5 Principles: How To Use Lean Startup Towards A Successful Project

Article by Kasunka Kumarage    No Comments

Lean startup is a loosely formed work-in-progress methodology that covers many aspects of startups such as customer development, business model design, measurement and agile engineering.

“Storyboard of the lean startup introduction” youtube video by StoryboardItsBetter

Today, ‘entrepreneurship’ and ‘startups’ are two words that are commonly heard. Stories about entrepreneurs who excel in businesses drive today’s youth, inspiring them to dream big and step in to the business world with new ideas and solutions. However, statistics show that over 90% of the tech startups fail over time. Research conducted by industry experts has revealed that the most common reason contributing to failure is not inefficiency, but the unwillingness of consumers to use the products/services provided by the startups. In other words, these startups efficiently build “something nobody wants”. This is where the lean startup methodology comes to light in identifying this issue and helps in preventing the entrepreneurs from building something nobody wants.

Lean startup is a loosely formed work-in-progress methodology that covers many aspects of startups such as customer development, business model design, measurement and agile engineering. A definition for lean methodology provided by the author of the book ‘The Lean Startup’ – Eric Reis is “Lean Methodology was pioneered as a just-in-time production solution by Toyota and popularized as a minimize-waste-maximize-value software development strategy.”

It aims to increase the entrepreneur’s odds of building a successful startup by establishing a strategy that helps to figure out the right thing to build, things customers want and will pay for at earliest possible.

Lean methodology introduces a broader vision rather than to follow a set of rigid rules. Instead of rules, it is built upon 5 principles that are to be adopted as a guideline for startups. These principles set the boundaries while setting the framework on which the lean methodology followers will build their strategies and targets.

Principle 1: Entrepreneurs are everywhere

Lean methodology defines startups as “human institutions designed to create new products and services under conditions of extreme uncertainty”. This redefines the points of application of the methodology itself and outlines where and when the methodology is to be used. In other words, the environment that is considered where the lean startup methodology will be effective is the “disruptive innovations” where the product/service and the market are both new. To be more precise, one should only use lean where the problem is not shared by many, innovation is dramatic and game changing, the market is new and consumers are unpredictable.

Principle 2: Entrepreneurship is Management

A common attitude towards startups is that it should concentrate solely on innovation and development of products or services, whereas lean methodology insists on viewing it as a form of management where all parties drive for a collective final outcome of a product and an institute where both hold equal importance. The target of an entrepreneur is to build solution that sustains. However, since startups inherently bear uncertainty, conventional methods of management will fail when applied to a startup. Thus, this requires a customized form of management style depending on the nature of the startup rather than what is done conventionally.

The management needs to start with a vision, which is the startup’s envisioned destination. A business model, product road map, the stakeholder expectations and potential customer segments should be planned out as the strategy for achieving the vision. The execution of the strategy will result in a product that will look far away from the vision in the start and will grow to reach the vision in many stages.

Principle 3: Validated Learning

The core process in achieving the vision of a startup is through ‘Validated Learning’. Validated learning is the process of demonstrating empirically, that a team has discovered valuable truths about a startup’s present and future business prospects. Rather than holding ‘learning’ as an excuse for a failed project, lean methodology sees startups as experiments designed to achieve validated learning. To properly place the importance of validated learning in lean, the effort that is not absolutely necessary for learning is considered as waste and is advised to be eliminated.

To gain validated learning, one should initially set a clear hypothesis and then should drive towards proving the hypothesis correct or wrong. The hypothesis can be an assumption of any kind. For an instance, it could be a value hypothesis where the results of the tests will be used to find whether a product or service really delivers to customer expectations once they have used it or it could be a growth hypothesis where results of the tests will be used to find out how new customers will discover the product or service. When defining a hypothesis, it is advisable to define the hypothesis pass criteria to clearly identify whether it fails or passes after a round of testing.

As a real world example of validated learning and hypothesis, let’s take Apple’s iPod. It was built on the hypothesis “people will pay [assumption A] to download music [assumption B] to listen to in public [assumption C]”. In this hypothesis, assumption B has been validated by services like Napster, assumption C has been validated by people using Sony Walkmans, however assumption A is considered as the risky one since it has not been tested out along with the other assumptions altogether. Hence, only upon validating assumption A, would Apple’s iPod be identified as a profitable product.

Principle 4: Build – Measure – Learn

“Quick Left – Lean MVP Deck” slide set in slide share by James Kenly

The experimenting required for validated learning is done by following the build – measure – learn cycle. The key focus of this is to minimize the total time to get to the solution using a product with minimal functionality for validation, learning and then acting upon the validated learning.

Build: In order to get through the build – measure – learn cycle with the minimum amount of effort and absolutely necessary functionality, a Minimum Viable Product (MVP) needs to be designed.

Minimum Viable Product (MVP)
MVP is the version of a product that will consume the minimum amount of time and enable collecting the maximum amount of validated learning about the startup. It should be a careful pick of features that balances both minimum and viable aspects of the product.

“The problem with a Lean Startup: the Minimum Viable Product” by Paul kortman

The minimum viable product should:

• Target early adopters (a person who embraces new technology before most others do) and provide them enough value while being able to grasp enough learning to move forward to the next cycle.
• Facilitate testing the toughest assumptions in concept (hypothesis).
• Be designed for the high level scope of the MVP that is derived by the ‘Core Loop’.

“Quick Left – Lean MVP Deck” slide set in slide share by James Kenly

Considering the perceived value addition to the customers against the development time for a product,

• The delta from the start to the MVP is large in terms of perceived velocity as it represents a huge amount of work.
• Generally, the call off as to when to launch of the MVP would be given by the customers when they hint that once a particular feature or a set of features has been added, they would be willing to pay for the product.
• There is enough learning to grasp features that will deliver just enough value to ‘Early Adopters’.

“Quick Left – Lean MVP Deck” slide set in slide share by James Kenly

Measure: During this phase, the entrepreneurs must,

• Measure the findings relating to different hypothesis by asking questions from the users.
• Incorporate new changes from feedback to iterative releases more frequently.
• Document these findings thoroughly.

Learn: The main focus of this phase is to learn if the hypothesis is correct or wrong and adapt the learning to the cycle. Most of the time, defined success criteria for the hypothesis will not be met in the first cycle; in that case, fast iterations can be done with minor optimizations.
Depending on the level of improvement, the optimization can go up to several cycles and the team could take a decision on whether to,

1. Preserve – Continue to iterate and test the product
2. Pivot – Change direction on invalid assumptions as required while standing ground on the validated learning for the product

Principle 5: Innovation Accounting

Established companies use revenue for accounting purposes. However, as a startup burns money in the beginning more than it earns, this type of accounting will not provide correct information on the timely investments done in the startup in terms of innovation. Thus, lean methodology holds innovation accountable and sets milestones from an innovation perspective.

Milestones for Accounting:

• Define Matrix – Establish a standard measure of progress that can stand as a measurement or a guideline for accounting innovation. For example, the pirate metrics has the below measurements:
  • Acquisition – A user is acquired.
  • Activation – User uses the product.
  • Retention – User continues to use the product.
  • Referrals – User refers other new users to the system.
  • Revenue – User pays for the system.
• Tune the Engine – Focus on single metric at a time and put them to test using the MVP. Collect statistics of the user activity and most importantly, the comments of the users. Experiment to see if the initial turnout can be improved towards the ideal. Carefully refer both numbers and comments to identify the exact reason for the number gap.
• Decide – Choose to preserve (continue to iterate & test) or pivot (change assumptions as required). When experiments reach diminishing returns, it’s time to pivot.

References

• Ries E., 2011. The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. 1st ed. USA: Crown Publishing.

Authors: Kasunka Kumarage & Shiran De Silva