Book Summary: The Lean Startup – How Today's Entrepreneurs Use Continuous Innovation by Eric Ries
Starting a business is one of the most exciting things you can do legally. The statistics of success are humbling. 80% of startup businesses fail in the first 5 years. Having a system in place to craft your business is required for success. The building blocks of a business are customers and positive profitable cash flow. Without those two things then there is no business and no wealth creation.
Why is this important to me?
I always want to ask this question as if I am sitting in your shoes. I do not want to waste your time. There are different types of businesses. If you are looking to start a coffee shop or some service based business that has an existing model then you should read the E-Myth by Michael Gerber. This book is very functional and will help you systematize your business like a successful franchise.
The Lean Startup is different. Eric is profiling organizations that are trying to create new ideas and bringing them to the market place. There are two reasons why startups fail, one they do not know who their customers are and they do not know what the product serves. When Facebook was getting off the ground, Mark Zuckerberg was not sure what the company was or how they would make money. What he was well aware of was the network effect known as Metcalf's law. This simply states that the value of the network grows exponentially as the number of users grows.
The Lean Startup consists of three main sections which are all very important. For the sake of time, I will cover a topic under each section.
1. Vision – Vision is the promise of why the organization exists. Validated learning is the name of the game. In the old days, companies had to spend a bunch of capital and resources on prototypes, engineering and products. They would invest most of their capital on these endeavors and not know if people would actually buy the product. Business people and technical gurus think that the product has to exist first. This is a fundamental flaw in today's fast paced economy. I know people who have started businesses and they were concerned about the office space, furniture and the plumbing but not the customer acquisition. The revenue has to come first and the infrastructure can follow. If you do it the other way, your failure rate is almost guaranteed.
2. Validated Learning – This is the most powerful concept in the book in my humble opinion. Eric speaks to vanity metrics. Examples of these would be a hockey shaped curve over time that shows the number of registrations on a website or the amount of complaints in PR. All of these things are good but not to base decisions on for your startup. Eric introduces Cohort Analytics in the book. Basically instead of looking at cumulative totals or gross numbers such as total revenue and total number of customers, one looks at performance of each group of customers that comes into contact with the product independently. Each group is called a cohort. Internet marketing people know this as split testing. If you are familiar with Google AdWords then you can create two ads and measure them against each other. The best ad stays and you can create a new one and test it against that ad. This allows you to view each group independently for real results. There is an old saying in business and that is – Money hides mistakes. Cohort Analytics removes the mistakes that Vanity statistics create.
3. Disciplined Action / Disciplined Thought – The Lean Startup dies Pretty deep into the manufacturing world. Being from Detroit, I have an affinity for large scale automotive manufacturing. Studying Toyota and Ed Deming's principles yields a host of learning that can help the startup. Manufacturing and incremental innovation are disciplined processes. If you commit to cohort analytics then split testing everything becomes the norm. This is not easy to do since people have an emotional tie to what they create. If a software developer spends three months on a high tech feature that THEY LOVE, it is very difficult to cut it out of the product if the customers do not want it. This is where the disable and some pre-planning can help. Showing the feature in an alpha state with a test group of customers will save the developer months of time and give you the validated learning required to either build it or dump it.
The Lean Startup is a great book that I recommend you read. If you are remotely considering investing or building a startup then this book is for you. These principles can be used by any entrepreneur to create a business and validate it before you invest your life savings. Here is an example: If you think a new product will sell, you can buy the inventory and hit the streets. This will probably lead to failure. Instead you can split test in Google AdWords two products that may sell and take pre-orders before you invest a dime. This is harder work up front and requires thought. Remember that Google is an automated prospecting engine that if used correctly can make you a fortune. Unlike Eric, I am not an engineer. I am on the sales and marketing side of business and I can tell you it was much tougher before Google because you had to knock on doors and make the calls. Today you can use your head and some excellent tools to prove your model. Think about this, Mark Zuckerberg of Facebook was deathly introverted yet he created the largest social network in the world. This type of power is at your fingertips if you are willing to do the work.
I hope you have found this summary summary useful. The key to any new idea is to work it into your daily routine until it becomes habit. Habits form in as little as 21 days. One thing you can take away from this book is Cohort Analytics. You can start by split testing everything in your business and start getting rid of the dead weight stuff that does not make you money but eats up your time.