:htp://startup-marketing.com/

AndrewChen’sblogFuturisticPlayisoneofthebestsourcesfor

thoughtsonviralmarketing,startupmetrics,anddesign:

htp://andrewchenblog.com/

BabakNiviwritestheexcelentblogVentureHacksandwasan

earlyLeanStartupevangelist:htp://venturehacks.com/.He’ssince

goneontocreateAngelList,whichmatchesstartupsandinvestors

aroundtheworld:htp://angel.co/

OtherfantasticLeanStartupblogsinclude:

•AshMauryahasemergedasaleaderinhelpingbootstrapped

onlinebusinessesapplyLeanStartupideas.Hisblogiscaled

RunningLean,andhealsohasreleasedaneBookofthesame

name.

Both

can

be

found

here:

htp://www.runningleanhq.com/

•SeanMurphyonearly-stagesoftwarestartups:

htp://www.skmurphy.com/blog/

•BrantCooper’sMarketbyNumbers:htp://market-by-

numbers.com/

•PatrickVlaskovitsontechnology,customerdevelopment,and

pricing:htp://vlaskovits.com/

•TheKISSmetricsMarketingBlog:htp://blog.kissmetrics.com/

andHitenShah’sht

p://hitenism.com

FURTHERREADING

ClaytonM.Christensen’sTheInnovator’sDilemmaandThe

Innovator’sSolutionareclassics.Inaddition,Christensen’smore

recentworkisalsoextremelyhelpfulforseeingthetheory

of

disruptiveinnovationinpractice,includingTheInnovator’s

Prescription(aboutdisruptinghealthcare)andDisruptingClass

(abouteducation).

htp://ericri.es/ClaytonChristensen

GeoreyA.Moore’searlyworkisfamousamongalentrepreneurs,

especialyCrossingtheChasmandInsidetheTornado.Buthehas

continuedtorenehisthinking,andIhavefoundhislatestwork,

DealingwithDarwin:HowGreatCompaniesInnovateat

Every

PhaseofTheirEvolution,especialyuseful.

htp://ericri.es/DealingWithDarwin

ThePrinciplesofProductDevelopmentFlow:SecondGeneration

LeanProductDevelopmentbyDonaldG.Reinertsen.

LeanProductDevelopmentbyDonaldG.Reinertsen.

htp://ericri.es/pdflow

TheToyotaWaybyJefreyLiker.

htp://ericri.es/thetoyotaway

LeanThinking:BanishWasteandCreateWealthinYour

Corporation,Revisedand

UpdatedbyJamesP.WomackandDaniel

T.Jones.

htp://ericri.es/LeanThinking

ThePeople’sTycoon:HenryFordandtheAmericanCenturyby

StevenWats.

ht

p://ericri.es/ThePeoplesTycoon

TheOneBestWay:FrederickWinslowTaylorandtheEnigmaof

EficiencybyRobertKanigel.

htp://ericri.es/OneBestWay

ThePrinciplesofScienticManagementbyFrederickWinslow

Taylor.

htp://ericri.es/ScientificManagement

ExtremeProgrammingExplained:EmbraceChangebyKentBeck

andCynthiaAndres.

htp://ericri.es/EmbraceChange

ToyotaProductionSystem:BeyondLarge-ScaleProductionby

TaichiOhno.

htp://ericri.es/TaichiOhno

TheideaoftheBuild-Measure-Learnfeedbackloopowesalotto

ideasfrommaneuverwarfare,especialyJohn

Boyd’sOODA

(Observe-Orient-Decide-Act)Loop.Themostaccessibleintroduction

toBoyd’sideasisCertaintoWin:TheStrategyofJohnBoyd,

AppliedtoBusinessbyChetRichards.

htp://ericri.es/CertainToWin

OutoftheCrisisbyW.EdwardsDeming.

htp://ericri.es/OutOfTheCrisis

MyYearswithGeneralMotorsbyAlfredSloan.

htp://ericri.es/MyYears

Bily,Alfred,andGeneralMotors:TheStoryofTwoUniqueMen,a

LegendaryCompany,andaRemarkableTimeinAmericanHistory

byWiliamPelfrey.

htp://ericri.es/BilyAlfred

ThePracticeofManagementbyPeterF.Drucker.

htp://ericri.es/PracticeOfManagement

GetingtoPlanB:BreakingThroughtoaBeterBusinessModelby

JohnMulinsandRandyKomisar.

htp://ericri.es/GetingToPlanB

Endnotes

Introduction

1.Foranup-to-datelistingofLeanStartupmeetupsortondone

nearyou,seehtp://lean-startup.meetup.comortheLean

StartupWiki:htp://leanstartup.pbworks.com/Meetups.Seealso

Chapter14,“JointheMovement.”

Chapter1.Start

1.Manufacturingstatisticsandanalysisaredrawnfromtheblog

FiveThirtyEight:htp://www.fivethirtyeight.com/2010/02/us-

manufacturing-is-not-dead.html

Chapter2.Define

1.TheInnovator’sDilemmaisaclassictextbyClaytonChristensen

aboutthedicultyestablishedcompanieshavewithdisruptive

innovation.Alongwithitssequel,TheInnovator’sSolution,it

laysoutspecicsuggestionsforhowestablishedcompaniescan

createautonomousdivisionstopursuestartup-likeinnovation.

Thesespecicstructuralprerequisitesarediscussedindetailin

Chapter12.

2.FormoreaboutSnapTax,seehtp://blog.turbotax.intuit.com/

turbotax-press-releases/taxes-on-your-mobile-phone-

it%E2%80%99s-a-snap/01142011–4865andhtp://mobilized.

althingsd.com/20110204/exclusive-

intuit-sees-more-than-

althingsd.com/20110204/exclusive-intuit-sees-more-than-

350000-downloads-for-snaptax-its-smartphone-tax-filing-app/

3.MostinformationrelatingtoIntuitandSnapTaxcomesfrom

privateinterviewswithIntuitmanagementandemployees.

InformationaboutIntuit’sfoundingcomesfromSuzanneTaylor

andKathySchroeder’sInsideIntuit:HowtheMakersofQuicken

BeatMicrosoftandRevolutionizedanEntireIndustry

(Cambridge,Mass.:HarvardBusinessPress,2003).

Chapter3.Learn

1.TheoriginalvefoundersofIMVUwereWilHarvey,Marcus

Gosling,MatDanzig,MelGuymon,andmyself.

2.UsageintheUnitedStateswasevenmoreconcentrated;

see

htp://www.businessweek.com/technology/tech_stats/

im050307.htm

3.TohearmoreaboutIMVU’searlyconversationswithcustomers

thatledtoourpivotawayfromtheadd-onstrategy,see:htp://

mixergy.com/ries-lean/

4.Awordofcaution:demonstratingvalidatedlearningrequiresthe

rightkindofmetrics,caledactionablemetrics,whichare

discussedinChapter7.

5.ThiscasewaswritenbyBethanyCoatesunderthedirectionof

ProfessorAndyRachle.Youcangetacopyhere:htp://hbr.

org/product/imvu/an/E254-PDF-ENG

Chapter4.Experiment

1.Someentrepreneurshaveadoptedthissloganastheirstartup

philosophy,usingthe

acronymJFDI.Arecentexamplecanbe

seen

athtp://www.cloudave.com/1171/what-makes-an-

entrepreneur-four-leters-jfdi/

2.htp://techcrunch.com/2009/11/02/amazon-

closes-zappos-deal-

ends-up-paying-1–2-bilion/

ends-up-paying-1–2-bilion/

3.IwanttothankCarolineBarlerinandHPforalowingmeto

includemyexperimentalanalysisofthisnewproject.

4.InformationaboutKodak

Galerycomesfrominterviews

conductedbySaraLeslie.

5.TheVLSstorywasrecountedbyElnorRozenrot,formerlyof

InnosightVentures.AdditionaldetailwasprovidedbyAkshay

Mehra.FormoreontheVLS,

seethearticleinHarvardBusiness

Review:

htp://hbr.org/2011/01/new-business-models-in-

emerging-markets/ar/1orpresscoverageathtp://

economictimes.indiatimes.com/news/news-by-company/

corporate-trends/vilage-laundry-services-takes-on-the-dhobi/

articleshow/5325032.cms

6.FormoreontheearlyeortsoftheCFPB,seetheWalStreet

Journal’sApril13,2011,article“ForComplaints,Don’tCal

ConsumerBureauYet”;htp://online.wsj.com/article/SB100

01424052748703551304576260772357440148.html.

Many

dedicatedpublicservantsarecurrentlyworkinghardto

incorporatethisexperimentalapproachinthepublicsector

undertheleadershipof

PresidentObama.Iwouldliketothank

AneeshChopra,ChrisVein,ToddPark,andDavidForrestfor

introducingmetothesegroundbreakingeforts.

Chapter5.Leap

1.Forexample,CUCommunity,whichbeganat

Columbia

University,hadanearlyheadstart.Seehtp://www.slate.com/

id/2269131/.ThisaccountofFacebook’sfoundingisdrawn

fromDavidKirkpatrick’sTheFacebookEfect(NewYork:Simon

&Schuster,2011).

2.Actualengagementnumbersfrom2004arehardtond,butthis

paternhasbeenconsistentthroughoutFacebook’spublic

statements.Forexample,ChrisHughesreportedin2005that

“60%logindaily.About85%loginatleastonceaweek,and

93%loginatleastonceamonth.”htp://techcrunch.com/

93%loginatleastonceamonth.”htp://techcrunch.com/

2005/09/07/85-of-colege-students-use-facebook/

3.Irstheardthetermleapoffaithappliedtostartupassumptions

byRandyKomisar,aformercoleagueandcurrentpartneratthe

venturermKleinerPerkinsCaueld&Byers.Heexpandson

theconceptinhisbookGetingtoPlanB,coauthored

withJohn

Mulins.

4.

htp://www.forbes.com/2009/09/17/venture-capital-ipod-

inteligent-technology-komisar.html

5.“Acarefulyresearched

tablecompiledforMotormagazineby

CharlesE.Duryea,himselfapioneercarmaker,revealedthat

from1900to1908,501companieswereformedintheUnited

Statesforthepurposeofmanufacturingautomobiles.Sixty

percentofthemfoldedoutrightwithinacoupleofyears;

another6percentmovedintootherareasofproduction.”This

quoteisfromtheFordbiographyThePeople’sTycoon:Henry

FordandtheAmericanCenturybyStevenWats

(NewYork:

Vintage,2006).

6.JefreyK.Liker,TheToyotaWay.NewYork:McGraw-Hil,2003,

p.223.

7.htp://www.autofieldguide.com/articles/030302.html

8.Inthecustomer

developmentmodel,thisiscaledcustomer

discovery.

9.FormoreonthefoundingofIntuit,seeSuzanneTaylorandKathy

Schroeder,InsideIntuit.

10.FormoreontheLeanUXmovement,seehtp://www.cooper.

com/journal/2011/02/lean_ux_product_stewardship_an.htmland

htp://www.slideshare.net/jgothelflean-ux-geting-out-of-the-

deliverables-business

Chapter6.Test

1.htp://www.pluggd.in/groupon-story-297/

2.“Groupon’s$6BilionGambler,”WalStreetJournal;htp://

2.“Groupon’s$6BilionGambler,”WalStreetJournal;htp://

online.wsj.com/article_email/SB100014240527487048281045

76021481410635432-IMyQjAxMTAwMDEwODExNDgyWj.html

3.Thetermminimumviable

producthasbeeninusesinceatleast

2000aspartofvariousapproachestoproductdevelopment.For

anacademicexample,seehtp://www2.cs.uidaho.edu/

~biljunk/Publications/DynamicBalance.pdf

SeealsoFrankRobinsonof

PMDI,whoreferstoaversionof

theproductthatisthesmalestneededtoseltopotential

customers(htp://productdevelopment.com/howitworks/mvp.

html).ThisissimilartoSteveBlank’sconceptofthe“minimum

featureset”incustomer

development(htp://steveblank.com/

2010/03/04/perfection-by-subtraction-the-minimum-feature-

set/).Myuseofthetermherehasbeengeneralizedtoany

versionofaproductthatcanbegintheprocessoflearning,using

theBuild-Measure-Learnfeedbackloop.Formore,seehtp://

www.startuplessonslearned.com/2009/08/minimum-viable-

product-guide.html

4.Manypeoplehavewritenaboutthisphenomenon,usingvarying

terminology.Probablythe

mostwidelyreadisGeoreyMoore’s

CrossingtheChasm.Formore,seeEricVonHippel’sresearch

intowhathetermed“leadusers”;hisbookTheSourcesof

Innovationisagreatplacetostart.SteveBlankusestheterm

earlyvangelisttoemphasizetheevangelicalpowersofthese

earlycustomers.

5.“Tothecasualobserver,theDropboxdemovideolookedlikea

normalproductdemonstration,”Drewsays,“butweputin

aboutadozenEastereggsthatweretailoredfortheDigg

audience.ReferencestoTayZondayand‘ChocolateRain’and

alusionstoOceSpaceandXKCD.Itwasatongue-in-cheek

nodtothatcrowd,anditkickedoachainreaction.

Within24

hours,thevideohadmorethan10,000Diggs.”htp://answers.

oreily.com/topic/1372-marketing-lessons-from-dropbox-a-qa-

with-ceo-drew-houston/.Youcanseetheoriginalvideoaswel

asthereactionfromtheDiggcommunityathtp://digg.com/

software/Google_Drive_kiler_coming_from_MIT_Startup.

For

software/Google_Drive_kiler_coming_from_MIT_Startup.

For

moreonDropbox’ssuccess,see“Dropbox:TheHotestStartup

You’veNeverHeardOf”athtp://tech.fortune.cnn.com/2011/

03/16/cloud-computing-for-the-rest-of-us/

6.ThisdescriptioncourtesyofLifehacker:htp://lifehacker.com/

5586203/food-on-the-table-builds-menus-and-grocery-lists-

based-on-your-familys-preferences

7.Thislistwascompiledbymycoleague,ProfessorTom

EisenmannatHarvardBusinessSchool,LaunchingTechnology

VenturesforacasethatheauthoredonAardvarkforhisnew

class.Formore,seehtp://platformsandnetworks.blogspot.com/

2011/01/launching-tech-ventures-part-i-course.html

8.

htp://www.robgo.org/post/568227990/product-

leadership-

series-user-driven-design-at

9.

htp://venturebeat.com/2010/02/11/confirmed-google-buys-

social-search-engine-aardvark-for-50-milion/

10.Thisistheheartofthe

Innovator’sDilemmabyClayton

Christensen.

11.Formore,seehtp://bit.ly/DontLaunch

Chapter7.Measure

1.Bycontrast,Google’smaincompetitorOverture(eventualy

boughtbyYahoo)hadaminimumaccountsizeof$50,which

deterredusfromsigningup,asitwastooexpensive.

2.FormoredetailsaboutFarb’sentrepreneurialjourney,seethis

Mixergy

interview:ht

p://mixergy.com/farbood-nivi-grockit-

interview/

Chapter8.Pivot(orPersevere)

1.htp://www.slideshare.net/dbineti/lean-startup-at-sxsw-votizen-

pivot-case-study

2.FormoreonPath,seehtp://techcrunch.com/2011/02/02/

2.FormoreonPath,seehtp://techcrunch.com/2011/02/02/

google-tried-to-buy-path-for-100-milion-path-said-no/

and

htp://techcrunch.com/2011/02/01kleiner-perkins-leads-8–5-

milion-round-for-path/

3.Includesapproximately$30milionofassetsundermanagement

andapproximately$150milionofassetsunderadministration,

asofApril1,2011.

4.FormoreonWealthfront,seethecasestudywritenby

Sarah

Milstein

athtp://www.startuplessonslearned.com/2010/07/

case-study-kaching-anatomy-of-pivot.html.Formoreon

Wealthfront’srecentsuccess,seehtp://bits.blogs.nytimes.com/

2010/10/19/wealthfront-loses-the-sound-efects/

5.IMVU’sresultshavebeensharedpubliclyonafewoccasions.For

2008,

seehtp://www.worldsinmotion.biz/2008/06/imvu_

reaches_20_milion_regist.php;for2009see

htp://www.imvu.

com/about/press_releases/press_release_20091005_1.php,and

for2010seehtp://techcrunch.com/2010/04/24/imvu-revenue/

6.BusinessarchitectureisaconceptexploredindetailinMoore’s

DealingwithDarwin.

“Organizationalstructurebasedon

prioritizingoneoftwobusinessmodels(Complexsystems

modelandVolumeoperationsmodel).Innovationtypesare

understoodandexecutedincompletelydierentways

dependingonwhichmodelanenterpriseadopts.”Formore,see

htp://www.dealingwithdarwin.com/theBook/

darwinDictionary.php

Chapter9.Batch

1.

ht

p://lssacademy.com/2008/03/24/a-response-to-the-video-

skeptics/

2.Ifyou’rehavingtroubleacceptingthisfact,itrealyishelpfulto

watchitonvideo.Oneextremelydetail-orientedbloggertook

onevideoandbrokeitdown,

second-by-second,toseewhere

thetimewent:“Youlosebetween2and5secondseverytime

youmovethepilearoundbetweensteps.Also,youhaveto

youmovethepilearoundbetweensteps.Also,youhaveto

managethepileseveraltimesduringatask,somethingyou

don’thavetodonearlyasmuchwith[single-pieceow].This

alsohasafactorycorolary:storing,moving,retrieving,and

lookingforworkinprogressinventory.”Seetherestofthe

commentary

here:htp://lssacademy.com/2008/03/24/a-

response-to-the-video-skeptics/

3.TimothyFitz,anearlyIMVUengineer,deservescreditforhaving

coinedthetermcontinuousdeploymentinablogpost:ht

p://

timothyfitz.wordpress.com/2009/02/10/continuous-

deployment-at-imvu-doing-the-impossible-fifty-times-a-day/.The

actualdevelopmentofthecontinuousdeploymentsystemisthe

workoftoomanydierentengineersatIMVUformeto

give

adequatecredithere.Fordetailsonhowtogetstartedwith

continuousdeployment,seehtp://radar.oreily.com/2009/03/

continuous-deployment-5-eas.html

4.Fortechnicaldetailsof

Wealthfront’scontinuousdeployment

setup,seehtp://eng.wealthfront.com/2010/05/deployment-

infrastructure-for.htmlandhtp://eng.wealthfront.com/2011/

03/lean-startup-stage-at-sxsw.html

5.ThisdescriptionofSchoolofOnewasprovidedby

Jennifer

CarolanofNewSchoolsVentureFund.

6.Formoreonthelarge-batchdeathspiral,seeThePrinciplesof

ProductDevelopmentFlow:SecondGenerationLeanProduct

DevelopmentbyDonaldG.

Reinertsen:htp://bit.ly/pdflow

7.TheseleanhealthcareexamplesarecourtesyofMarkGraban,

authorofLeanHospitals(NewYork:ProductivityPress,2008).

8.ThisilustrativestoryaboutpulisdrawnfromLeanProduction

SimplifiedbyPascalDennis(NewYork:ProductivityPress,

2007).

9.Foranexampleofthismisunderstandingatwork,seehtp://

www.oreilygmt.eu/interview/fatboy-in-a-lean-world/

10.InformationaboutAlphabetEnergycomesfrominterviews

conductedbySaraLeslie.

11.FormoreonToyota’slearningorganization,seeTheToyota

11.FormoreonToyota’slearningorganization,seeTheToyota

WaybyJefreyLiker.

Chapter10.Grow

1.TheHotmailstory,alongwithmanyotherexamples,isrecounted

inAdamL.Penenberg’sViralLoop.FormoreonHotmail,also

seehtp://www.fastcompany.com/magazine/27/netef

ects.html

2.Formoreonthefourcustomercurrenciesoftime,money,skil,

andpassion,seehtp://www.startuplessonslearned.com/2009/

12/business-ecology-and-four-customer.html

3.

htp://pmarca-archive.posterous.com/the-pmarca-guide-to-

startups-part-4-the-only

4.ThisisthelessonofGeoreyMoore’sbestselingbookCrossing

theChasm(NewYork:HarperPaperbacks,2002).

Chapter11.Adapt

1.ToyotaProductionSystem:BeyondLarge-ScaleProductionby

TaichiOhno(NewYork:ProductivityPress,1988).

2.FormoreonNetPromoterScore,seehtp://www.

startuplessonslearned.com/2008/11/net-promoter-score-

operational-tool-to.htmland

TheUltimateQuestionbyFred

Reichheld(Cambridge,Mass.:HarvardBusinessPress,2006).

3.InformationaboutQuickBookscomesfrominterviewsconducted

byMarisaPorzig.

Chapter12.Innovate

1.JereyLiker,JohnE.Etlie,andJohnCreightonCampbel,

EngineeredinJapan:JapaneseTechnology-Management

Practices(NewYork:OxfordUniversityPress,1995),p.196.

2.Foroneaccount,seePCMagazine’s“LookingBack:

15Yearsof

PCMagazine”byMichaelMiler,htp://www.pcmag.com/

PCMagazine”byMichaelMiler,htp://www.pcmag.com/

article2/0,2817,35549,00.asp

3.ThefolowingdiscussionowesagreatdealtoGeorey

Moore’s

DealingwithDarwin(NewYork:PortfolioTrade,2008).Ihave

hadsuccessimplementingthisframeworkincompaniesofmany

diferentsizes.

Chapter13.Epilogue:WasteNot

1.htp://www.ibiblio.org/eldritch/fwt/ti.html

2.htp://www.goodreads.com/author/quotes/66490.Peter_Drucker

3.htp://www.ibiblio.org/eldritch/fwt/ti.html

4.Infact,somesuchresearchhasalreadybegun.FormoreonLean

Startupresearchprograms,

seeNathanFurr’sLeanStartup

ResearchProjectatBYU,htp://nathanfurr.com/2010/09/15/

the-lean-startup-research-project/,andTomEisenmannof

HarvardBusinessSchool’sLaunchingTechnologyVentures

project,htp://platformsandnetworks.blogspot.com/2011/01/

launching-tech-ventures-part-iv.html

Disclosures

Ihaveworkedwiththefolowingcompaniesnamedinthisbook

eitherasaconsultant,adviser,orinvestor.Ihavea

relationshipor

equityinterestineachofthem.

Aardvark

IMVU

Dropbox

Intuit

FoodontheTable

Votizen

Grockit

Wealthfront

Ihaveadditionalinterestsincompaniesthroughmyaliations

withventurecapitalrms.Ihaveinvestedinorworkedwiththe

folowingrmsaseitheraconsultantorasalimitedpartner.

Throughtheserms,Ihaveequityandrelationshipinterestsin

manymorecompaniesbeyondthoselistedabove.

500Startups

KleinerPerkinsCaufield&

Byers

Floodgate

GreylockPartners

SeraphGroup

Acknowledgments

Ioweatremendousdebtofgratitudetothemanypeoplewhohave

helpedmakeTheLeanStartupareality.Firstandforemostarethe

thousandsofentrepreneursaroundtheworldwhohavetestedthese

ideas,chalengedthem,renedthem,andimprovedthem.Without

theirrelentless—andmostlyunheralded—workeveryday,

noneof

thiswouldbepossible.Thankyou.

Realstartupsinvolvefailure,embarrassingmistakes,andconstant

chaos.Inmyresearchforthisbook,Idiscoveredthatmost

entrepreneursandmanagerswouldprefernottohavethe

realstory

oftheirdailyworktoldinpublic.Therefore,Iamindebtedtothe

courageousentrepreneurswhoconsentedtohavetheirstoriestold,

manyofwhomspenthoursintediousinterviewsandfact-checking

conversations.Thankyou.

Ihavebeengratefulthroughoutmycareertohavementorsand

colaboratorswhohavepushedmetoaccomplishmorethanIcould

haveonmyown.WilHarveyisresponsibleforbothrecruitingme

toSiliconValeyintherstplaceandfortrustingmewiththe

opportunitytotryoutmanyoftheseideasforthersttimeat

IMVU.IamgratefultomyotherIMVUcofoundersMarcusGosling,

MatDanzig,andMelGuymonaswelasthemany

IMVU

employeeswhodidsomuchoftheworkIdiscussed.Ofcourse,

noneofthatwouldhavebeenpossiblewithoutthesupportof

milionsofIMVUcustomersovertheyears.I’dalsoliketothank

DavidMilstone,KenDuda,FernandoPaiz,SteveWeinstein,Owen

Mahoney,RayOcampo,andJasonAltierifortheirhelpalongthe

way.

WealoweSteveBlankadebtfortheworkhediddeveloping

WealoweSteveBlankadebtfortheworkhediddeveloping

thetheoryofcustomerdevelopmentatatimewhenitwas

consideredhereticalinstartupandVCcircles.AsImentionedinthe

Introduction,Stevewasanearlyinvestorinandadviser

toIMVU.

Forthepastsevenyears,hehasbeenanadviser,mentor,and

colaboratortomepersonaly.Iwanttothankhimforhis

encouragement,support,andfriendship.

TheLeanStartupmovementismadeupofmanymore

thinkers,

practitioners,andwritersthanjustme.IwanttothankDave

McClure,AshMaurya,BrantCooper,PatrickVlaskovits,SeanElis,

AndrewChen,SeanMurphy,TrevorOwens,HitenShah,andKent

Beckfortheirideas,support,andevangelism.Severalinvestorsand

venturecapitalistswereearlysupportersandadopters.Iwouldlike

tothankMikeMaplesandAnnMiura-Ko(Floodgate),Steve

Anderson(Baseline),JoshKopelman(FirstRound

Capital),Ron

Conway(SVAngel),andJefClavier(SoftTechVC).

Asyoucanimagine,thisbookinvolvedatremendousamountof

feedback,iteration,andtesting.Ireceivedinvaluable,in-depthearly

feedbackfromLaura

Crescimano,LeeHoman,ProfessorTom

Eisenmann,andSachaJudd.ThanksalsotoMitchKapor,Scot

Cook,ShawnFanning,MarkGraban,JenniferCarolan,Manuel

Rosso,TimO’Reily,andReidHomanfortheirsuggestions,

feedback,andsupport.IoweaspecialnoteofthankstoRuth

KaplanandIraFayfortheirwisdomandfriendship.

Throughouttheprocessofwritingthebook,Ihadthebenetofa

custom-builttestingplatformtorunsplit-testexperimentson

everythingfromcoverdesigntosubtitlestoactualbitsofthebook

(youcanseetheresultsoftheseexperimentsathtp://lean.st).

PivotalLabsbuiltthissoftwareforme;theyarethepremier

practitionersofagiledevelopment.Specialthanks

toRobMee,Ian

McFarland,and—mostimportant—ParkerThompson,whoworked

tirelesslytobuild,experiment,andlearnwithme.

ThanksalsotoIMVUcofounderMarcusGosling,oneofthemost

talenteddesignersIknow,whodesignedthisbook’scover,after

countlessiterations.

Oneofthepremierwebanduserexperiencedesignrms,Digital

Telepathy,

designed

and

built

the

website

for

Telepathy,

designed

and

built

the

website

for

htp://theleanstartup.com,usingtheiruniqueIterativePerformance

Design

process.

It’s

awesome.

Learn

more

at

htp://www.dtelepathy.com/

Iwasextremelyfortunateto

havethesupportofthreelegendary

institutionsatvariouspointsinmyjourney.Muchoftheresearch

thatwentintothisbookwasgenerouslyunderwritenbythe

KaumanFoundation.AtKauman,IwanttoespecialythankBo

FishbackandNickSeguinfortheirsupport.Ispentthepastyearas

anentrepreneur-in-residenceatHarvardBusinessSchool,whereI

enjoyedtheopportunitytotestmyideasagainstsomeofthe

brightestmindsinbusiness.Iamespecialygratefulto

Professors

TomEisenmannandMikeRobertsfortheirsponsorshipand

support,aswelastothestudentsoftheHBSStartupTribe.Ialso

hadtheopportunitytospendabrieftimewithanoceatthe

premierventurecapitalrminSiliconValey,KleinerPerkins

Caueld&Byers,whereIreceivedanin-deptheducationintohow

entrepreneurshipisnurturedatthehighestlevels.ThankstoChi-

HuaChien,RandyKomisar,MatMurphy,BingGordon,

AileenLee,

andElenPao,andtomyoficemateandEIR,CyriacRoeding.

Myresearchteamhelpedmedocumentcasestudies,interview

hundredsofstartups,andlterthousandsofstories.Iwanttothank

MarisaPorzig,whologgedcountlesshoursdocumenting,cross-

referencing,andinvestigating.Additionalcasestudieswere

developedbySaraGaviserLeslieandSarahMilstein.

Traditionalpublishingisacomplicatedandinsularbusiness.I

benetedfromadviceandconnectionsfrommanypeople.Tim

FerrissandRamitSethisetmestraightearlyon.Iamalsograteful

toPeterSims,PaulMichelman,MaryTreseler,Joshua-MichéleRoss,

ClaraShih,SarahMilstein,AdamPenenberg,Gretchen

Rubin,Kate

Lee,HolisHeimbouch,BobSuton,FrankieJones,RandyKomisar,

andJefRosenthal.

AtCrown,theherculeantaskofturningthisideaintothebook

youarereadingfeltoahugeteamofpeople.Myeditor,

Roger

Schol,sawthevisionofthisbookfromtheverybeginningand

shepherdeditthroughtheentireprocess.IwanttoalsothankTina

Constable,TaraGilbride,andMeredithMcGinnisandeveryoneelse

Constable,TaraGilbride,andMeredithMcGinnisandeveryoneelse

whoworkedonmakingthisbookareality.

Thosewhohadthemisfortuneofreadinganearlydraftknowjust

howmuchgratitudeIowetoLaureenRowland,whoprovided

essentialeditorialhelponanunbelievablytightschedule.Ifyou

enjoyedanypartofthisbook,shedeservesyourthanks.

Myadviser,partner,andconsiglierethroughoutthepublishing

processhasbeenmyphenomenalagent,ChristyFletcher.Shehas

theuncannyabilitytopredictthefuture,makethingshappen,and

keepeverystakeholderhappy—alatthesametime.Shetruly

understandsthemodernmedialandscapeandhashelpedme

navigateitscrazywatersateveryturn.AtFletcherand

Company,I

alsowanttothankAlyssaWol,whohasbeenatirelessadvocate

andgatekeeper,andMelissaChinchilo,whoisworkingtobring

thisbooktonewregionsandlanguages.

Iknowitisaclichétosay,

“Noneofthiswouldhavebeen

possiblewithouttheconstantsupportofmylovingfamily.”Butin

thiscase,itissimplythetruth.Myparents,VivianReznikand

AndrewRies,havealwayssupportedmyloveoftechnologywhile

stilinsistingontheimportanceofaliberalartseducation.Without

theirconstantloveandsupport,Iwouldneverhavehadthe

couragetostepintothevoidofentrepreneurshiporhavefoundmy

ownvoiceasawriter.Iknowmygrandparentshavebeen

withme

everystepofthisjourney—theybelieveddeeplyinthepowerof

writingandtooksupremejoyinmysisters’andmyevery

accomplishment.TomysistersNicoleandAmandaandmybrother-

in-lawDov,Icanonlysay:

thankyouforsupportingmealthese

years.

Mywife,TaraSophiaMohr,hasbeenaconstantsourceofjoy

andcomforteverystepoftheway.Shehasexperiencedeverystress,

everyhigh,andeverylow

throughthisverylengthyprocess.Tara,

youareanincrediblybriliant,strong,andcompassionatewoman.

WordscannotexpresshowmuchIappreciateyoursteadfast

support,youroverwhelminglove,andthedailyadventurethatis

ourlifetogether.Thankyou.

AbouttheAuthor

ERICRIESisanentrepreneurandauthorofthepopularblog

StartupLessonsLearned.HecofoundedandservedasCTOof

IMVU,histhirdstartup.Heisafrequentspeakerat

businessevents,

hasadvisedanumberofstartups,largecompanies,andventure

capitalrmsonbusinessandproductstrategy,andisan

entrepreneur-in-residenceatHarvardBusinessSchool.HisLean

Startupmethodologyhas

beenwritenaboutintheNewYork

Times,theWalStreetJournal,theHarvardBusinessReview,the

HufingtonPost,andmanyblogs.HelivesinSanFrancisco.