Daily Reading Notes

March 20, 2019

The Lean Startup

Eric Rise explains the methodology behind successful innovation and dispels the myth that you need to be lucky to succeed.

In order to succeed in today's markets, we need innovation more than ever. Tradition business practices can't be applied to innovation because it's hard to have a long term plan for innovations. However, it still requires management and business leadership, just a different kind.

Not being able to plan for the long term doesn't mean that creativity requires a muse, a chaotic environment, or a the perfect mix of luck and timing. All this line of reasoning gives you is a convenient excuse for when you fail. If you didn't release with the correct timing, it wasn't your fault, it was just bad timing. In reality, it was due to a lack of managing your endeavor and respond to feedback quickly.

There are key traits that make entrepreneurs successful. They aren't a magic bullet that guarantees you will become a billionaire, but they can guide you on the journey to create a successful new product.

To make a new product successful you can't blindly stick to a plan and guess which features to deliver. This only leads you chaos.

To prevent the chaos, your product has to be flexible. You should be willing to pivot on you strategy. You may even need to modify the vision. This flexibility doesn't mean being indecisive or eccentric.

Backup your decisions with data. Listen to your customers. Get input as early as possible. You can spend all day arguing internally about what the customer needs, but nothing beats getting direct input.

In order to get this data, launch an unfinished product. Get the customer input as early as possible. Having data, even on an unfinished product, produces huge amount of learning. It focuses your limited time on the features that the customer wants.

At the heart of every successful startup is a simple iterative three step process: build, measure, learn. You must apply this process until you meet the criteria of value and growth. The value criteria tests if your product solves a real problem for the users. Before putting in significant work, you want to make sure that you will build something people want. This requires getting the product into the hands of at least a small group of customers.

The growth criteria validates that the product can catch on. It's what you need for the product to gain customer and achieve the often dreamed of hockey stick growth. You don't need to launch your product publicly to gauge this, but you must be willing to expose your product to an ever growing audience.

Without meeting these, all the marketing and planning in the world will only get you a false sense of security. Once they are met, you are ready to launch, start spreading the reach of your product, and iterating on features. But continue to use the same process for every change you make.

Although the MVP will be far from perfect, it should not compromise on the core of the product. It can have bugs or missing features, but the most important aspect should still be high quality.

For example, if your goal is great customer service, you can handle many parts of the MVP manually. This ensures great service while giving you time to learn exactly what customers want before investing time into building features. You will also learn the biggest pain points of your business model, letting you automate these first.

Your MVP can take many shapes. But it is always measured against the growth criteria most important to your business model.

If your business is to grow through the viral effect, every features you deliver should make it spread faster. Any feature that doesn't achieve this goal is a failure. With every failure you learn which paths not to travel.

Many metrics companies gather are meaningless. They are too broad to produce insights that guide the direction of the product. These vanity metrics only produce a cloudy picture of the effects caused by any number of efforts.

Good metrics aren't produced from looking at the general data set with ill defined criteria. They are produced by clearly splitting up the users into cohorts and applying precise criteria of measurement.

The users can be split up in many ways: by registration status, the number of visits, or specific type of interaction. The split allows you to measure exactly which segment of users is impacted by the new feature or marketing campaign.

The metrics themselves need to be easy to understand. Click through rate can be interpreted in to many ways to be meaningful. The number of new users, on the other hand, is a clear metric that everyone can understand. Using precise measurements allows you to only keep the features that have the desired effect.

In order to make these metrics useful, you can't release multiple features at once and expect to know which one caused the effect. People are notoriously bad and gauging effect accurately. You will need to work in smaller batches taking the features all the way through an analysis phase before calling them complete. Only then will you be able to understand the full effect of your efforts.

A startup may need to pivot in any stage of its life cycle. Even a successful company reaches the limit of where it could go with the current strategy. A time like that requires them to decide between pivoting of persevering. Either option poses danger in its own right.

If you decide to pivot, you run the risk of making the wrong turn, throwing away valuable work, or even losing the ground you worked hard to gain. It's a scary thing for anyone to take on. However, it can be the only way to test a new hypothesis for the company and open up hidden opportunities.

With all these dangers facing a pivot, perseverance may seem like the safer option. It let's you keep the current momentum, keep the team's morel high, and saves you the embarrassment of admitting you were wrong. However, it can be a more dangerous path than a pivot. By the time you start loosing customers because of stagnation, you may have lost too much reputation to win new ones. You might have invested so much into a dead end road that there is no way to recover. Persevering despite the data is a sure fire way to fail.

This is why it's important to have a regular meeting where you determine if you should pivot or persevere. Bring this question into light regularly so it's not a taboo topic. Consider the real metrics of your business, and come up with a new hypothesis. Then stress test this hypothesis using the testing methodologies you previously develop. You could end up with magnificent results.

Small batch sizes seem counter intuitive. Why would you want to incur the cost of constant context switching? It seems more efficient to repeat the same step multiple times until a large batch is ready to move on.

Small batches allow you to catch defects and learn lessons early in the process. The large batch approach would require you to put out hundreds or even thousands of defected or unwanted features. With a small batch, you get feedback from the first product completed. This feed back can be used to change your product or to optimize the overall production process. Focusing on the whole process produces more efficiency gains than focusing on optimizing only a single step.

Working in small batches also focuses your efforts. Instead of having large Work in Progress (WIP) ques of generic feature, you have small WIPs of exactly what you need. This means every feature you put out will be meaningful. Let your hypothesis and your clients pull the features that you deliver. Take every release as an opportunity to learn the impacts of what you create.

Don't push endless feature lists onto your teams and customers. The only thing you will accomplish with a push mentality is landing all your eggs in one basket. One release that could ruin you if it goes wrong, and chances are that at least part of it will. Failure should not spell disaster, it should be just a bump on the road to success.

A startup has three engines of growth to choose from. It's important to focus on one engine of growth at a time because it let's you accurately measure and plan out your efforts. Sometimes the type of business dictates which model to follow. Other times you may need to validate and pivot before landing at the correct model. The three methods of growth are:

Sticky growth. This type of growth relies on clients continuing to use the product once they started. Because a big component is customer retention, you don't have a single metric to measure. Instead, you have to balance between the rate of acquisition and the rate of churn. If they even out and you start loosing customers at the same rate that you gain them, your business will stagnate.

Viral growth. This type of growth became popularized by the rise of social networks. It's trademark is that customers spread it to other customers. The key to this type of growth is making sure that every customer refers more than one person. Even if they only refer 1.1 customers on average, it will still cause exponential growth.

Paid growth. This is the traditional way to grow your clientele. It requires a sales staff, marketing budget, and support personal. Sustaining this model requires balancing a simple equation of the money spent on customer and the money the customers earn the company through their use of the product. As long as the customers produce more revenue than it costs to acquire them, the company will grow.

The 5 whys is a powerful technique to get deeper than root cause analysis. If done correctly, it uncovers the underlying process problem and allows you to solve a whole category of problems instead of only the surface level symptom.

To implement the 5 whys correctly, you must pick a small subset of issues that you tackle as they come up. This ensure that they are fresh, still relevant, and can be analyzed in real time. Then you proceed with asking the why five times to determine the cause.

This process will provide you with causes at multiple levels. The problem uncovered by each why requires more effort to solve. So if you come across a minor or first time issue, you may only need to act on the first or second why. However, as the severity increases, the amount of prevention offered by the latter whys become worth the time investment.

One thing to look out for during the analysis is the tendency of shifting to blaming instead of analyzing. This happens with teams new to the process or during high pressure situations. The only solution to this problem is build experience and trust. Once everyone knows that they are in this as a team to solve a problem and no one is on the chopping block, the team can come together to form a great solution.

Entrepreneurial spirit isn't reserved for start ups. Large established companies will get to a point where their current line of business hits a ceiling and they need to expand their portfolio. This is a time when they need to invest in internal innovation. This effort comes with a completely different set of challenges than running an established business or starting a new company.

The biggest challenge comes from the customers and reputation the company already has. A failed product or even a failed experiment can ruin the companies entire reputation. Loosing the primary market share is not an acceptable price to pay for innovation.

To protect the parent company, the innovative sector must be sand boxed. This sectioning off allows the experimentation to focus on a narrow customer segment, or release the product under a completely separate brand. Once the learning cycles have been complete and the value of the new offering is proven out, the sandbox can be disbanded and integrated back into the parent.

Putting the innovation team into a sandbox also has benefits for the team. It gives them a secure budget by removing the political pressures of the internal departments. It allows the team to have full control over their experimentation without being slowed down by requests for approval. It gives the team a personal stake in the success of the new venture. These contribute to creating a highly motivated and inspired team that can open new avenues of business for an established company.

Copyright © Artem Chernyak 2020