Lean thinking defines value as providing benefit to the customer; anything else is waste.

We adopted the view that our job was to find a
synthesis between our vision and what customers would accept

I’ve come to believe that learning is the essential unit of progress for startups. The effort that is not absolutely necessary for learning what customers want can be eliminated. I call this validated learning because it is always demonstrated by positive improvements in the startup’s core metrics

This is one of the most important lessons of the scienti􀀱c method: if you cannot fail, you cannot learn.

too many startup business plans look more like they are planning to launch a rocket ship than drive a car. They prescribe the steps to take and the results to expect in excruciating detail, and as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes

We adopted the view that our job was to 􀀸nd a
synthesis between our vision and what customers would accept

Zappos is the world’s largest online shoe store, with annual gross sales in excess of $1 billion.

His hypothesis was that customers were ready and willing to buy shoes online. To test it, he began by asking local shoe stores if he could take pictures of their inventory. In exchange for permission to take the pictures, he would post the pictures online and come back to buy the shoes at full price if a customer bought them Online.

To sell the shoes, Zappos had to interact with customers: taking payment, handling returns, and dealing with customer support. This is decidedly di􀀹erent from market research. If Zappos had relied on existing market research or conducted a survey, it could have asked what customers thought they wanted. By building a product instead, albeit a simple one, the company learned much more:

1. It had more accurate data about customer demand because it was observing real customer behavior, not asking hypothetical questions.
   
   
   

2. It put itself in a position to interact with real customers and learn about their needs. For example, the business Plan might call for discounted pricing, but how are customer perceptions of the product affected by the discounting strategy? 3. It allowed itself to be surprised when customers behaved in unexpected ways, revealing information Zappos might not have known to ask about. For example, what if customers returned the shoes?

Kodak Gallery Business Case

Kodak Gallery o􀀹ered wedding cards with gilded text and graphics on its site. Those designs were popular with customers who were getting married, and so the team redesigned the cards to be used at other special occasions, such as for holidays.

The market research and design process indicated that customers would like the new cards, and that finding justified the significant effort that went into creating them. Days before the launch, the team realized the cards were too di􀀿cult to understand from their depiction on the website; people couldn’t see how beautiful they were. They were also hard to produce. Cook realized that they had done the work backward. He explained, “Until we could 􀀱gure out how to sell and make the product, it wasn’t worth spending any engineering time on.”

Learning from that experience, Cook took a di􀀹erent approach. They believed that an online “event album” would provide a way for people who attended a wedding, a conference, or another gathering to share photos with other attendees. In a break with the past, Cook led the group through a process of
identifying risks and assumptions before building anything and then testing those assumptions experimentally.

There were two main hypotheses underlying the proposed event album:

1. The team assumed that customers would want to create the albums in the first place.

   
   

2. It assumed that event participants would upload photos to event albums created by friends or colleagues.

   
   
   

The Kodak Gallery team built a simple prototype that lacked many features. However, even at that early stage, allowing customers to use the prototype helped the team refute their hypotheses. First, creating an album was not as easy as the team had predicted; none of the early customers were able to create one. Further, customers complained that the early product version lacked essential features. Cook explained that even though the product was missing features, the project was not a failure. The initial product—􀁊aws and all con􀀱rmed that users did have the desire to create event albums, which was extremely valuable information. Where customers complained about missing features, this suggested that the team was
on the right track. What about features that were on the road map but that customers didn’t complain about? Maybe those features weren’t as important as they initially seemed.

Through a beta launch the team continued to learn and iterate. While the early users were enthusiastic and the numbers were promising, the team made a major discovery. Through the use of online surveying tool KISSinsights, the team learned that many customers wanted to be able to arrange the order of pictures before
they would invite others to contribute. Knowing they weren’t ready to launch, Cook held o􀀹 his division’s general manager by explaining how iterating and experimenting before beginning the marketing campaign would yield far better results. As Cook says, “Success is not delivering a feature; success is learning how to solve the customer’s problem.”

how Facebook was able to raise so much money when its actual usage was so small. By all accounts, what impressed investors the most were two facts about Facebook’s early growth.

The first fact was the raw amount of time Facebook’s active users spent on the site. More than half of the users came back to the site every single day. This is an example of how a company can validate its value hypothesis—that customers find the product valuable.

The second impressive thing about Facebook’s early traction was the rate at which it had taken over its 􀀦rst few college campuses. The rate of growth was staggering: Facebook launched on February 4, 2004, and by the end of that month almost three-quarters of Harvard’s undergraduates were using it, without a dollar of marketing or advertising having been using it, without a dollar of marketing or advertising having been spent. In other words, Facebook also had validated its growth hypothesis. These two hypotheses represent two of the most important leap-of-faith questions any new startup faces.

Analogs and Antilogs

There is nothing intrinsically wrong with basing strategy on comparisons to other companies and industries. In fact, that approach can help you discover assumptions that are not really leaps of faith. For instance, the analog-antilog concept by using the iPod as an example. “If you were looking for analogs, you would have to look at the Walkman,” he says. “It solved a critical question that Steve Jobs never had to ask himself: Will people listen to music in a public place using earphones? We think of that as a nonsense question today, but it is fundamental. When Sony asked the question, they did not have the answer. Steve Jobs had [the answer]
in the analog [version]” Sony’s Walkman was the analog.

Jobs then had to face the fact that although people were willing to download music, they were not willing to pay for it. “Napster was an antilog. That antilog had to lead him to address his business in a particular way,” Komisar says. “Out of these analogs and antilogs come a series of unique, unanswered questions. Those are leaps of faith that I, as an entrepreneur, am taking if I go through with this business venture. They are going to make or break my business. In the iPod business, one of those leaps of faith was that people would pay for music.” Of course that leap of faith turned out to be correct.

Groupon

It didn’t start out successful as it is now. When customers took Groupon up on its 􀀥rst deal, a whopping twenty people bought two-for-one pizza in a restaurant on the 􀀥rst 􀀨oor of the company’s Chicago offices—hardly a world-changing event. In fact, Groupon wasn’t originally meant to be about commerce at all.

The founder, Andrew Mason, intended his company to become a “collective activism platform” called The Point. Its goal was to bring people together to solve problems they couldn’t solve on their own, such as fund-raising for a cause or boycotting a certain retailer. The Point’s early results were disappointing, however, and at the end of 2008 the founders decided to try something new. Although they still had grand ambitions, they were determined to keep the new product simple. They built a minimum viable product. Does this sound like a billion-dollar company to you? Mason tells the story:

We took a WordPress Blog and we skinned it to say Groupon and then every day we would do a new post. It was totally ghetto. We would sell T-shirts on the 􀀥rst version of Groupon. We’d say in the write-up, “This T-shirt will come in the color red, size large. If you want a different color or size, e-mail that to us.” We didn’t have a form to color or size, e-mail that to us.” We didn’t have a form to add that stuff. It was just so cobbled together. It was enough to prove the concept and show that it was something that people really liked.

Handmade PDFs, a pizza coupon, and a simple blog were enough to launch Groupon into record-breaking success; it is on pace to become the fastest company in history to achieve $1 billion in sales.

Dropbox

The founding team was made up of engineers, as the product demanded signi􀀥cant technical expertise to build. It required, for example, integration with a variety of computer platforms and operating systems: Windows, Macintosh, iPhone, Android, and so on. Each of these implementations happens at a deep level of the
system and requires specialized know-how to make the user experience exceptional. In fact, one of Dropbox’s biggest competitive advantages is that the product works in such a seamless way that the competition struggles to emulate it.

Customers often don’t know what they want. Houston learned this the hard way when he tried to raise venture capital. In meeting after meeting, investors would explain that this “market space” was crowded with existing products, none of them had made very much money, and the problem wasn’t a very important one. Drew would ask: “Have you personally tried those other products?” When they would say yes, he’d ask: “Did they work seamlessly for you?” The answer was almost always no. Yet in meeting after meeting, the venture capitalists could not imagine a world in line with Drew’s vision. Drew, in contrast, believed that if the software “just worked like magic,” customers would flock to it.

To avoid the risk of waking up after years of development with a product nobody wanted, Drew did something unexpectedly easy: he made a video. The video is banal, a simple three-minute demonstration of the technology as it is meant to work, but it was targeted at a community of technology early adopters. Drew narrates the video personally, and as he’s narrating, the viewer is watching his screen. Drew recounted, “It drove hundreds of thousands of people to the website. Our beta waiting list went from 5,000 people to 75,000 people literally overnight. It totally blew us away.” Today, Dropbox is one of Silicon Valley’s hottest companies, rumored to be worth more than $1 billion. In this case, the video was the minimum viable product. The MVP validated Drew’s leap-of-faith assumption that customers wanted the product he was developing not because they said so in a focus group or because of a hopeful analogy to another business, but because they actually signed up.

THE CONCIERGE MINIMUM VIABLE PRODUCT - COMPANY FOOD ON THE TABLE

Consider another kind of MVP technique: the concierge MVP. Austin, Texas–based startup called Food on the Table

You might be surprised to learn that Food on the Table (FotT) began life with a single customer. Instead of supporting thousands of grocery stores around the country as it does today, FotT supported just one. How did the company choose which store to support? The founders didn’t—until they had their rst customer. Similarly, they began life with no recipes whatsoever—until their rst customer was ready to begin her meal planning. In fact, the company served its rst customer without building any software, without signing any business development partnerships, and without hiring any chefs. Manuel, along with VP of product Steve Sanderson, went to local supermarkets and moms’ groups in his hometown of Austin. Part of their mission was the typical observation of customers that is a part of design thinking and other ideation techniques. However, Manuel and his team were also on the hunt for something else: their first customer.

Each iteration of their minimum viable product allowed them to save a little more time and serve a few more customers: delivering the recipes and shopping list via e-mail instead of via an in-home visit, starting to
shopping list via e-mail instead of via an in-home visit, starting to parse lists of what was on sale automatically via software instead of by hand, even eventually taking credit card payments online instead of a handwritten check. Before long, they had built a substantial service oering, rst in the Austin area and eventually nationwide. But along the way, their product development team was always focused on scaling something that was working rather than trying to invent something that might work in the future.

If we do not know who the customer is, we do not know what quality is.

MVP is fear of competitors—especially large established companies—stealing a startup’s ideas. If only it were so easy to have a good idea stolen! Part of the special challenge of being a startup is the near impossibility of having your idea, company, or product be noticed by anyone, let alone a competitor.
The truth is that most managers in most companies are already overwhelmed with good ideas. Their challenge lies in prioritization and execution, and it is those challenges that give a startup hope of surviving.

entrepreneurs in existing organizations often are constrained by the fear of damaging the parent company’s established brand. In either
fear of damaging the parent company’s established brand. In either of these cases, there is an easy solution: launch the MVP under a dierent brand name

split-test experiment

is one in which dierent versions of a
A split-test experiment is one in which dierent versions of a product are oered to customers at the same time. By observing the changes in behavior between the two groups, one can make inferences about the impact of the dierent variations

For Grokit, they tried a simple split-test. They took one cohort of customers and required that they register immediately, based on nothing more than Grockit’s marketing materials. To their surprise, this cohort’s behavior was exactly the same as that of the lazy registration group: they had the same rate of registration, activation, and subsequent retention. In other words, the extra eort of lazy registration was a complete waste even though it was considered an industry best practice

INNOVATION ACCOUNTING LEADS TO FASTER PIVOTS

To see this process in action, meet David Binetti, the CEO of Votizen. David wanted to tackle the problem of civic participation in the political process. His rst product concept was a social network of veried voters, a place where people passionate about civic causes could get together, share ideas, and recruit their friends.

David built his first minimum viable product for just over $1,200 in about three months and launched it.

David’s initial concept involved four big leaps of faith:

1. Customers would be interested enough in the social network to sign up. (Registration)
2. Votizen would be able to verify them as registered voters. (Activation)
3. Customers who were veried voters would engage with the site’s activism tools over time. (Retention)
4. Engaged customers would tell their friends about the service and recruit them into civic causes. (Referral)
   
   

But after several tests, the product was a semi-failure.

David had two advantages that helped him avoid this fate:

1. Despite being committed to a signicant vision, he had done his best to launch early and iterate.
2. David had identied his leap-of-faith questions explicitly at the outset and, more important, had made quantitative predictions about each of them.
   
   

In this case, David’s direct contact with customers proved essential.

A pivot requires that we keep one foot rooted in what we’ve learned so far, while making a fundamental change in strategy in order to seek even greater validated learning. In this case, David’s direct contact with customers proved essential.

Catalog of Pivots

Zoom-in Pivot In this case, what previously was considered a single feature in a product becomes the whole product.

Zoom-out Pivot. What was considered to be the whole product, becomes a feature of a much larger product.

Customer Segment Pivot. In this pivot, the company realizes that the product it’s building solves a real problem for real customers but that they are not the customers it originally planned to serve

Customer Need Pivot As a result of getting to know customers extremely well, it sometimes becomes clear that the problem we’re trying to solve for them is not very important. However, because of this customer intimacy, we often discover other related problems that are important and can be solved by our team.

Platform Pivot. Most commonly, startups that aspire to create a new platform begin life by selling a single application, the so-called killer app, for their platform. Only later does the platform emerge as a vehicle for third parties to leverage as a way to create their own related products.

Business Architecture Pivot This pivot borrows a concept from Georey Moore, who observed that companies generally follow one of two major business architectures: high margin, low volume (complex systems model) or low margin, high volume (volume operations model).6 The former commonly is associated with business to business (B2B) or enterprise sales cycles, and the latter with consumer products (there are notable exceptions).

THE THREE ENGINES OF GROWTH

The Sticky Engine of Growth. Attract and retain customer for the long term.

The Viral Engine of Growth Online social networks and Tupperware are examples of products for which customers do the lion’s share of the marketing. Awareness of the product spreads rapidly from person to person similarly to the way a virus becomes an epidemic.

The Paid Engine of Growth Imagine another pair of businesses. The rst makes $1 on each customer it signs up; the second makes $100,000 from each customer it signs up. To predict which company will grow faster, you need to know only one additional thing: how much it costs to sign up a new customer.