The Lean Startup: How Today's Entrepreneurs use Continuous Innovation to Create Radically Successful Businesses

If you want a successful startup, you have to follow the right process. This is a process that eliminates waste, relies on constant innovation and experimentation, and shortens product development cycles. The right process helps you answer the question, "What works and what doesn't?" so you can quickly get rid of the bad and focus on the good.

As you might imagine, "The Lean Startup" explains this process. The book dissects what it takes to start and manage growth successfully, and turns it into a science. The author has taken the principles behind lean manufacturing and created a framework you can use to bring your ideas to market efficiently.

"The Lean Startup" was published in 2011, and it's already considered a classic by many people. Although the book is written for entrepreneurs, or people who are dreaming about starting their own business, it's also valuable for anyone who works in product development, or manages teams responsible for bringing a new product or idea to market.

The author, Eric Ries, knows firsthand what it's like to start a promising company and fall flat on your face. He developed the lean startup methodology while building his second company, a successful social and entertainment website. He's consulted with Fortune 500 companies, government organizations, and nonprofits all over the world.

So, keep listening to hear what two assumptions you need to make early on in your venture, why you should hit the streets to understand your customer, and why it's so important to build an early prototype of your product or service.

The author's lean startup framework relies on five key principles, which come up again and again throughout the book.

The first of these is that entrepreneurs are everywhere. It doesn't matter if you have a good idea you want to work on in your garage, or you're part of a talented team in a huge organization. If you have an idea that you want to try in an environment of extreme uncertainty, you're an entrepreneur.

The second principle is that entrepreneurship is management. But the management approach has to be unique so that it thrives in an environment of extreme uncertainty.

The third principle focuses on "validated learning." Entrepreneurs need to run frequent experiments that test their ideas. This constant learning and change keeps the company in tune with what's working and what isn't, so it can adapt at a moment's notice.

The fourth principle is build-measure-learn. The basic process for a startup is to turn an idea into a product, measure how customers respond, and then decide whether to keep going or change direction. All the processes in the company should be geared to speed up this fundamental activity.

The last principle is innovation accounting. Startups have to know how to measure progress, set up milestones, and prioritize work. The accounting process that oversees all this needs to take into consideration the unique needs of the startup itself.

"The Lean Startup" is divided into three parts, with 14 chapters. Part one, "Vision," is where the author makes his case for the lean startup methodology. He also goes over the importance of validated learning in a startup environment.

In part two, "Steer," he discusses the specifics of his lean startup approach. These chapters are full of case studies and detailed instructions on applying these processes to your startup or organization. Here, you learn how to implement the build-measure-learn feedback loop, which is at the core of the lean startup model.

Part three, "Accelerate," shows you how to speed up the build-measure-learn feedback loop. The author also shows you how to apply this and the other principles to a large organization.

Let's take a closer look at the author's lean startup approach.

As you just heard, at the core of the lean startup methodology is the build-measure-learn feedback loop. But before you can jump into the build phase, you first have to look closely at the two most important assumptions that you'll make as an entrepreneur. These are the value hypothesis and the growth hypothesis.

The value hypothesis tests whether your product or service will really deliver value to customers once they start using it. What's the best indicator that your product will deliver this value?

The growth hypothesis tests how new customers will discover your product or service. Your goal isn't to find your average customer, but to find your early adopters. These customers are more forgiving of mistakes, and can give you valuable input on how to evolve.

Here's a good example of why these two assumptions are important.

When Facebook launched in 2004, it had only 150,000 users. Yet within its first year, it managed to raise more than £12 million dollars in venture capital, and it did this by validating its value and growth hypotheses.

It proved its value because even though it only had 150,000 users, half of those users visited the site every single day. This suggested that people found the site incredibly valuable.

Facebook validated its growth hypothesis because within its first month, three-quarters of Harvard's undergraduates were using the site. And this was without any advertising or marketing. Investors knew that this high level of engagement would be incredibly valuable to advertisers.

The goal with your own startup is to first come up with realistic hypotheses, and then start testing these assumptions as quickly as possible.

Once you know that your product or service can provide value and growth, you need to see if it's going to work in the market. And, you need to see this for yourself. The best way to find out what your customers want is to go out and talk to them.

In lean manufacturing, this concept is called "genchi gembutsu," which is loosely translated as "go and see for yourself." Here's an example of what this concept looks like.

In 2004, Toyota decided to redesign its Sienna minivan, a task assigned to Yuju Yokoya. Yokoya had almost no experience in North America, which was the Sienna's primary market.

To figure out how to redesign this vehicle he could have depended on reports from his North American colleagues, or used focus groups. Instead, he followed the principle of genchi gembutsu, and took a cross-country road trip in a Toyota Sienna. The trip spanned all 50 states, and all of Canada and Mexico.

While he drove, Yokoya talked to current Sienna customers, and made his own observations about the van. On his trip, he discovered an important point – the parents or grandparents may own the minivan, but it's the kids who rule it. He realized that the new Sienna needed to appeal to the kids sitting in the back seats.

The redesign focused on making the van more comfortable and fun for kids, and as a result, that first year sales of the new model were 60 percent higher than sales of the previous one.

One of your first steps as an entrepreneur is to understand, on a basic level, what type of problems your customer is facing, and how your product or service can help solve it. The principle behind genchi gembutsu forces you to get out and learn this for yourself.

It's easy for an entrepreneur to fall into the trap of over-analyzing. How do you know when to stop asking questions and start building? This important question is addressed in chapter six. Here, you learn how to build what the author calls a minimum viable product, or MVP – a type of prototype.

An MVP helps you start the process of learning as quickly as possible. The author says this prototype isn't necessarily the smallest or simplest product imaginable; its goal is to test your assumptions, and learn from what you're doing wrong. It's certainly not meant to be perfect.

An MVP is one of the best ways to test the two hypotheses just discussed: the value hypothesis and the growth hypothesis.

It can be as simple or as complex as you want – it's your judgment call. But it's important to get it out in front of your customers quickly. The author says that most entrepreneurs drastically overestimate how complex their initial offering needs to be. When you're in doubt, he suggests, simplify.

We really like the concept of the MVP, even though it sounds a bit risky. After all, you're putting out a product that hasn't been tested, and might have missing features or be full of bugs. That might be hard for a lot of people to bear, especially if you're a perfectionist.

But the MVP gives you an incredible opportunity to learn. The lesson of the MVP is to focus on building a product that will help you start learning, even if it's really simple. Making your initial offering perfect or overly complex will, in the end, waste time and resources, especially if customers aren't really interested in the extra features you put in.

To underscore how important the MVP is, the author includes several case studies from companies that successfully used this concept. These also show you several different techniques you can use when designing and implementing your MVP.

One of the most important techniques you learn in this chapter is that your MVP doesn't necessarily have to be the product itself; rather, it can be how you market your product or idea.

One of the companies that used the MVP concept was Dropbox, an easy-to-use online file-sharing tool.

The founding team at Dropbox was made up entirely of engineers. And they knew that they needed to test their value hypothesis early on. They wanted to know, if they provided a superior customer experience, would people be willing to try their product?

Now, the team knew that Dropbox had to work like magic if it was going to succeed. They couldn't release a buggy program and figure things out from there. So, they focused on making Dropbox completely seamless and easy to use.

The problem was that most people didn't really know they had a file-sharing problem. Dropbox was one of those rare ideas that have to be demonstrated to be understood and appreciated.

The team at Dropbox didn't have any marketing experience among them. But, they knew they needed to show people what the program could do if they were going to sign up.

So, they made a simple three-minute video, and this video was their MVP. In it, Dropbox CEO Drew Houston explained how the tool worked, and showed users each step on his own computer screen. The video contained some secret jokes that would only be understood by technology early adopters.

The video went viral. Dropbox had a waiting list of people who wanted to try their product in the testing phase. This grew from 5,000 to over 75,000 almost overnight.

The lesson here is a good one. You don't always have to release a minimum viable product. Sometimes, your marketing or sign-up efforts can be used to test your product or service idea.

The rest of the book continues in this same vein. Each chapter builds on the concepts and steps introduced in the previous one, so this is not a book you should randomly skip through. Lean startup is a process, and the steps here need to be followed in order.

This is why we've only covered a small portion of what's in the book. Lean startup isn't complex, but it is involved. Each step is important and there for a reason, and the author does a great job of guiding readers through all these steps and strategies.

He goes into great detail with each concept, which means readers should have no trouble understanding how to implement each stage in their own organization.

The book is full of case studies that bring each step in the process to life. We think the examples are well chosen, and provide a good illustration of what these concepts look like in practice.

"The Lean Startup" is considered a new classic for a reason. The lessons you learn here will help you reduce waste and failure, become more efficient, and build a product or service that customers actually want to buy.

"The Lean Startup" by Eric Ries is published by Crown Business.

That's the end of this episode of Book Insights. Thanks for listening.