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EFFECTIVE & ENGAGING BOOK SUMMARIES VISUAL BOOK SUMMARY
Each and every day, newentrepreneurs around the world are starting their own enterprises.Most of whomare armed withan idea for an amazing service or product (sothey think), butnot armed withthe tools theyneed to build an enduring business.
Each and every day, new What awaits you in theseThat’s where author Eric Ries comes entrepreneurs literally the keys to a pages isin. He has seen numerous around the system that – almostbusinesses start and fail – most world are without fail – will lead younotably, his own. However, he starting their a successful business. tohas also learned the lessons ownSo if you are willing to putfrom these false starts and has enterprises. you think you know whatgone on to great success Most of whom aside, you are about tobuilding a multi-million are armed with way almost every learn thedollar enterprise, and an idea for an new business in the world willcoaching others to do the amazing be run in less than 10 years.same. service or According to Ries, there are 5 product (so principles that are critical they think), but to the success of a not armed with startup, and what the tools they makes a startup need to build a “lean” one. an enduring business.
What does it mean to run a Lean Startup?First is the idea that entrepreneurs are everywhere. They are the person who just lost their jobin the recession and have struck out on their own. They are the person who has started andsold his first 5 businesses, and is on to his sixth. These are the people we traditionally readabout in magazines and books – the self-made success stories. However, entrepreneurs are alsofound in global corporations, working on the next big idea.The second idea is that entrepreneurship is management. The goal of an entrepreneur is tobuild a sustainable enterprise, and so there needs to be a new (and predictable) methodof doing so – especially in the middle of the cool digital revolution we find ourselves in.
ENT GEM M ANA OD METH ABILITY SUSTAIN ABILITY PREDICTThe third idea is that startups exist – not to make money or even to serve customers – but tolearn how to build a sustainable business. This is the idea that is the most critical to Ries’ entirepremise, and it’s a revolutionary one. Most entrepreneurs start a business with a new ideathinking (most of the time, incorrectly) that they have an idea that will be a huge success. Whyelse start a business and take all that risk? They then plod along, hustling the hell out of thatidea until it either succeeds or fails – usually in spectacular fashion.
LAUNCH T AP LE AD AR N VALIDATED LEARNING RN AD EA A L PT LAUNCHHowever, Ries argues, if the organization can learn as quickly as possible what the marketplace values enough to pay for, they will be able to adapt their business and grow it into a sustainable enterprise. He calls this validated learning.
Fourth is the method in which companies should approachthis task – build, measure and learn. The idea is toget back to “build” as quickly as possible afterlearning from the marketplace. The quicker youcan get through this cycle, the faster you’lllearn what the market values, and the better MEASUREchance you have of surviving and building asustainable business. LEARN BUILD
Lastly is the idea of innovation accounting. Although it sounds sexy, this isactually the boring stuff that will make a company successful. It’s themeasurements you take, the milestones you set, and how you prioritizeyour work.
What these 5 principles add up to is a new way of thinkingabout management. Because if you value innovation Biggus Bloatus Corpusas a company – whether you area startup or a multi-billionbehemoth – this is the wayyou will accomplish it. Ventura Capitalista Startupitus Optimus
The first thing you need to do is to build a quality product or service for the marketplace. And if you don’t know who the customer is, you don’t know what quality is. So the first step is to create something called a customer archetype. The purpose of the archetype is to humanize the target market for your business. It will guide all of the decisionsyou make about product development andallocation of resources moving forward. So, before you make anything, make sure you know exactly who you are making it for. SUPERbot BUILD A PRODUCT
Second, you are going to need to take a leap of faith at some point. No matter how much research you’ve done, and how certain you are of your chances of success, your new venture is going to have to make some assumptions on some very important things. The key is to know just what part of your plan is aleap of faith. A simple tool for this would be the analogue/antilog. There’s no problem basing the strategy for your new business based on the success ofsome other company or industry, as long as you also know what you don’t know.
be the analogue/antilog. There’s no problem basing the strategy for your new business based on the success ofsome other company or industry, as long as you also know what you don’t know. For instance, when they were building the iPod, Apple knew that people would listen to music in public places wearing earphones based on the success of the Sony Walkman. This answered a critical question for Apple. However, what they didn’t know was whether or not people would pay for music. The anitlog to this is that Napster had just proven that people – in record numbers – would stop paying for music when offered a free (albeit illegal) alternative. So they built their now insanely successful business on a leap of faith, but they knew exactly where the risk lied.
The next step on this processis to build a rapid prototype.Most people have heard ofZappos by now – the billiondollar a year online shoppingportal. It had started out as arapid prototype by founderNick Swinmurn. In fact, hisoriginal idea was to build abrand new retail experience –which he could have pursuedat great cost and risk.Instead, he chose to run anexperiment. He wanted tosee if people would buyshoes online. So, he wentaround to shoe stores in hisarea and asked if he couldtake pictures of the shoes thestores had in stock. He wouldtake those pictures and putthem up on a website, and ifpeople bought the shoesfrom him, he would return tothe store and buy them at fullprice. There, for next tonothing except for time andenergy, Nick had figured outthat people would indeedbuy shoes online.
There are a few important lessons to glean here. The first is to always build what the startupcommunity now calls a “minimum viable product” (MVP). It’s the smallest product or servicethat you can create and start generating learning from. Nick didn’t need anything more than asimple website to start Zappos, and it’s likely that you need a heck of a lot less than you thinkyou do to launch your new product. Second, you should be attempting to attract the earlyadopter market with this MVP. Because these early adopters know that they will almost alwaysget a product with “bugs” in it, you don’t need to worry about having the best possibleproduct to launch. In fact, any effort beyond what you need for an MVP is considered waste –because it wasn’t driven in a response to the marketplace.
WHERE ARE WE?The startup’s job is to figure out where they are right now, confront the cold hard facts, and then design experiments to move the numbers closer to what they laid out in the business plan. These come together in what Ries calls the 3 Learning Milestones: (1) establish the baseline (2) tuning the engine (3) pivot (or persevere)
In establishing the baseline, you need to make sure you are setting the right metrics. One thing to be waryof are “vanity metrics”. In the web startup world these metrics might include “website visitors”, and insome cases even “registered users”. In almost every case, these metrics will lead you to focus on actionsthat, at best, limit your chances for success. In order to prevent this, you should sure your metrics meetthe “3 A’s test”, where your metrics are actionable, accessible and audit-able.
Actionable: demonstrate a clear cause and effectrelationship so that you can take definitive action inresponse to it.Accessible: be easily understood and availablewidely to people in the company.Auditable: be able to go back to the source ofdata to prove that the metrics were telling the true(and entire) story.
One example of these kinds of metrics would be the onesused by IMVU (Ries’ company) in their startup phase. Thecompany sold a 3D avatar/social networking service that Iwould describe as a chat service where you can dress upyour character. Using $5 a day in pay per click advertising,they were able to get 100 visits to their website to test theirproduct. They considered each day’s visitors to be onecohort, and tested each cohort on the following data points: • Registration – how many people signed up • Activation – how many people then went on to actually login to their account • Retention – how many people had 1 chat, how many people had 5 chats, and how many people became paying customers.A good way to do this for your own business is to pickmetrics in the following buckets: registration, activation,retention and referral.
his pany – used t earn ing com lit an online l ts, u sing “spGrokit – th sprin ts) to l in on e-mon red to A/B tes s the w eremode refer ange m etimes o f the ch ette sts” (so ffect iveness n, pro ducts g etermi ne the e ct. Qu ite ofte heard f rom d rodu t he to the p CEO says tha , or a making hen the ature X d” w ke fe the “ improve ey didn’t li improve at th can have so me body th ys t hat they hanges r sa se c enginee ften the and mo st p roduct g Y. Most o t all, t by doin eh aviour a is a produc cust omer b notic ed. This no e ffect on fact goes un king at critical W hen ma r of t imes th unde rstand. e onl y arbite oint to duct, th . And c ritical p o yo ur pro the metrics ove ments t ucc essful is ent to y our impr not it w as s vem or a n impro ent w hether mple menting at im provem hen y ou are i be te sting th impact the w hould any – t, you s hat – if produc line to s ee w ts. a base sine ss resul against your bu as on c hange h
Didn’tyou hear? Moneyis goingout ofstyle!P.S. This is the only way acompany should beimplementing a productdevelopment strategy. Unless,of course, you somehow havemillions of dollars somewherethat doesn’t need to beaccounted for to anybody,and that you don’t need toprovide a positive return on.
PIVOT?At some point, you will need tomake the decision about whether ornot your business strategy has a reasonablechance of success. This is the time where youwill need to decide to either “pivot or persevere”.Of course, if things are working well and you can see a paththe great success and profits, keep working on the idea you’vestarted with. Just make sure to make your decision based on the cold hard facts.PERSEVERE?
A pivot is a fundamental change in business strategy. Ifyou conclude that your business strategy isn’t likely tosucceed, you can change your strategy. This is wherethe mindset of an entrepreneur comes in. A trueentrepreneur is learning how to build a sustainableenterprise, not make a single product idea a success.There are many kinds of pivots you could make.
• Zoom-in: where a single feature of your product becomes the entire product.• Zoom-out: where your product is too narrow to support a business, and you decide to make a broader product.• Customer segment: where you realize that you are building a product that solves a need for a segment of customers that is different than the one you started with.• Customer need: based on an intimate understanding of the customers developed during your iteration process, you realize that the need you were solving for isn’t very important. But you find new needs you can solve instead.• Business architecture: this is where you go from a high margin, low volume solution to a low margin high volume solution.• Technology: where you realize that you could solve the exact same problem using a completely different (and usually less expensive) technology.There are other pivots you could make, and we’d encourage you to buythe book to find out what they are. But most importantly, realize thatwhatever pivot you make, it’s only the next hypothesis in your businessmodel, and that it should be rigorously tested just like everything else.
One company that took this idea and ran with it built a technology called Aardvark – analternative to other search engines where the answer needs some form of humaninteraction. For instance, a question like “where’s the best place to get a drink after themovies tonight” is not something that Google will give you a great answer for. However,Aardvark will. But this wasn’t the first product launched by Max Ventilla and DamonHorowitz. In fact, is was the sixth product they launched. In fact, it was their sixth productin less than six months. Because they had used the Lean Startup model of the MVP alongwith rapid prototyping and measuring the results, they found out very quickly that theirfirst 5 products were destined to become flops. Aardvark was the first and only productthat pointed to success, and not surprisingly, it’s the product that they are now growingusing the same principles we’ve discussed so far.
One company that took this idea and ran with it built a technology calledAardvark – an alternative to other search engines where the answer needssome form of human interaction. For instance, a question like “where’s thebest place to get a drink after the movies tonight” is not something thatGoogle will give you a great answer for. However, Aardvark will. But thiswasn’t the first product launched by Max Ventilla and Damon Horowitz. Infact, is was the sixth product they launched. In fact, it was their sixthproduct in less than six months. Because they had used the Lean Startupmodel of the MVP along with rapid prototyping and measuring theresults, they found out very quickly that their first 5 products weredestined to become flops. Aardvark was the first and only product thatpointed to success, and not surprisingly, it’s the product that they are nowgrowing using the same principles we’ve discussed so far.
GROWTHNow that you’ve found the product thatyou know will help you create asustainable business, you need to havesustainable growth. And the only wayyou can build a sustainable business iswhen your new customers come from oldcustomers. There are 3 ways to do this.
First, you can create a “sticky” growth engine. This depends on having a product or service that customers willcontinue to pay for over time. In this model, ifyou can bring in new customers at a fasterrate than your old customers leave theservice, your business will grow. The metricthat you’ll want to pay the most attentionto is your retention rate. Stickytron 100
Second, you could create a “viral” engine of growth. In this model, you depend on your current customers to bring in your new customers. The most famous example of this is Hotmail, which was once a slow growth business struggling to get traction. That was until they decided to append each mail message You sent with an invitation for other people to sign up for the service, with a link directly to the signup page. The metric for this engine is something called the “viral loop”. If you can get each new customer to bring in 1 or more customers, the viral growth will continue.
LCV CAC = :)The last engine for growth is the “paid”model. In this model, you take the profitsyou’ve earned from your old customers,and invest it into advertising (or any newbusiness development tactic) to attractnew customers. The metrics to payattention to in this case are the LifetimeCustomer Value (the profits you’ll makeoff each customer over the lifetime ofdoing business with you) and theCustomer Acquisition Cost. As long asyour LCV exceeds your new customeracquisition costs, you will grow.
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So there you have it – everything youneed to know in order to begin yourLean Startup journey. If you are truly anentrepreneur, you’ll take Ries’ advice andget passionate about building asustainable enterprise rather than seeingyour new idea succeed at all costs. Goodluck, and I hope to see your next ideaand become one of your customers.For more information about this book and our othergreat book summaries, visit:EFFECTIVE ENGAGING BOOK SUMMARIES