Eirc Ries – The Lean Startup

The Lean Startup: How Constant Innovation Creates Radically Successful BusinessesI started reading Eric Ries‘s new book The Lean Startup last night and so far it is very, very good. Almost ‘can’t put it down’ good, or at least as close to that as you could expect from a business book.

Most of you will be familiar with the lean startup methodology by now. Testing your assumptions in the market and pivoting if they are wrong and keeping costs low until you have found product-market fit. Some of you will be tempted to think that because you understand the basics you don’t need to read this book.

That would be a mistake.

There is a lot of important detail which sits underneath the main ideas that Eric proposes, and probably more importantly Eric’s main point is subtly different from the lean startup summary I gave above. The real essence of the lean startup methodology is to make learning how to build a sustainable business the central objective of management. The learning should derive from a continuous process of hypothesis generation, hypothesis testing and iteration. This goes much further than iterating the product to achieve market fit (important though that is). It also requires much more discipline to execute and I would say is more difficult for most teams to adopt. Those that do, however, will have a better chance of success.

I’m going to finish with a passage from the book which shows one of the management challenges that arises if you follow the disciplines of the lean startup methodology.

The context for this passage is that rapid experimentation requires small targets so success or failure can be assessed quickly.

Despite IMVU’s [Eric’s second startup] early success our gross numbers were still pretty small. Unfortunately, because of the traditional way businesses are evaluated, this is a dangerous situation … Zero invites imagination, but small numbers invite questions about whether large numbers will ever materialise. Everyonr knows (or thinks he or she knows) stories of products that achieved breakthrough sucess overnight. As long as nothing has been released and no data collected, it is still possible to imagine overnight success in the future. Small number pour cold water on that hope.

This phenomenon creates a brutal incentive: postpone getting any data until you are certain of success.

The emphasis is mine.

Having the strength to set small targets and be prepared to reject hypotheses if they are not met is an example of a discipline that many managers find tough to stick with. Remember that our natural tendency is to do the opposite, and seek out only the data that confirms our beliefs.

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  • I agree with the need to collect data Nick.  As an investor, the question that lies unanswered for me is what type of companies can be built using this methodology?  Is it possible to get ballsy binary bets out of this method? Or only more incrementally built business that generate meaningful numbers early?

  • If you look at the big venture wins in recent years I’m not sure how binary they were. At Google, Facebook and Skype you could see value building in the usage metrics from an early stage. Translating that into a valuation is always going to involve a lot of guesswork about future growth, but from an operational perspective it was all about experiments and incremental improvement.
    Facebook and Google both stand out as having tried tons of initiatives and canned most of them to be left with a small number of big successes – e.g. Android and the Facebook app platform.

  • Andrew Hall

    My understanding is that many investors in startups use fixed milestones to track progress. Sometimes these milestones are written into agreements. However, having fixed objectives is at odds with the lean methodology. So, how should the investor-company relationship change in the future to facilitate the lean startup methodology? 

  • 🙂 good point. Being serious, I think milestones are often used to bridge a difference in valuation between entrepreneur and investor. I.e. Only agreeing to the price if performance continues to be good during the milestone period. That practice could continue, although in lean startup parlance the it would change to ‘only agreeing to the valuation if the current hypotheses turn out to be correct’.
    More generally though, I think that milestones are becoming less common and I’m sure that part of the reason is that as business becomes less predictable (and hence more in need of lean startup thinking) they are less appropriate.

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