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  • AcclaimforTHELEANSTARTUP

    AcclaimforTHELEANSTARTUP

    TheLeanStartupisntjustabouthowtocreateamoresuccessful

    entrepreneurialbusiness;itsaboutwhatwecanlearnfromthose

  • businessestoimprovevirtualyeverythingwedo.IimagineLean

    Startupprinciplesappliedtogovernmentprograms,tohealthcare,

    andtosolvingtheworldsgreatproblems.Itsultimatelyananswer

    tothequestionHowcanwelearnmorequicklywhat

  • worksand

    discardwhatdoesnt?

    TimOReily,CEO,OReilyMedia

    EricRiesunravelsthemysteriesofentrepreneurshipandreveals

    thatmagicandgeniusarenotthenecessaryingredientsforsuccess

  • butinsteadproposesascienticprocessthatcanbelearnedand

    replicated.Whetheryouareastartupentrepreneurorcorporate

    entrepreneur,thereareimportantlessonshereforyouonyour

    questtowardthenewandunknown.

  • TimBrown,CEO,IDEO

    Theroadmapforinnovationforthetwenty-firstcentury.Theideas

    inTheLeanStartupwilhelpcreatethenextindustrialrevolution.

    SteveBlank,lecturer,StanfordUniversity,

    UCBerkeleyHassBusiness

  • School

    Everyfoundingteamshouldstopforforty-eighthoursandread

    TheLeanStartup.Seriously,stopandreadthisbooknow.

    ScotCase,CEO,StartupAmericaPartnership

    Thekeylessonofthisbookisthatstartupshappeninthe

  • present

    thatmessyplacebetweenthepastandthefuturewherenothing

    happensaccordingtoPowerPoint.Riessreadandreactapproach

    tothissport,hisrelentlessfocusonvalidatedlearning,thenever-

  • endinganxietyofhoveringbetweenpersevereandpivot,albear

    witnesstohisappreciationforthedynamicsofentrepreneurship.

    witnesstohisappreciationforthedynamicsofentrepreneurship.

    GeofreyMoore,author,CrossingtheChasm

  • Ifyouareanentrepreneur,readthisbook.Ifyouarethinking

    aboutbecominganentrepreneur,readthisbook.Ifyouarejust

    curiousaboutentrepreneurship,readthisbook.StartingLeanis

    todaysbestpracticeforinnovators.Doyourselfa

  • favorandread

    thisbook.

    RandyKomisar,foundingdirectorofTiVoandauthorofthe

    bestselingTheMonkandtheRiddle

    Howdoyouapplythefty-year-oldideasofLeantothefast-

  • paced,high-uncertaintyworldofstartups?Thisbookprovidesa

    briliant,wel-documented,andpracticalanswer.Itissureto

    becomeamanagementclassic.

    DonReinertsen,author,ThePrinciplesofProductDevelopment

  • Flow

    Whatwouldhappenifbusinesseswerebuiltfromthegroundup

    tolearnwhattheircustomersrealywanted?TheLeanStartupis

    thefoundationforreimaginingalmosteverythingabouthowwork

  • works.Dontletthewordstartupinthetitleconfuseyou.Thisisa

    cookbookforentrepreneursinorganizationsofalsizes.

    RoyBahat,president,IGNEntertainment

    TheLeanStartupisafoundationalmust-readforfounders,

  • enablingthemtoreduceproductfailuresbybringingstructureand

    sciencetowhatisusualyinformalandanart.Itprovides

    actionablewaystoavoidproduct-learningmistakes,rigorously

    evaluateearlysignalsfromthemarketthroughvalidated

  • learning,

    anddecidewhethertopersevereortopivot,alchalengesthat

    heightenthechanceofentrepreneurialfailure.

    NoamWasserman,professor,HarvardBusinessSchool

    Oneofthebestandmost

  • insightfulnewbookson

    entrepreneurshipandmanagementIveeverread.Shouldbe

    entrepreneurshipandmanagementIveeverread.Shouldbe

    requiredreadingnotonlyfortheentrepreneursthatIworkwith,

  • butformyfriendsandcoleaguesinvariousindustrieswhohave

    inevitablygrappledwithmanyofthechalengesthatTheLean

    Startupaddresses.

    EugeneJ.Huang,partner,TrueNorthVenturePartner

    Inbusiness,alean

  • enterpriseissustainableeciencyinaction.

    EricRiessrevolutionaryLeanStartupmethodwilhelpbringyour

    newbusinessideatoanendresultthatissuccessfulandsustainable.

    Youlndinnovativestepsandstrategiesforcreatingand

  • managingyourownstartupwhilelearningfromthereal-life

    successesandcolapsesofothers.Thisbookisamust-readfor

    entrepreneurswhoaretrulyreadytostartsomethinggreat!

    KenBlanchard,coauthorofTheOneMinute

  • Manager

    andTheOneMinuteEntrepreneur

  • Copyright2011byEricRies

    Allrightsreserved.

    PublishedintheUnitedStatesbyCrownBusiness,animprintoftheCrownPublishing

    Group,adivisionofRandomHouse,Inc.,NewYork.www.crownpublishing.com

  • CROWNBUSINESSisatrademarkandCROWNandtheRisingSuncolophonare

    registeredtrademarksofRandomHouse,Inc.

    LibraryofCongressCataloging-in-PublicationData

    Ries,Eric,1978

    Theleanstartup/EricRies.

  • 1sted.

    p.cm.

    1.Newbusinessenterprises.2.Consumerspreferences.3.Organizational

    effectiveness.I.Title.

    HD62.5.R5452011

    658.11dc222011012100

  • eISBN:978-0-307-88791-7

  • BookdesignbyLaurenDong

    IllustrationsbyFredHaynes

    JacketdesignbyMarcusGosling

    v3.1

    ForTara

  • Contents

    Cover

    TitlePage

    Copyright

    Dedication

    Introduction

  • PartOneVISION

    1.Start

    2.Define

    3.Learn

    4.Experiment

  • PartTwoSTEER

    5.Leap

    6.Test

    7.Measure

    8.Pivot(orPersevere)

  • PartThreeACCELERATE

    9.Batch

    10.Grow

    11.Adapt

    12.Innovate

    13.Epilogue:WasteNot

    14.JointheMovement

  • Endnotes

    Disclosures

    Disclosures

    Acknowledgments

    AbouttheAuthor

  • Introduction

    Stopmeifyouveheardthisonebefore.Briliantcolegekids

    sitinginadormareinventingthefuture.Heedlessofboundaries,

    possessedofnewtechnologyandyouthfulenthusiasm,theybuild

  • anewcompanyfromscratch.Theirearlysuccessalowsthemto

    raisemoneyandbringanamazingnewproducttomarket.They

    hiretheirfriends,assembleasuperstarteam,anddaretheworldto

    stopthem.

  • Tenyearsandseveralstartupsago,thatwasme,buildingmyrst

    company.Iparticularlyrememberamomentfrombackthen:the

    momentIrealizedmycompanywasgoingtofail.Mycofounder

    andIwereatourwitsend.Thedot-combubblehad

  • burst,andwe

    hadspentalourmoney.Wetrieddesperatelytoraisemore

    capital,andwecouldnot.Itwaslikeabreakupscenefroma

    Holywoodmovie:itwasraining,andwewerearguinginthe

  • street.Wecouldntevenagreeonwheretowalknext,andsowe

    partedinanger,headinginoppositedirections.Asametaphorfor

    ourcompanysfailure,thisimageofthetwoofus,lostintherain

    anddriftingapart,isperfect.

  • Itremainsapainfulmemory.Thecompanylimpedalongfor

    monthsafterward,butoursituationwashopeless.Atthetime,it

    hadseemedweweredoingeverythingright:wehadagreat

    product,abriliantteam,amazingtechnology,andthe

  • rightideaat

    therighttime.Andwerealywereontosomething.Wewere

    buildingawayforcolegekidstocreateonlineprolesforthe

    purposeofsharingwithemployers.Oops.Butdespitea

  • promisingidea,wewerenonethelessdoomedfromdayone,

    becausewedidnotknowtheprocesswewouldneedtousetoturn

    becausewedidnotknowtheprocesswewouldneedtousetoturn

    ourproductinsightsintoagreatcompany.

  • Ifyouveneverexperiencedafailurelikethis,itishardto

    describethefeeling.Itsasiftheworldwerefalingoutfromunder

    you.Yourealizeyouvebeenduped.Thestoriesinthemagazines

    arelies:hardworkandperseverancedontleadtosuccess.Even

  • worse,themany,many,manypromisesyouvemadetoemployees,

    friends,andfamilyarenotgoingtocometrue.Everyonewho

    thoughtyouwerefoolishforsteppingoutonyourownwilbe

    provenright.

  • Itwasntsupposedtoturnoutthatway.Inmagazinesand

    newspapers,inblockbustermovies,andoncountlessblogs,wehear

    themantraofthesuccessfulentrepreneurs:throughdetermination,

    briliance,greattiming,andabovealagreatproduct,youtoo

  • canachievefameandfortune.

    Thereisamythmakingindustryhardatworktoselusthatstory,

    butIhavecometobelievethatthestoryisfalse,theproductof

    selectionbiasandafter-the-factrationalization.Infact,having

  • workedwithhundredsofentrepreneurs,Ihaveseenrsthandhow

    oftenapromisingstartleadstofailure.Thegrimrealityisthatmost

    startupsfail.Mostnewproductsarenotsuccessful.Mostnew

    venturesdonotliveuptotheirpotential.

  • Yetthestoryofperseverance,creativegenius,andhardwork

    persists.Whyisitsopopular?Ithinkthereissomethingdeeply

    appealingaboutthismodern-dayrags-to-richesstory.Itmakes

    successseeminevitableifyoujusthavetherightstu.It

  • meansthat

    themundanedetails,theboringstu,thesmalindividualchoices

    dontmater.Ifwebuildit,theywilcome.Whenwefail,asso

    manyofusdo,wehaveaready-madeexcuse:wedidnthavethe

  • rightstu.Wewerentvisionaryenoughorwerentintheright

    placeattherighttime.

    Aftermorethantenyearsasanentrepreneur,Icametoreject

    thatlineofthinking.Ihavelearnedfrombothmyownsuccesses

  • andfailuresandthoseofmanyothersthatitstheboringstuthat

    matersthemost.Startupsuccessisnotaconsequenceofgood

    genesorbeingintherightplaceattherighttime.Startupsuccess

    canbeengineeredbyfolowingtherightprocess,

  • whichmeansit

    canbeengineeredbyfolowingtherightprocess,whichmeansit

    canbelearned,whichmeansitcanbetaught.

    Entrepreneurshipisakindofmanagement.No,youdidntread

    thatwrong.Wehavewildly

  • divergentassociationswiththesetwo

    words,entrepreneurshipandmanagement.Lately,itseemsthatone

    iscool,innovative,andexcitingandtheotherisdul,serious,and

    bland.Itistimetolookpastthesepreconceptions.

  • Letmetelyouasecondstartupstory.Its2004,andagroupof

    foundershavejuststartedanewcompany.Theirpreviouscompany

    hadfailedverypublicly.Theircredibilityisatanal-timelow.They

    haveahugevision:tochangethewaypeoplecommunicate

  • by

    usinganewtechnologycaledavatars(remember,thiswasbefore

    JamesCameronsblockbustermovie).Theyarefolowinga

    visionarynamedWilHarvey,whopaintsacompelingpicture:

  • peopleconnectingwiththeirfriends,hangingoutonline,using

    avatarstogivethemacombinationofintimateconnectionandsafe

    anonymity.Evenbeter,insteadofhavingtobuildaltheclothing,

    furniture,andaccessoriestheseavatarswouldneedto

  • accessorize

    theirdigitallives,thecustomerswouldbeenlistedtobuildthose

    thingsandselthemtooneanother.

    Theengineeringchalengebeforethemisimmense:creating

    virtualworlds,user-

  • generatedcontent,anonlinecommerceengine,

    micropayments,andlastbutnotleastthethree-dimensional

    avatartechnologythatcanrunonanyonesPC.

    Iminthissecondstory,too.Imacofounderandchieftechnology

  • ocerofthiscompany,whichiscaledIMVU.Atthispointinour

    careers,mycofoundersandIaredeterminedtomakenewmistakes.

    Wedoeverythingwrong:insteadofspendingyearsperfectingour

    technology,webuildaminimumviableproduct,an

  • earlyproduct

    thatisterrible,fulofbugsandcrash-your-computer-yes-realy

    stabilityproblems.Thenweshipittocustomerswaybeforeits

    ready.Andwechargemoneyforit.Aftersecuringinitialcustomers,

  • wechangetheproductconstantlymuchtoofastbytraditional

    standardsshippingnewversionsofourproductdozensoftimes

    everysingleday.

    Werealydidhavecustomersinthoseearlydaystruevisionary

  • earlyadoptersandweoftentalkedtothemandaskedfortheir

    earlyadoptersandweoftentalkedtothemandaskedfortheir

    feedback.Butweemphaticalydidnotdowhattheysaid.We

    viewedtheirinputasonlyonesourceofinformation

  • aboutour

    productandoveralvision.Infact,weweremuchmorelikelyto

    runexperimentsonourcustomersthanweweretocatertotheir

    whims.

    Traditionalbusinessthinkingsaysthatthisapproach

  • shouldnt

    work,butitdoes,andyoudonthavetotakemywordforit.As

    youlseethroughoutthisbook,theapproachwepioneeredat

    IMVUhasbecomethebasisforanewmovementofentrepreneurs

  • aroundtheworld.Itbuildsonmanypreviousmanagementand

    productdevelopmentideas,includingleanmanufacturing,design

    thinking,customerdevelopment,andagiledevelopment.It

    representsanewapproachtocreatingcontinuous

  • innovation.Its

    caledtheLeanStartup.

    Despitethevolumeswritenonbusinessstrategy,thekey

    atributesofbusinessleaders,andwaystoidentifythenextbig

    thing,innovatorsstilstruggletobringtheirideastolife.Thiswas

  • thefrustrationthatledustotryaradicalnewapproachatIMVU,

    onecharacterizedbyanextremelyfastcycletime,afocusonwhat

    customerswant(withoutaskingthem),andascienticapproachto

    makingdecisions.

  • ORIGINSOFTHELEANSTARTUP

    Iamoneofthosepeoplewhogrewupprogrammingcomputers,

    andsomyjourneytothinkingaboutentrepreneurshipand

    managementhastakenacircuitouspath.Ihavealwaysworkedon

  • theproductdevelopmentsideofmyindustry;mypartnersand

    bossesweremanagersormarketers,andmypeersworkedin

    engineeringandoperations.Throughoutmycareer,Ikepthaving

    theexperienceofworkingincrediblyhardonproducts

  • that

    ultimatelyfailedinthemarketplace.

    Atrst,largelybecauseofmybackground,Iviewedtheseas

    technicalproblemsthatrequiredtechnicalsolutions:beter

    architecture,abeter

  • engineeringprocess,beterdiscipline,focus,or

    architecture,abeterengineeringprocess,beterdiscipline,focus,or

    productvision.Thesesupposedxesledtostilmorefailure.SoI

    readeverythingIcouldgetmyhandsonandwasblessedtohave

  • hadsomeofthetopmindsinSiliconValeyasmymentors.Bythe

    timeIbecameacofounderofIMVU,Iwashungryfornewideas

    abouthowtobuildacompany.

    Iwasfortunatetohavecofounderswhowerewilingto

  • experimentwithnewapproaches.TheywerefedupasIwasby

    thefailureoftraditionalthinking.Also,wewereluckytohave

    SteveBlankasaninvestorandadviser.Backin2004,Stevehadjust

    begunpreachinganewidea:thebusinessandmarketing

  • functions

    ofastartupshouldbeconsideredasimportantasengineeringand

    productdevelopmentandthereforedeserveanequalyrigorous

    methodologytoguidethem.HecaledthatmethodologyCustomer

  • Development,anditoeredinsightandguidancetomydailywork

    asanentrepreneur.

    Meanwhile,IwasbuildingIMVUsproductdevelopmentteam,

    usingsomeoftheunorthodoxmethodsImentionedearlier.

    Measuredagainstthe

  • traditionaltheoriesofproductdevelopmentI

    hadbeentrainedoninmycareer,thesemethodsdidnotmake

    sense,yetIcouldseersthandthattheywereworking.Istruggled

    toexplainthepracticestonewemployees,investors,andthe

  • foundersofothercompanies.Welackedacommonlanguagefor

    describingthemandconcreteprinciplesforunderstandingthem.

    Ibegantosearchoutsideentrepreneurshipforideasthatcould

    helpmemakesenseofmyexperience.Ibegantostudy

  • other

    industries,especialymanufacturing,fromwhichmostmodern

    theoriesofmanagementderive.Istudiedleanmanufacturing,a

    processthatoriginatedinJapanwiththeToyotaProduction

  • System,acompletelynewwayofthinkingaboutthemanufacturing

    ofphysicalgoods.Ifoundthatbyapplyingideasfromlean

    manufacturingtomyownentrepreneurialchalengeswithafew

    tweaksandchangesIhadthebeginningsofa

  • frameworkfor

    makingsenseofthem.

    ThislineofthoughtevolvedintotheLeanStartup:the

    applicationofleanthinkingtotheprocessofinnovation.

    IMVUbecameatremendoussuccess.IMVUcustomershave

  • IMVUbecameatremendoussuccess.IMVUcustomershave

    createdmorethan60milionavatars.Itisaprotablecompany

    withannualrevenuesofmorethan$50milionin2011,employing

    morethanahundredpeopleinourcurrentocesin

  • Mountain

    View,California.IMVUsvirtualgoodscatalogwhichseemedso

    riskyyearsagonowhasmorethan6milionitemsinit;more

    than7,000areaddedeveryday,almostalcreatedbycustomers.

  • AsaresultofIMVUssuccess,Ibegantobeaskedforadviceby

    otherstartupsandventurecapitalists.WhenIwoulddescribemy

    experiencesatIMVU,Iwasoftenmetwithblankstaresorextreme

    skepticism.ThemostcommonreplywasThat

  • couldneverwork!

    Myexperiencesoewinthefaceofconventionalthinkingthat

    mostpeople,evenintheinnovationhubofSiliconValey,could

    notwraptheirmindsaroundit.

    ThenIstartedtowrite,rston

  • ablogcaledStartupLessons

    Learned,andspeakatconferencesandtocompanies,startups,and

    venturecapitaliststoanyonewhowouldlisten.Intheprocessof

    beingcaledontodefendandexplainmyinsightsandwiththe

  • colaborationofotherwriters,thinkers,andentrepreneurs,Ihada

    chancetoreneanddevelopthetheoryoftheLeanStartupbeyond

    itsrudimentarybeginnings.Myhopealalongwastondwaysto

    eliminatethetremendouswasteIsawalaroundme:

  • startupsthat

    builtproductsnobodywanted,newproductspuledfromthe

    shelves,countlessdreamsunrealized.

    Eventualy,theLeanStartupideablossomedintoaglobal

    movement.Entrepreneursbeganforminglocalin-

  • persongroupsto

    discussandapplyLeanStartupideas.Therearenoworganized

    communitiesofpracticeinmorethanahundredcitiesaroundthe

    world.1Mytravelshavetakenmeacrosscountriesandcontinents.

  • EverywhereIhaveseenthesignsofanewentrepreneurial

    renaissance.TheLeanStartupmovementismaking

    entrepreneurshipaccessibletoawholenewgenerationoffounders

    whoarehungryfornewideasabouthowtobuildsuccessful

  • companies.

    Althoughmybackgroundisinhigh-techsoftware

    entrepreneurship,themovementhasgrownwaybeyondthose

    entrepreneurship,themovementhasgrownwaybeyondthose

    roots.Thousandsof

  • entrepreneursareputingLeanStartup

    principlestoworkineveryconceivableindustry.Ivehadthe

    chancetoworkwithentrepreneursincompaniesofalsizes,in

    dierentindustries,andeveningovernment.Thisjourneyhastaken

  • metoplacesIneverimaginedIdsee,fromtheworldsmostelite

    venturecapitalists,toFortune500boardrooms,tothePentagon.

    ThemostnervousIhaveeverbeeninameetingwaswhenIwas

    atemptingtoexplainLeanStartupprinciplestothechief

  • informationoceroftheU.S.Army,whoisathree-stargeneral

    (fortherecord,hewasextremelyopentonewideas,evenfroma

    civilianlikeme).

    PretysoonIrealizedthatitwastimetofocusontheLean

  • Startupmovementfultime.Mymission:toimprovethesuccess

    rateofnewinnovativeproductsworldwide.Theresultisthebook

    youarereading.

    THELEANSTARTUPMETHOD

    Thisisabookfor

  • entrepreneursandthepeoplewhoholdthem

    accountable.TheveprinciplesoftheLeanStartup,whichinform

    althreepartsofthisbook,areasfolows:

    1.Entrepreneursareeverywhere.Youdonthavetoworkina

  • garagetobeinastartup.Theconceptofentrepreneurshipincludes

    anyonewhoworkswithinmydenitionofastartup:ahuman

    institutiondesignedtocreatenewproductsandservicesunder

    conditionsofextremeuncertainty.Thatmeans

  • entrepreneursare

    everywhereandtheLeanStartupapproachcanworkinanysize

    company,evenaverylargeenterprise,inanysectororindustry.

    2.Entrepreneurshipismanagement.Astartupisaninstitution,

  • notjustaproduct,andsoitrequiresanewkindofmanagement

    specicalygearedtoitscontextofextremeuncertainty.Infact,asI

    wilarguelater,Ibelieveentrepreneurshouldbeconsidereda

    wilarguelater,Ibelieveentrepreneurshouldbe

  • considereda

    jobtitleinalmoderncompaniesthatdependoninnovationfor

    theirfuturegrowth.

    3.Validatedlearning.Startupsexistnotjusttomakestu,make

    money,orevenservecustomers.Theyexistto

  • learnhowtobuilda

    sustainablebusiness.Thislearningcanbevalidatedscienticalyby

    runningfrequentexperimentsthatalowentrepreneurstotesteach

    elementoftheirvision.

    4.Build-Measure-Learn.Thefundamentalactivityofa

  • startupis

    toturnideasintoproducts,measurehowcustomersrespond,and

    thenlearnwhethertopivotorpersevere.Alsuccessfulstartup

    processesshouldbegearedtoacceleratethatfeedbackloop.

    5.Innovationaccounting.To

  • improveentrepreneurialoutcomes

    andholdinnovatorsaccountable,weneedtofocusontheboring

    stu:howtomeasureprogress,howtosetupmilestones,andhow

    toprioritizework.Thisrequiresanewkindofaccountingdesigned

  • forstartupsandthepeoplewhoholdthemaccountable.

    WhyStartupsFail

    Whyarestartupsfailingsobadlyeverywherewelook?

    Therstproblemisthealureofagoodplan,asolidstrategy,

    andthoroughmarketresearch.Inearliereras,

  • thesethingswere

    indicatorsoflikelysuccess.Theoverwhelmingtemptationisto

    applythemtostartupstoo,butthisdoesntwork,becausestartups

    operatewithtoomuchuncertainty.Startupsdonotyetknowwho

  • theircustomerisorwhattheirproductshouldbe.Astheworld

    becomesmoreuncertain,itgetsharderandhardertopredictthe

    future.Theoldmanagementmethodsarenotuptothetask.

    Planningandforecastingareonlyaccuratewhenbasedon

  • along,

    stableoperatinghistoryandarelativelystaticenvironment.Startups

    stableoperatinghistoryandarelativelystaticenvironment.Startups

    haveneither.

    Thesecondproblemisthatafterseeingtraditional

  • management

    failtosolvethisproblem,someentrepreneursandinvestorshave

    thrownuptheirhandsandadoptedtheJustDoItschoolof

    startups.Thisschoolbelievesthatifmanagementistheproblem,

  • chaosistheanswer.Unfortunately,asIcanatestrsthand,this

    doesntworkeither.

    Itmayseemcounterintuitivetothinkthatsomethingas

    disruptive,innovative,andchaoticasastartupcanbemanagedor,

    tobeaccurate,mustbe

  • managed.Mostpeoplethinkofprocessand

    managementasboringanddul,whereasstartupsaredynamicand

    exciting.Butwhatisactualyexcitingistoseestartupssucceedand

    changetheworld.Thepassion,energy,andvisionthatpeoplebring

  • tothesenewventuresareresourcestooprecioustowaste.Wecan

    andmustdobeter.Thisbookisabouthow.

    andmustdobeter.Thisbookisabouthow.

    HOWTHISBOOKISORGANIZED

    Thisbookisdividedinto

  • threeparts:Vision,Steer,and

    Accelerate.

    Visionmakesthecaseforanewdisciplineofentrepreneurial

    management.Iidentifywhoisanentrepreneur,deneastartup,

    andarticulateanewwayfor

  • startupstogaugeiftheyaremaking

    progress,caledvalidatedlearning.Toachievethatlearning,wel

    seethatstartupsinagarageorinsideanenterprisecanuse

    scienticexperimentationtodiscoverhowtobuildasustainable

  • business.

    SteerdivesintotheLeanStartupmethodindetail,showingone

    majorturnthroughthecoreBuild-Measure-Learnfeedbackloop.

    Beginningwithleap-of-faithassumptionsthatcryoutforrigorous

  • testing,youllearnhowtobuildaminimumviableproducttotest

    thoseassumptions,anewaccountingsystemforevaluatingwhether

    youremakingprogress,andamethodfordecidingwhetherto

    pivot(changingcoursewithonefootanchoredtothe

  • ground)or

    persevere.

    InAccelerate,welexploretechniquesthatenableLean

    StartupstospeedthroughtheBuild-Measure-Learnfeedbackloop

    asquicklyaspossible,evenastheyscale.Welexplorelean

  • manufacturingconceptsthatareapplicabletostartups,too,suchas

    thepowerofsmalbatches.Welalsodiscussorganizationaldesign,

    howproductsgrow,andhowtoapplyLeanStartupprinciples

    beyondtheproverbialgarage,eveninsidetheworlds

  • largest

    companies.

    MANAGEMENTSSECONDCENTURY

    Asasociety,wehaveaprovensetoftechniquesformanagingbig

    companiesandweknowthebestpracticesforbuildingphysical

  • products.Butwhenitcomestostartupsandinnovation,wearestil

    shootinginthedark.Wearerelyingonvision,chasingthegreat

    shootinginthedark.Wearerelyingonvision,chasingthegreat

    menwhocanmakemagichappen,ortryingtoanalyze

  • ournew

    productstodeath.Thesearenewproblems,bornofthesuccessof

    managementinthetwentiethcentury.

    Thisbookatemptstoputentrepreneurshipandinnovationona

    rigorousfooting.Weareat

  • thedawnofmanagementssecond

    century.Itisourchalengetodosomethinggreatwiththe

    opportunitywehavebeengiven.TheLeanStartupmovementseeks

    toensurethatthoseofuswholongtobuildthenextbigthingwil

  • havethetoolsweneedtochangetheworld.

    PartOne

  • PartOne

    VISION

    1START

    ENTREPRENEURIALMANAGEMENT

    Buildingastartupisanexerciseininstitutionbuilding;thus,it

  • necessarilyinvolvesmanagement.Thisoftencomesasasurprise

    toaspiringentrepreneurs,becausetheirassociationswiththese

    twowordsaresodiametricalyopposed.Entrepreneursarerightly

    waryofimplementingtraditionalmanagement

  • practicesearlyonin

    astartup,afraidthattheywilinvitebureaucracyorstiflecreativity.

    Entrepreneurshavebeentryingtotthesquarepegoftheir

    uniqueproblemsintotheroundholeofgeneralmanagementfor

  • decades.Asaresult,manyentrepreneurstakeajustdoitatitude,

    avoidingalformsofmanagement,process,anddiscipline.

    Unfortunately,thisapproachleadstochaosmoreoftenthanitdoes

    tosuccess.Ishouldknow:myrststartupfailureswere

  • alofthis

    kind.

    Thetremendoussuccessofgeneralmanagementoverthelast

    centuryhasprovidedunprecedentedmaterialabundance,butthose

    managementprinciplesareilsuitedtohandlethechaos

  • and

    uncertaintythatstartupsmustface.

    Ibelievethatentrepreneurshiprequiresamanagerialdisciplineto

    harnesstheentrepreneurialopportunitywehavebeengiven.

    Therearemoreentrepreneurs

  • operatingtodaythanatany

    previoustimeinhistory.Thishasbeenmadepossiblebydramatic

    previoustimeinhistory.Thishasbeenmadepossiblebydramatic

    changesintheglobaleconomy.Tocitebutoneexample,oneoften

  • hearscommentatorslamentthelossofmanufacturingjobsinthe

    UnitedStatesovertheprevioustwodecades,butonerarelyhears

    aboutacorrespondinglossofmanufacturingcapability.Thats

    becausetotalmanufacturingoutputintheUnitedStatesis

  • increasing(by15percentinthelastdecade)evenasjobscontinue

    tobelost(seethechartsbelow).Ineect,thehugeproductivity

    increasesmadepossiblebymodernmanagementandtechnology

    havecreatedmoreproductivecapacitythanrmsknowwhat

  • todo

    with.1

    Wearelivingthroughanunprecedentedworldwide

    entrepreneurialrenaissance,butthisopportunityislacedwithperil.

    Becausewelackacoherentmanagementparadigmfornew

  • innovativeventures,werethrowingourexcesscapacityaround

    withwildabandon.Despitethislackofrigor,wearendingsome

    waystomakemoney,butforeverysuccesstherearefartoomany

    failures:productspuledfromshelvesmereweeks

  • afterbeing

    launched,high-prolestartupslaudedinthepressandforgotena

    fewmonthslater,andnewproductsthatwindupbeingusedby

    nobody.Whatmakesthesefailuresparticularlypainfulisnotjust

  • theeconomicdamagedonetoindividualemployees,companies,

    andinvestors;theyarealsoacolossalwasteofourcivilizations

    mostpreciousresource:thetime,passion,andskilofitspeople.

    TheLeanStartupmovementisdedicatedtopreventing

  • these

    failures.

  • THEROOTSOFTHELEANSTARTUP

    TheLeanStartuptakesits

  • namefromtheleanmanufacturing

    revolutionthatTaichiOhnoandShigeoShingoarecreditedwith

    developingatToyota.Leanthinkingisradicalyalteringtheway

    supplychainsandproductionsystemsarerun.Amongitstenetsare

  • drawingontheknowledgeandcreativityofindividualworkers,the

    shrinkingofbatchsizes,just-in-timeproductionandinventory

    control,andanaccelerationofcycletimes.Ittaughttheworldthe

    dierencebetweenvalue-creatingactivitiesandwaste

  • andshowed

    howtobuildqualityintoproductsfromtheinsideout.

    TheLeanStartupadaptstheseideastothecontextof

    entrepreneurship,proposingthatentrepreneursjudgetheirprogress

    dierentlyfromthewayotherkindsofventuresdo.

  • Progressin

    dierentlyfromthewayotherkindsofventuresdo.Progressin

    manufacturingismeasuredbytheproductionofhigh-quality

    physicalgoods.AswelseeinChapter3,theLeanStartupusesa

  • dierentunitofprogress,caledvalidatedlearning.Withscientific

    learningasouryardstick,wecandiscoverandeliminatethesources

    ofwastethatareplaguingentrepreneurship.

    Acomprehensivetheoryofentrepreneurshipshouldaddressal

  • thefunctionsofanearly-stageventure:visionandconcept,product

    development,marketingandsales,scalingup,partnershipsand

    distribution,andstructureandorganizationaldesign.Ithasto

    provideamethodformeasuringprogressinthe

  • contextofextreme

    uncertainty.Itcangiveentrepreneursclearguidanceonhowto

    makethemanytrade-odecisionstheyface:whetherandwhento

    investinprocess;formulating,planning,andcreatinginfrastructure;

  • whentogoitaloneandwhentopartner;whentorespondto

    feedbackandwhentostickwithvision;andhowandwhento

    investinscalingthebusiness.Mostofal,itmustalow

    entrepreneurstomaketestablepredictions.

  • Forexample,considertherecommendationthatyoubuildcross-

    functionalteamsandholdthemaccountabletowhatwecal

    learningmilestonesinsteadoforganizingyourcompanyintostrict

    functionaldepartments(marketing,sales,

  • informationtechnology,

    humanresources,etc.)thatholdpeopleaccountableforperforming

    welintheirspecializedareas(seeChapter7).Perhapsyouagree

    withthisrecommendation,orperhapsyouareskeptical.Either

  • way,ifyoudecidetoimplementit,Ipredictthatyoupretyquickly

    wilgetfeedbackfromyourteamsthatthenewprocessisreducing

    theirproductivity.Theywilasktogobacktotheoldwayof

    working,inwhichtheyhadtheopportunitytostaye

  • cientby

    workinginlargerbatchesandpassingworkbetweendepartments.

    Itssafetopredictthisresult,andnotjustbecauseIhaveseenit

    manytimesinthecompaniesIworkwith.Itisastraightforward

  • predictionoftheLeanStartuptheoryitself.Whenpeopleareused

    toevaluatingtheirproductivitylocaly,theyfeelthatagooddayis

    oneinwhichtheydidtheirjobwelalday.WhenIworkedasa

    programmer,thatmeanteightstraighthoursof

  • programming

    withoutinterruption.Thatwasagoodday.Incontrast,ifIwas

    withoutinterruption.Thatwasagoodday.Incontrast,ifIwas

    interruptedwithquestions,process,orheavenforbidmeetings,I

  • feltbad.WhatdidIrealyaccomplishthatday?Codeandproduct

    featuresweretangibletome;Icouldseethem,understandthem,

    andshowthemof.Learning,bycontrast,isfrustratinglyintangible.

    TheLeanStartupaskspeopletostartmeasuringtheir

  • productivitydierently.Becausestartupsoftenaccidentalybuild

    somethingnobodywants,itdoesntmatermuchiftheydoiton

    timeandonbudget.Thegoalofastartupistogureouttheright

    thingtobuildthethingcustomerswantandwilpay

  • foras

    quicklyaspossible.Inotherwords,theLeanStartupisanewway

    oflookingatthedevelopmentofinnovativenewproductsthat

    emphasizesfastiterationandcustomerinsight,ahugevision,and

  • greatambition,alatthesametime.

    HenryFordisoneofthemostsuccessfulandcelebrated

    entrepreneursofaltime.Sincetheideaofmanagementhasbeen

    boundupwiththehistoryoftheautomobilesinceitsrstdays,I

  • believeitistingtousetheautomobileasametaphorfora

    startup.

    Aninternalcombustionautomobileispoweredbytwoimportant

    andverydierentfeedbackloops.Therstfeedbackloopisdeep

  • insidetheengine.BeforeHenryFordwasafamousCEO,hewasan

    engineer.Hespenthisdaysandnightstinkeringinhisgaragewith

    theprecisemechanicsofgetingtheenginecylinderstomove.Each

    tinyexplosionwithinthecylinderprovidesthemotive

  • forcetoturn

    thewheelsbutalsodrivestheignitionofthenextexplosion.Unless

    thetimingofthisfeedbackloopismanagedprecisely,theengine

    wilsputerandbreakdown.

    StartupshaveasimilarenginethatIcaltheengineof

  • growth.

    Themarketsandcustomersforstartupsarediverse:atoycompany,

    aconsultingrm,andamanufacturingplantmaynotseemlike

    theyhavemuchincommon,but,aswelsee,theyoperatewiththe

  • sameengineofgrowth.

    Everynewversionofaproduct,everynewfeature,andevery

    Everynewversionofaproduct,everynewfeature,andevery

    newmarketingprogramisanatempttoimprovethisengineof

  • growth.LikeHenryFordstinkeringinhisgarage,notalofthese

    changesturnouttobeimprovements.Newproductdevelopment

    happensintsandstarts.Muchofthetimeinastartupslifeis

    spenttuningtheenginebymakingimprovementsin

  • product,

    marketing,oroperations.

    Thesecondimportantfeedbackloopinanautomobileis

    betweenthedriverandthesteeringwheel.Thisfeedbackisso

    immediateandautomaticthatweoftendontthink

  • aboutit,butit

    issteeringthatdierentiatesdrivingfrommostotherformsof

    transportation.Ifyouhaveadailycommute,youprobablyknow

    theroutesowelthatyourhandsseemtosteeryouthereontheir

  • ownaccord.Wecanpracticalydrivetherouteinoursleep.YetifI

    askedyoutocloseyoureyesandwritedownexactlyhowtogetto

    yourocenotthestreetdirectionsbuteveryactionyouneedto

    take,everypushofhandonwheelandfootonpedals

  • youdnd

    itimpossible.Thechoreographyofdrivingisincrediblycomplex

    whenoneslowsdowntothinkaboutit.

    Bycontrast,arocketshiprequiresjustthiskindofin-advance

    calibration.Itmustbe

  • launchedwiththemostpreciseinstructions

    onwhattodo:everythrust,everyringofabooster,andevery

    changeindirection.Thetiniesterroratthepointoflaunchcould

    yieldcatastrophicresultsthousandsofmileslater.

  • Unfortunately,toomanystartupbusinessplanslookmorelike

    theyareplanningtolauncharocketshipthandriveacar.They

    prescribethestepstotakeandtheresultstoexpectinexcruciating

    detail,andasinplanningtolauncharocket,theyareset

  • upinsuch

    awaythateventinyerrorsinassumptionscanleadtocatastrophic

    outcomes.

    OnecompanyIworkedwithhadthemisfortuneofforecasting

    signicantcustomeradoptioninthemilionsforoneof

  • itsnew

    products.Poweredbyasplashylaunch,thecompanysuccessfuly

    executeditsplan.Unfortunately,customersdidnotocktothe

    productingreatnumbers.Evenworse,thecompanyhadinvestedin

  • massiveinfrastructure,hiring,andsupporttohandletheinuxof

    customersitexpected.Whenthecustomersfailedtomaterialize,the

    customersitexpected.Whenthecustomersfailedtomaterialize,the

    companyhadcommiteditselfsocompletelythatthey

  • couldnot

    adaptintime.Theyhadachievedfailuresuccessfuly,faithfuly,

    andrigorouslyexecutingaplanthatturnedouttohavebeenuterly

    flawed.

    TheLeanStartupmethod,incontrast,isdesignedtoteach

  • you

    howtodriveastartup.Insteadofmakingcomplexplansthatare

    basedonalotofassumptions,youcanmakeconstantadjustments

    withasteeringwheelcaledtheBuild-Measure-Learnfeedback

  • loop.Throughthisprocessofsteering,wecanlearnwhenandifits

    timetomakeasharpturncaledapivotorwhetherweshould

    perseverealongourcurrentpath.Oncewehaveanenginethats

    revvedup,theLeanStartupoersmethodstoscaleand

  • growthe

    businesswithmaximumacceleration.

    Throughouttheprocessofdriving,youalwayshaveaclearidea

    ofwhereyouregoing.Ifyourecommutingtowork,youdontgive

    upbecausetheresadetourin

  • theroadoryoumadeawrongturn.

    Youremainthoroughlyfocusedongetingtoyourdestination.

    Startupsalsohaveatruenorth,adestinationinmind:creatinga

    thrivingandworld-changingbusiness.Icalthatastartupsvision.

  • Toachievethatvision,startupsemployastrategy,whichincludesa

    businessmodel,aproductroadmap,apointofviewaboutpartners

    andcompetitors,andideasaboutwhothecustomerwilbe.The

    productistheendresultofthisstrategy(seethecharton

  • thispage).

  • Productschangeconstantlythroughtheprocessofoptimization,

    whatIcaltuningtheengine.

  • Lessfrequently,thestrategymayhave

    tochange(caledapivot).However,theoverarchingvisionrarely

    changes.Entrepreneursarecommitedtoseeingthestartupthrough

    tothatdestination.Everysetbackisanopportunityforlearning

  • howtogetwheretheywanttogo(seethechartbelow).

    Inreallife,astartupisaportfolioofactivities.Alotishappening

    simultaneously:theengineisrunning,acquiringnewcustomersand

    servingexistingones;wearetuning,tryingtoimproveour

  • product,

    marketing,andoperations;andwearesteering,decidingifand

    whentopivot.Thechalengeofentrepreneurshipistobalanceal

    theseactivities.Eventhesmaleststartupfacesthechalengeof

  • supportingexistingcustomerswhiletryingtoinnovate.Eventhe

    mostestablishedcompanyfacestheimperativetoinvestin

    innovationlestitbecomeobsolete.Ascompaniesgrow,what

    changesisthemixoftheseactivitiesinthecompanys

  • portfolioof

    work.

    Entrepreneurshipismanagement.Andyet,imagineamodern

    managerwhoistaskedwithbuildinganewproductinthecontext

    ofanestablishedcompany.Imaginethatshegoesbackto

  • her

    companyschiefnancialocer(CFO)ayearlaterandsays,We

    havefailedtomeetthegrowthtargetswepredicted.Infact,we

    havealmostnonewcustomersandnonewrevenue.However,we

  • havelearnedanincredibleamountandareonthecuspofa

    breakthroughnewlineofbusiness.Alweneedisanotheryear.

    Mostofthetime,thiswouldbethelastreportthisintrapreneur

    wouldgiveheremployer.Thereasonisthatingeneral

  • management,afailuretodeliverresultsisduetoeitherafailureto

    planadequatelyorafailuretoexecuteproperly.Bothare

    signicantlapses,yetnewproductdevelopmentinourmodern

    economyroutinelyrequiresexactlythiskindoffailureontheway

  • togreatness.IntheLeanStartupmovement,wehavecometo

    realizethattheseinternalinnovatorsareactualyentrepreneurs,too,

    andthatentrepreneurialmanagementcanhelpthemsucceed;thisis

    thesubjectofthenextchapter.

  • 2DEFINE

    WHO,EXACTLY,ISANENTREPRENEUR?

    AsItraveltheworldtalkingabouttheLeanStartup,Im

    consistentlysurprisedthatImeetpeopleintheaudiencewho

    seemoutofplace.Inadditiontothemoretraditional

  • startup

    entrepreneursImeet,thesepeoplearegeneralmanagers,mostly

    workinginverylargecompanies,whoaretaskedwithcreatingnew

    venturesorproductinnovations.Theyareadeptatorganizational

  • politics:theyknowhowtoformautonomousdivisionswith

    separateprotandlossstatements(P&Ls)andcanshield

    controversialteamsfromcorporatemeddling.Thebiggestsurprise

    isthattheyarevisionaries.LikethestartupfoundersI

  • haveworked

    withforyears,theycanseethefutureoftheirindustriesandare

    preparedtotakeboldriskstoseekoutnewandinnovative

    solutionstotheproblemstheircompaniesface.

    Mark,forexample,isamanagerforanextremely

  • largecompany

    whocametooneofmylectures.Heistheleaderofadivisionthat

    recentlyhadbeencharteredtobringhiscompanyintothetwenty-

    rstcenturybybuildinganewsuiteofproductsdesignedtotake

  • advantageoftheInternet.Whenhecametotalktomeafterward,I

    startedtogivehimthestandardadviceabouthowtocreate

    innovationteamsinsidebigcompanies,andhestoppedmein

    midstream:Yeah,IvereadTheInnovatorsDilemma.1

  • Ivegotthat

    altakencareof.Hewasalong-termemployeeofthecompany

    andasuccessfulmanagertoboot,somanaginginternalpoliticswas

    andasuccessfulmanagertoboot,somanaginginternalpoliticswas

  • theleastofhisproblems.Ishouldhaveknown;hissuccesswasa

    testamenttohisabilitytonavigatethecompanyscorporate

    policies,personnel,andprocessestogetthingsdone.

    Next,Itriedtogivehimsomeadviceaboutthefuture,aboutcool

  • newhighlyleveragedproductdevelopmenttechnologies.He

    interruptedmeagain:Right.IknowalabouttheInternet,andI

    haveavisionforhowourcompanyneedstoadapttoitordie.

    Markhasaltheentrepreneurialprerequisites

  • nailedproper

    teamstructure,goodpersonnel,astrongvisionforthefuture,and

    anappetiteforrisktakingandsoitnalyoccurredtometoask

    whyhewascomingtomeforadvice.Hesaid,Itsasifwehaveal

  • oftherawmaterials:kindling,wood,paper,int,evensome

    sparks.Butwheresthere?Thetheoriesofmanagementthat

    Markhadstudiedtreatinnovationlikeablackboxbyfocusingon

    thestructurescompaniesneedtoputinplacetoform

  • internal

    startupteams.ButMarkfoundhimselfworkinginsidetheblack

    boxandinneedofguidance.

    WhatMarkwasmissingwasaprocessforconvertingtheraw

    materialsofinnovationinto

  • real-worldbreakthroughsuccesses.

    Onceateamissetup,whatshoulditdo?Whatprocessshouldit

    use?Howshoulditbeheldaccountabletoperformance

    milestones?ThesearequestionstheLeanStartupmethodologyis

  • designedtoanswer.

    Mypoint?MarkisanentrepreneurjustlikeaSiliconValeyhigh-

    techfounderwithagaragestartup.Heneedstheprinciplesofthe

    LeanStartupjustasmuchasthefolksIthoughtofasclassic

  • entrepreneursdo.

    Entrepreneurswhooperateinsideanestablishedorganization

    sometimesarecaledintrapreneursbecauseofthespecial

    circumstancesthatatendbuildingastartupwithinalarger

  • company.AsIhaveappliedLeanStartupideasinanever-widening

    varietyofcompaniesandindustries,Ihavecometobelievethat

    intrapreneurshavemuchmoreincommonwiththerestofthe

    communityofentrepreneursthanmostpeoplebelieve.

  • Thus,when

    Iusethetermentrepreneur,Iamreferringtothewholestartup

    ecosystemregardlessofcompanysize,sector,orstageof

    ecosystemregardlessofcompanysize,sector,orstageof

  • development.

    Thisbookisforentrepreneursofalstripes:fromyoung

    visionarieswithlitlebackingbutgreatideastoseasoned

    visionarieswithinlargercompaniessuchasMarkandthepeople

    whoholdthemaccountable.

  • IFIMANENTREPRENEUR,WHATSASTARTUP?

    TheLeanStartupisasetofpracticesforhelpingentrepreneurs

    increasetheiroddsofbuildingasuccessfulstartup.Tosettherecord

    straight,itsimportanttodefinewhatastartupis:

  • Astartupisahumaninstitutiondesignedtocreateanew

    productorserviceunderconditionsofextremeuncertainty.

    Ivecometorealizethatthemostimportantpartofthis

    denitioniswhatitomits.Itsaysnothingaboutsizeofthe

  • company,theindustry,orthesectoroftheeconomy.Anyonewhois

    creatinganewproductorbusinessunderconditionsofextreme

    uncertaintyisanentrepreneurwhetherheorsheknowsitornot

    andwhetherworkinginagovernmentagency,a

  • venture-backed

    company,anonprot,oradecidedlyfor-protcompanywith

    financialinvestors.

    Letstakealookateachofthepieces.Thewordinstitution

    connotesbureaucracy,process,evenlethargy.How

  • canthatbepart

    ofastartup?Yetsuccessfulstartupsarefulofactivitiesassociated

    withbuildinganinstitution:hiringcreativeemployees,coordinating

    theiractivities,andcreatingacompanyculturethatdeliversresults.

  • Weoftenlosesightofthefactthatastartupisnotjustabouta

    product,atechnologicalbreakthrough,orevenabriliantidea.A

    startupisgreaterthanthesumofitsparts;itisanacutelyhuman

    enterprise.

  • Thefactthatastartupsproductorserviceisanewinnovationis

    alsoanessentialpartofthedenitionandatrickyparttoo.Iprefer

    tousethebroadestdenitionofproduct,onethatencompassesany

    tousethebroadestdenitionofproduct,onethat

  • encompassesany

    sourceofvalueforthepeoplewhobecomecustomers.Anything

    thosecustomersexperiencefromtheirinteractionwithacompany

    shouldbeconsideredpartofthatcompanysproduct.Thisistrueof

  • agrocerystore,ane-commercewebsite,aconsultingservice,anda

    nonprotsocialserviceagency.Ineverycase,theorganizationis

    dedicatedtouncoveringanewsourceofvalueforcustomersand

    caresabouttheimpactofitsproductonthosecustomers.

  • Itsalsoimportantthatthewordinnovationbeunderstood

    broadly.Startupsusemanykindsofinnovation:novelscientic

    discoveries,repurposinganexistingtechnologyforanewuse,

    devisinganewbusinessmodelthatunlocksvaluethat

  • washidden,

    orsimplybringingaproductorservicetoanewlocationora

    previouslyunderservedsetofcustomers.Inalthesecases,

    innovationisattheheartofthecompanyssuccess.

    Thereisonemoreimportantpartofthisdefinition:the

  • contextin

    whichtheinnovationhappens.Mostbusinesseslargeandsmal

    alikeareexcludedfromthiscontext.Startupsaredesignedto

    confrontsituationsofextremeuncertainty.Toopenupanew

  • businessthatisanexactcloneofanexistingbusinessaltheway

    downtothebusinessmodel,pricing,targetcustomer,andproduct

    maybeanatractiveeconomicinvestment,butitisnotastartup

    becauseitssuccessdependsonlyonexecutionsomuch

  • sothatthis

    successcanbemodeledwithhighaccuracy.(Thisiswhysomany

    smalbusinessescanbenancedwithsimplebankloans;thelevel

    ofriskanduncertaintyisunderstoodwelenoughthataloanocer

  • canassessitsprospects.)

    Mosttoolsfromgeneralmanagementarenotdesignedtoourish

    intheharshsoilofextremeuncertaintyinwhichstartupsthrive.

    Thefutureisunpredictable,customersfaceagrowingarrayof

  • alternatives,andthepaceofchangeiseverincreasing.Yetmost

    startupsingaragesandenterprisesalikestilaremanagedby

    usingstandardforecasts,productmilestones,anddetailedbusiness

    plans.

  • THESNAPTAXSTORY

    In2009,astartupdecidedtotrysomethingrealyaudacious.They

    wantedtoliberatetaxpayersfromexpensivetaxstoresby

    automatingtheprocessofcolectinginformationtypicalyfoundon

    W-2forms(theend-of-year

  • statementthatmostemployeesreceive

    fromtheiremployerthatsummarizestheirtaxablewagesforthe

    year).Thestartupquicklyranintodiculties.Eventhoughmany

    consumershadaccesstoaprinter/scannerintheirhomeoroce,

  • fewknewhowtousethosedevices.Afternumerousconversations

    withpotentialcustomers,theteamlitupontheideaofhaving

    customerstakephotographsoftheformsdirectlyfromtheircel

    phone.Intheprocessoftestingthisconcept,

  • customersasked

    somethingunexpected:woulditbepossibletonishthewholetax

    returnrightonthephoneitself?

    Thatwasnotaneasytask.Traditionaltaxpreparationrequires

    consumerstowadethrough

  • hundredsofquestions,manyforms,and

    alotofpaperwork.Thisstartuptriedsomethingnovelbydeciding

    toshipanearlyversionofitsproductthatcoulddomuchlessthan

    acompletetaxpackage.Theinitialversionworkedonlyfor

  • consumerswithaverysimplereturntole,anditworkedonlyin

    California.

    Insteadofhavingconsumersloutacomplexform,they

    alowedthecustomerstousethephonescameratotakeapicture

    oftheirW-2forms.From

  • thatsinglepicture,thecompany

    developedthetechnologytocompileandlemostofthe1040EZ

    taxreturn.Comparedwiththedrudgeryoftraditionaltaxling,the

    newproductcaledSnapTaxprovidesamagicalexperience.

  • Fromitsmodestbeginning,SnapTaxgrewintoasignicantstartup

    successstory.Itsnationwidelaunchin2011showedthatcustomers

    lovedit,tothetuneofmorethan350,000downloadsintherst

    threeweeks.

  • Thisisthekindofamazinginnovationyoudexpectfromanew

    startup.

    However,thenameofthiscompanymaysurpriseyou.SnapTax

    wasdevelopedbyIntuit,Americaslargestproducerofnance,tax,

  • andaccountingtoolsforindividualsandsmalbusinesses.With

    andaccountingtoolsforindividualsandsmalbusinesses.With

    morethan7,700employeesandannualrevenuesinthebilions,

    Intuitisnotatypicalstartup.2

  • TheteamthatbuiltSnapTaxdoesntlookmuchlikethe

    archetypalimageofentrepreneurseither.Theydontworkina

    garageoreatramennoodles.Theircompanydoesntlackfor

    resources.Theyarepaidafulsalaryandbenefits.Theycomeintoa

  • regularoficeeveryday.Yettheyareentrepreneurs.

    Storieslikethisonearenotnearlyascommoninsidelarge

    corporationsastheyshouldbe.Afteral,SnapTaxcompetesdirectly

    withoneofIntuitsagshipproducts:thefulyfeaturedTurboTax

  • desktopsoftware.Usualy,companieslikeIntuitfalintothetrap

    describedinClaytonChristenstensTheInnovatorsDilemma:they

    areverygoodatcreatingincrementalimprovementstoexisting

    productsandservingexistingcustomers,which

  • Christensencaled

    sustaininginnovation,butstruggletocreatebreakthroughnew

    productsdisruptiveinnovationthatcancreatenewsustainable

    sourcesofgrowth.

    OneremarkablepartoftheSnapTaxstoryiswhatthe

  • team

    leaderssaidwhenIaskedthemtoaccountfortheirunlikelysuccess.

    Didtheyhiresuperstarentrepreneursfromoutsidethecompany?

    No,theyassembledateamfromwithinIntuit.Didtheyface

  • constantmeddlingfromseniormanagement,whichisthebaneof

    innovationteamsinmanycompanies?No,theirexecutivesponsors

    createdanislandoffreedomwheretheycouldexperimentas

    necessary.Didtheyhaveahugeteam,alargebudget,

  • andlotsof

    marketingdolars?Nope,theystartedwithateamoffive.

    WhatalowedtheSnapTaxteamtoinnovatewasnottheirgenes,

    destiny,orastrologicalsignsbutaprocessdeliberatelyfacilitatedby

  • Intuitsseniormanagement.Innovationisabotoms-up,

    decentralized,andunpredictablething,butthatdoesntmeanit

    cannotbemanaged.Itcan,buttodosorequiresanew

    managementdiscipline,onethatneedstobemasterednotjustby

  • practicingentrepreneursseekingtobuildthenextbigthingbutalso

    bythepeoplewhosupportthem,nurturethem,andholdthem

    accountable.Inotherwords,cultivatingentrepreneurshipisthe

    accountable.Inotherwords,cultivatingentrepreneurship

  • isthe

    responsibilityofseniormanagement.Today,acuting-edge

    companysuchasIntuitcanpointtosuccessstorieslikeSnapTax

    becauseithasrecognizedtheneedforanewmanagement

    paradigm.Thisisa

  • realizationthatwasyearsinthemaking.3

    ASEVEN-THOUSAND-PERSONLEANSTARTUP

    In1983,Intuitsfounder,thelegendaryentrepreneurScotCook,

    hadtheradicalnotion(withcofounderTomProulx)thatpersonal

  • accountingshouldhappenbycomputer.Theirsuccesswasfarfrom

    inevitable;theyfacednumerouscompetitors,anuncertainfuture,

    andaninitialytinymarket.Adecadelater,thecompanywent

    publicandsubsequentlyfendedowel-publicizedat

  • acksfrom

    largerincumbents,includingthesoftwarebehemothMicrosoft.

    PartlywiththehelpoffamedventurecapitalistJohnDoerr,Intuit

    becameafulydiversiedenterprise,amemberoftheFortune

  • 1000thatnowprovidesdozensofmarket-leadingproductsacross

    itsmajordivisions.

    Thisisthekindofentrepreneurialsuccesswereusedtohearing

    about:aragtagteamofunderdogswhoeventualyachievefame,

  • acclaim,andsignificantriches.

    Flash-forwardto2002.Cookwasfrustrated.Hehadjusttabulated

    tenyearsofdataonalofIntuitsnewproductintroductionsand

    hadconcludedthatthecompanywasgetingameaslyreturnonits

  • massiveinvestments.Simplyput,toomanyofitsnewproducts

    werefailing.Bytraditionalstandards,Intuitisanextremelywel-

    managedcompany,butasScotdugintotherootcausesofthose

    failures,hecametoadicultconclusion:theprevailing

  • managementparadigmheandhiscompanyhadbeenpracticing

    wasinadequatetotheproblemofcontinuousinnovationinthe

    moderneconomy.

    Byfal2009,CookhadbeenworkingtochangeIntuits

    managementculturefor

  • severalyears.Hecameacrossmyearly

    workontheLeanStartupandaskedmetogiveatalkatIntuit.In

    SiliconValeythisisnotthekindofinvitationyouturndown.I

    SiliconValeythisisnotthekindofinvitationyouturndown.I

  • admitIwascurious.IwasstilatthebeginningofmyLeanStartup

    journeyanddidnthavemuchappreciationforthechalengesfaced

    byaFortune1000companylikehis.

    MyconversationswithCookandIntuitchiefexecutiveocer

  • (CEO)BradSmithweremyinitiationintothethinkingofmodern

    generalmanagers,whostrugglewithentrepreneurshipeverybitas

    muchasdoventurecapitalistsandfoundersinagarage.Tocombat

    thesechalenges,ScotandBradaregoingbackto

  • Intuitsroots.

    Theyareworkingtobuildentrepreneurshipandrisktakingintoal

    theirdivisions.

    Forexample,consideroneofIntuitsagshipproducts.Because

    TurboTaxdoesmostofitssalesaroundtaxseasoninthe

  • United

    States,itusedtohaveanextremelyconservativeculture.Overthe

    courseoftheyear,themarketingandproductteamswould

    conceiveonemajorinitiativethatwouldberoledoutjustintime

  • fortaxseason.Nowtheytestovervehundreddierentchangesin

    atwo-and-a-half-monthtaxseason.Theyrerunninguptoseventy

    dierenttestsperweek.Theteamcanmakeachangeliveonits

    websiteonThursday,runitovertheweekend,readthe

  • resultson

    Monday,andcometoconclusionsstartingTuesday;thenthey

    rebuildnewtestsonThursdayandlaunchthenextsetonThursday

    night.

    AsScotputit,Boy,theamountoflearningtheyget

  • isjust

    immensenow.Andwhatitdoesisdevelopentrepreneurs,because

    whenyouhaveonlyonetest,youdonthaveentrepreneurs,you

    havepoliticians,becauseyouhavetosel.Outofahundredgood

  • ideas,youvegottoselyouridea.Soyoubuildupasocietyof

    politiciansandsalespeople.Whenyouhavevehundredtests

    yourerunning,theneverybodysideascanrun.Andthenyoucreate

    entrepreneurswhorunandlearnandcanretestand

  • relearnas

    opposedtoasocietyofpoliticians.Soweretryingtodrivethat

    throughoutourorganization,usingexampleswhichhavenothingto

    dowithhightech,likethewebsiteexample.Everybusinesstoday

  • hasawebsite.Youdonthavetobehightechtousefast-cycle

    testing.

    Thiskindofchangeishard.Afteral,thecompanyhasa

    Thiskindofchangeishard.Afteral,thecompanyhasa

    signicantnumberofexistingcustomerswhocontinueto

  • demand

    exceptionalserviceandinvestorswhoexpectsteady,growing

    returns.

    Scotsays,

    Itgoesagainstthegrainofwhatpeoplehavebeentaughtin

  • businessandwhatleadershavebeentaught.Theproblem

    isntwiththeteamsortheentrepreneurs.Theylovethe

    chancetoquicklygettheirbabyoutintothemarket.They

    lovethechancetohavethecustomervoteinsteadofthe

  • suitsvoting.Therealissueiswiththeleadersandthe

    middlemanagers.Therearemanybusinessleaderswho

    havebeensuccessfulbecauseofanalysis.Theythinktheyre

    analysts,andtheirjobistodogreatplanningandanalyzing

  • andhaveaplan.

    Theamountoftimeacompanycancountonholdingonto

    marketleadershiptoexploititsearlierinnovationsisshrinking,and

    thiscreatesanimperativeforeventhemostentrenchedcompanies

  • toinvestininnovation.Infact,Ibelieveacompanysonly

    sustainablepathtolong-termeconomicgrowthistobuildan

    innovationfactorythatusesLeanStartuptechniquestocreate

    disruptiveinnovationsonacontinuousbasis.Inother

  • words,

    establishedcompaniesneedtogureouthowtoaccomplishwhat

    ScotCookdidin1983,butonanindustrialscaleandwithan

    establishedcohortofmanagerssteepedintraditionalmanagement

  • culture.

    Everthemaverick,Cookaskedmetoputtheseideastothetest,

    andsoIgaveatalkthatwassimulcasttoalseventhousandplus

    IntuitemployeesduringwhichIexplainedthetheoryoftheLean

  • Startup,repeatingmydenition:anorganizationdesignedtocreate

    newproductsandservicesunderconditionsofextremeuncertainty.

    Whathappenednextisetchedinmymemory.CEOBradSmith

    hadbeensitingnexttomeasIspoke.WhenIwasdone,he

  • gotup

    andsaidbeforealofIntuitsemployees,Folks,listenup.You

    andsaidbeforealofIntuitsemployees,Folks,listenup.You

    heardEricsdefinitionofastartup.Ithasthreeparts,andwehereat

  • Intuitmatchalthreepartsofthatdefinition.

    ScotandBradareleaderswhorealizethatsomethingnewis

    neededinmanagementthinking.Intuitisproofthatthiskindof

    thinkingcanworkinestablishedcompanies.Bradexplainedtome

  • howtheyholdthemselvesaccountablefortheirnewinnovation

    eortsbymeasuringtwothings:thenumberofcustomersusing

    productsthatdidntexistthreeyearsagoandthepercentageof

    revenuecomingfromoferingsthatdidnotexistthree

  • yearsago.

    Undertheoldmodel,ittookanaverageof5.5yearsfora

    successfulnewproducttostartgenerating$50milioninrevenue.

    Bradexplainedtome,Wevegenerated$50milioninoerings

    thatdidnotexisttwelve

  • monthsagointhelastyear.Nowitsnot

    oneparticularoering.Itsacombinationofawholebunchof

    innovationhappening,butthatsthekindofstuthatscreating

    someenergyforus,thatwethinkwecantrulyshort-circuitthe

  • rampbykilingthingsthatdontmakesensefastanddoubling

    downontheonesthatdo.ForacompanyaslargeasIntuit,these

    aremodestresultsandearlydays.Theyhavedecadesoflegacy

    systemsandlegacythinkingtoovercome.However,their

  • leadership

    inadoptingentrepreneurialmanagementisstartingtopayof.

    Leadershiprequirescreatingconditionsthatenableemployeesto

    dothekindsofexperimentationthatentrepreneurshiprequires.For

  • example,changesinTurboTaxenabledtheIntuitteamtodevelop

    vehundredexperimentspertaxseason.Beforethat,marketers

    withgreatideascouldnthavedonethosetestseveniftheyd

    wantedto,becausetheydidnthaveasysteminplace

  • through

    whichtochangethewebsiterapidly.Intuitinvestedinsystemsthat

    increasedthespeedatwhichtestscouldbebuilt,deployed,and

    analyzed.

    AsCooksays,Developingtheseexperimentation

  • systemsisthe

    responsibilityofseniormanagement;theyhavetobeputinbythe

    leadership.ItsmovingleadersfromplayingCaesarwiththeir

    thumbsupanddownoneveryideatoinsteadputinginthe

  • cultureandthesystemssothatteamscanmoveandinnovateatthe

    speedoftheexperimentationsystem.

    3LEARN

    Asanentrepreneur,nothingplaguedmemorethanthequestion

    ofwhethermycompanywas

  • makingprogresstowardcreatinga

    successfulbusiness.Asanengineerandlaterasamanager,Iwas

    accustomedtomeasuringprogressbymakingsureourwork

    proceededaccordingtoplan,washighquality,andcostaboutwhat

  • wehadprojected.

    Aftermanyyearsasanentrepreneur,Istartedtoworryabout

    measuringprogressinthisway.Whatifwefoundourselves

    buildingsomethingthatnobodywanted?Inthatcasewhatdidit

  • materifwediditontimeandonbudget?WhenIwenthomeat

    theendofadayswork,theonlythingsIknewforsurewerethatI

    hadkeptpeoplebusyandspentmoneythatday.Ihopedthatmy

    teamseortstookusclosertoourgoal.Ifwewoundup

  • takinga

    wrongturn,Idhavetotakecomfortinthefactthatatleastwed

    learnedsomethingimportant.

    Unfortunately,learningistheoldestexcuseinthebookfora

    failureofexecution.Itswhatmanagersfalbackonwhen

  • theyfail

    toachievetheresultswepromised.Entrepreneurs,underpressure

    tosucceed,arewildlycreativewhenitcomestodemonstrating

    whatwehavelearned.Wecanaltelagoodstorywhenourjob,

  • career,orreputationdependsonit.

    However,learningiscoldcomforttoemployeeswhoare

    folowinganentrepreneurintotheunknown.Itiscoldcomfortto

    theinvestorswhoalocatepreciousmoney,time,andenergyto

  • entrepreneurialteams.Itiscoldcomforttotheorganizationslarge

    entrepreneurialteams.Itiscoldcomforttotheorganizationslarge

    andsmalthatdependonentrepreneurialinnovationtosurvive.

    Youcanttakelearningtothebank;youcantspenditor

  • investit.

    Youcannotgiveittocustomersandcannotreturnittolimited

    partners.Isitanywonderthatlearninghasabadnamein

    entrepreneurialandmanagerialcircles?

    Yetifthefundamentalgoal

  • ofentrepreneurshipistoengagein

    organizationbuildingunderconditionsofextremeuncertainty,its

    mostvitalfunctionislearning.Wemustlearnthetruthaboutwhich

    elementsofourstrategyareworkingtorealizeourvisionand

  • whicharejustcrazy.Wemustlearnwhatcustomersrealywant,not

    whattheysaytheywantorwhatwethinktheyshouldwant.We

    mustdiscoverwhetherweareonapaththatwilleadtogrowinga

    sustainablebusiness.

  • IntheLeanStartupmodel,wearerehabilitatinglearningwitha

    conceptIcalvalidatedlearning.Validatedlearningisnotafter-the-

    factrationalizationoragoodstorydesignedtohidefailure.Itisa

    rigorousmethodfordemonstratingprogresswhen

  • oneisembedded

    inthesoilofextremeuncertaintyinwhichstartupsgrow.Validated

    learningistheprocessofdemonstratingempiricalythatateamhas

    discoveredvaluabletruthsaboutastartupspresentandfuture

  • businessprospects.Itismoreconcrete,moreaccurate,andfaster

    thanmarketforecastingorclassicalbusinessplanning.Itisthe

    principalantidotetothelethalproblemofachievingfailure:

    successfulyexecutingaplanthatleadsnowhere.

  • VALIDATEDLEARNINGATIMVU

    Letmeilustratethiswithanexamplefrommycareer.Many

    audienceshaveheardmerecountthestoryofIMVUsfoundingand

    themanymistakeswemadeindevelopingourrstproduct.Il

  • nowelaborateononeofthosemistakestoilustratevalidated

    learningclearly.

    ThoseofusinvolvedinthefoundingofIMVUaspiredtobe

    seriousstrategicthinkers.Eachofushadparticipatedinprevious

  • venturesthathadfailed,andwewereloathtorepeatthat

    venturesthathadfailed,andwewereloathtorepeatthat

    experience.Ourmainconcernsintheearlydaysdealtwiththe

    folowingquestions:Whatshouldwebuildandforwhom?What

  • marketcouldweenteranddominate?Howcouldwebuilddurable

    valuethatwouldnotbesubjecttoerosionbycompetition?1

    BriliantStrategy

    Wedecidedtoentertheinstantmessaging(IM)market.In2004,

  • thatmarkethadhundredsofmilionsofconsumersactively

    participatingworldwide.However,themajorityofthecustomers

    whowereusingIMproductswerenotpayingfortheprivilege.

    Instead,largemediaandportalcompaniessuchas

  • AOL,Microsoft,

    andYahoo!operatedtheirIMnetworksasalossleaderforother

    serviceswhilemakingmodestamountsofmoneythrough

    advertising.

    IMisanexampleofamarketthatinvolvesstrongnetwork

  • efects.Likemostcommunicationnetworks,IMisthoughttofolow

    Metcalfeslaw:thevalueofanetworkasawholeisproportionalto

    thesquareofthenumberofparticipants.Inotherwords,themore

    peopleinthenetwork,themorevaluablethenetwork.

  • Thismakes

    intuitivesense:thevaluetoeachparticipantisdrivenprimarilyby

    howmanyotherpeopleheorshecancommunicatewith.Imagine

    aworldinwhichyouowntheonlytelephone;itwouldhaveno

  • value.Onlywhenotherpeoplealsohaveatelephonedoesit

    becomevaluable.

    In2004,theIMmarketwaslockedupbyahandfulof

    incumbents.Thetopthreenetworkscontroledmorethan80

    percentoftheoveralusage

  • andwereintheprocessof

    consolidatingtheirgainsinmarketshareattheexpenseofa

    numberofsmalerplayers.2Thecommonwisdomwasthatitwas

    moreorlessimpossibletobringanewIMnetworktomarket

  • withoutspendinganextraordinaryamountofmoneyonmarketing.

    Thereasonforthatwisdomissimple.Becauseofthepowerof

    networkeects,IMproductshavehighswitchingcosts.Toswitch

    fromonenetworktoanother,customerswouldhaveto

  • convince

    fromonenetworktoanother,customerswouldhavetoconvince

    theirfriendsandcoleaguestoswitchwiththem.Thisextrawork

    forcustomerscreatesabarriertoentryintheIMmarket:withal

  • consumerslockedintoanincumbentsproduct,thereareno

    customersleftwithwhomtoestablishabeachhead.

    AtIMVUwesetledonastrategyofbuildingaproductthat

    wouldcombinethelargemassappealoftraditionalIMwiththe

  • highrevenuepercustomerofthree-dimensional(3D)videogames

    andvirtualworlds.Becauseofthenearimpossibilityofbringinga

    newIMnetworktomarket,wedecidedtobuildanIMadd-on

    productthatwouldinteroperatewiththeexisting

  • networks.Thus,

    customerswouldbeabletoadopttheIMVUvirtualgoodsand

    avatarcommunicationtechnologywithouthavingtoswitchIM

    providers,learnanewuserinterface,andmostimportantbring

  • theirfriendswiththem.

    Infact,wethoughtthislastpointwasessential.Fortheadd-on

    producttobeuseful,customerswouldhavetouseitwiththeir

    existingfriends.Everycommunicationwouldcomeembeddedwith

  • aninvitationtojoinIMVU.Ourproductwouldbeinherentlyviral,

    spreadingthroughouttheexistingIMnetworkslikeanepidemic.To

    achievethatviralgrowth,itwasimportantthatouradd-onproduct

    supportasmanyoftheexistingIMnetworksas

  • possibleandwork

    onalkindsofcomputers.

    SixMonthstoLaunch

    Withthisstrategyinplace,mycofoundersandIbeganaperiodof

    intensework.Asthechieftechnologyocer,itwasmy

    responsibility,amongother

  • things,towritethesoftwarethatwould

    supportIMinteroperabilityacrossnetworks.MycofoundersandI

    workedformonths,putingincrazyhoursstrugglingtogetourrst

    productreleased.Wegaveourselvesaharddeadlineofsixmonths

  • 180daystolaunchtheproductandatractourrstpaying

    customers.Itwasagruelingschedule,butweweredeterminedto

    launchontime.

    Theadd-onproductwassolargeandcomplexandhadsomany

  • Theadd-onproductwassolargeandcomplexandhadsomany

    movingpartsthatwehadtocutalotofcornerstogetitdoneon

    time.Iwontmincewords:therstversionwasterrible.Wespent

    endlesshoursarguingaboutwhichbugstoxandwhich

  • wecould

    livewith,whichfeaturestocutandwhichtotrytocramin.Itwasa

    wonderfulandterrifyingtime:wewerefulofhopeaboutthe

    possibilitiesforsuccessandfuloffearabouttheconsequencesof

  • shippingabadproduct.

    Personaly,Iwasworriedthatthelowqualityoftheproduct

    wouldtarnishmyreputationasanengineer.PeoplewouldthinkI

    didntknowhowtobuildaqualityproduct.Alofusfeared

    tarnishingtheIMVUbrand;

  • afteral,wewerechargingpeople

    moneyforaproductthatdidntworkverywel.Wealenvisioned

    thedamningnewspaperheadlines:IneptEntrepreneursBuild

    DreadfulProduct.

    Aslaunchdayapproached,

  • ourfearsescalated.Inoursituation,

    manyentrepreneurialteamsgiveintofearandpostponethelaunch

    date.AlthoughIunderstandthisimpulse,Iamgladwepersevered,

    sincedelaypreventsmanystartupsfromgetingthefeedbackthey

  • need.Ourpreviousfailuresmadeusmoreafraidofanother,even

    worse,outcomethanshippingabadproduct:buildingsomething

    thatnobodywants.Andso,teethclenchedandapologiesatthe

    ready,wereleasedourproducttothepublic.

  • Launch

    Andthennothinghappened!Itturnedoutthatourfearswere

    unfounded,becausenobodyeventriedourproduct.AtrstIwas

    relievedbecauseatleastnobodywasndingouthowbadthe

  • productwas,butsoonthatgavewaytoseriousfrustration.Afteral

    thehourswehadspentarguingaboutwhichfeaturestoincludeand

    whichbugstox,ourvaluepropositionwassofarothat

    customerswerentgetingfarenoughintotheexperiencetondout

  • howbadourdesignchoiceswere.Customerswouldnteven

    downloadourproduct.

    Overtheensuingweeksandmonths,welaboredtomakethe

    Overtheensuingweeksandmonths,welaboredtomakethe

  • productbeter.Webroughtinasteadyowofcustomersthrough

    ouronlineregistrationanddownloadprocess.Wetreatedeach

    dayscustomersasabrand-newreportcardtoletusknowhowwe

    weredoing.Weeventualylearnedhowtochangethe

  • products

    positioningsothatcustomersatleastwoulddownloadit.Wewere

    makingimprovementstotheunderlyingproductcontinuously,

    shippingbugxesandnewchangesdaily.However,despiteour

  • besteorts,wewereabletopersuadeonlyapatheticalysmal

    numberofpeopletobuytheproduct.

    Inretrospect,onegooddecisionwemadewastosetclear

    revenuetargetsforthoseearlydays.Intherstmonthweintended

  • tomake$300intotalrevenue,andwedidbarely.Manyfriends

    andfamilymemberswereasked(okay,begged).Eachmonthour

    smalrevenuetargetsincreased,rstto$350andthento$400.As

    theyrose,ourstrugglesincreased.Wesoonranoutof

  • friendsand

    family;ourfrustrationescalated.Weweremakingtheproduct

    betereveryday,yetourcustomersbehaviorremainedunchanged:

    theystilwouldntuseit.

    Ourfailuretomovethenumbersproddedusto

  • accelerateour

    eortstobringcustomersintoouroceforin-personinterviews

    andusabilitytests.Thequantitativetargetscreatedthemotivation

    toengageinqualitativeinquiryandguidedusinthequestionswe

  • asked;thisisapaternwelseethroughoutthisbook.

    IwishIcouldsaythatIwastheonetorealizeourmistakeand

    suggestthesolution,butintruth,Iwasthelasttoadmitthe

    problem.Inshort,ourentirestrategicanalysisofthemarketwas

  • uterlywrong.Weguredthisoutempiricaly,through

    experimentation,ratherthanthroughfocusgroupsormarket

    research.Customerscouldnotteluswhattheywanted;most,after

    al,hadneverheardof3Davatars.Instead,theyrevealedthetruth

  • throughtheiractionorinactionaswestruggledtomakethe

    productbeter.

    TalkingtoCustomers

    Outofdesperation,wedecidedtotalktosomepotentialcustomers.

    Webroughtthemintoouroce,andsaid,Trythisnew

  • product;

    itsIMVU.Ifthepersonwasateenager,aheavyuserofIM,ora

    techearlyadopter,heorshewouldengagewithus.Inconstrast,if

    itwasamainstreamperson,theresponsewas,Right.Soexactly

  • whatwouldyoulikemetodo?Wedgetnowherewiththe

    mainstreamgroup;theythoughtIMVUwastooweird.

    Imagineaseventeen-year-oldgirlsitingdownwithustolookat

    thisproduct.Shechoosesheravatarandsays,Oh,thisis

  • realy

    fun.Shescustomizingtheavatar,decidinghowshesgoingtolook.

    Thenwesay,Alright,itstimetodownloadtheinstantmessaging

    add-on,andsheresponds,Whatsthat?

    Wel,itsthisthingthat

  • interoperateswiththeinstantmessaging

    client.Sheslookingatusandthinking,Iveneverheardofthat,

    myfriendshaveneverheardofthat,whydoyouwantmetodo

    that?Itrequiredalotofexplanation;aninstantmessagingadd-on

  • wasnotaproductcategorythatexistedinhermind.

    Butsinceshewasintheroomwithus,wewereabletotalkher

    intodoingit.Shedownloadstheproduct,andthenwesay,Okay,

    inviteoneofyourfriendstochat.Andshesays,Noway!Wesay,

  • Whynot?Andshesays,Wel,Idontknowifthisthingiscool

    yet.Youwantmetoriskinvitingoneofmyfriends?Whatarethey

    goingtothinkofme?Ifitsucks,theyregoingtothinkIsuck,

    right?Andwesay,No,no,itsgoingtobesomuchfun

  • onceyou

    getthepersoninthere;itsasocialproduct.Shelooksatus,her

    faceledwithdoubt;youcanseethatthisisadealbreaker.Of

    course,thersttimeIhadthatexperience,Isaid,Itsalright,its

  • justthisoneperson,sendherawayandgetmeanewone.Then

    thesecondcustomercomesinandsaysthesamething.Thenthe

    thirdcustomercomesin,anditsthesamething.Youstarttosee

    paterns,andnomaterhowstubbornyouare,theres

  • obviously

    somethingwrong.

    Customerskeptsaying,Iwanttouseitbymyself.Iwanttotryit

    outrsttoseeifitsrealycoolbeforeIinviteafriend.Ourteam

    wasfromthevideogameindustry,soweunderstood

  • whatthat

    meant:single-playermode.Sowebuiltasingle-playerversion.

    meant:single-playermode.Sowebuiltasingle-playerversion.

    Wedbringnewcustomersintoouroce.Theydcustomizethe

  • avataranddownloadtheproductlikebefore.Thentheywouldgo

    intosingle-playermode,andwedsay,Playwithyouravatarand

    dressitup;checkoutthecoolmovesitcanmake.Folowedby,

    Okay,youdidthatbyyourself;nowitstimeto

  • inviteoneofyour

    friends.Youcanseewhatscoming.Theydsay,Noway!Thisisnt

    cool.Andwedsay,Wel,wetoldyouitwasntgoingtobecool!

    Whatisthepointofasingle-playerexperienceforasocial

    product?See,wethoughtwe

  • shouldgetagoldstarjustfor

    listeningtoourcustomers.Exceptourcustomersstildidntlikethe

    product.Theywouldlookatusandsay,Listen,oldman,youdont

    understand.Whatisthedealwiththiscrazybusinessofinviting

  • friendsbeforeIknowifitscool?Itwasatotaldealbreaker.

    Outoffurtherdesperation,weintroducedafeaturecaled

    ChatNowthatalowsyoutopushabutonandberandomly

    matchedwithsomebodyelseanywhereintheworld.The

  • only

    thingyouhaveincommonisthatyoubothpushedthebutonat

    thesametime.Alofasudden,inourcustomerservicetests,people

    weresaying,Oh,thisisfun!

    Sowedbringthemin,

  • theyduseChatNow,andmaybethey

    wouldmeetsomebodytheythoughtwascool.Theydsay,Hey,

    thatguywasneat;Iwanttoaddhimtomybuddylist.Wheresmy

    buddylist?Andwedsay,Oh,no,youdontwantanewbuddy

  • list;youwanttouseyourregularAOLbuddylist.Remember,this

    washowweplannedtoharnesstheinteroperabilitythatwould

    leadtonetworkeectsandviralgrowth.Picturethecustomer

    lookingatus,asking,Whatdoyouwantmetodo

  • exactly?And

    wedsay,Wel,justgivethestrangeryourAIMscreennamesoyou

    canputhimonyourbuddylist.Youcouldseetheireyesgowide,

    andtheydsay,Areyoukiddingme?AstrangeronmyAIMbuddy

  • list?Towhichwedrespond,Yes;otherwiseyoudhaveto

    downloadawholenewIMclientwithanewbuddylist.And

    theydsay,DoyouhaveanyideahowmanyIMclientsIalready

    run?

  • No.Oneortwo,maybe?Thatshowmanyclientseachofusin

    theoceused.Towhichtheteenagerwouldsay,Duh!Irun

    theoceused.Towhichtheteenagerwouldsay,Duh!Irun

    eight.Wehadnoideahowmanyinstantmessaging

  • clientsthere

    wereintheworld.

    Wehadtheincorrectpreconceptionthatitsachalengetolearn

    newsoftwareanditstrickytomoveyourfriendsovertoanew

    buddylist.Ourcustomersrevealedthatthiswas

  • nonsense.We

    wantedtodrawdiagramsonthewhiteboardthatshowedwhyour

    strategywasbriliant,butourcustomersdidntunderstandconcepts

    likenetworkeectsandswitchingcosts.Ifwetriedtoexplainwhy

  • theyshouldbehavethewaywepredicted,theydjustshaketheir

    headsatus,bewildered.

    Wehadamentalmodelforhowpeopleusedsoftwarethatwas

    yearsoutofdate,andsoeventualy,painfuly,afterdozensof

  • meetingslikethat,itstartedtodawnonusthattheIMadd-on

    conceptwasfundamentalyflawed.3

    OurcustomersdidnotwantanIMadd-on;theywantedastand-

    aloneIMnetwork.Theydidnotconsiderhavingtolearnhowto

  • useanewIMprogramabarrier;onthecontrary,ourearlyadopters

    usedmanydierentIMprogramssimultaneously.Ourcustomers

    werenotintimidatedbytheideaofhavingtotaketheirfriends

    withthemtoanewIMnetwork;itturnedoutthat

  • theyenjoyed

    thatchalenge.Evenmoresurprising,ourassumptionthatcustomers

    wouldwanttouseavatar-basedIMprimarilywiththeirexisting

    friendswasalsowrong.Theywantedtomakenewfriends,an

  • activitythat3Davatarsareparticularlywelsuitedtofacilitating.

    Bitbybit,customerstoreapartourseeminglybriliantinitial

    strategy.

    ThrowingMyWorkAway

    Perhapsyoucansympathizewithoursituationandforgive

  • my

    obstinacy.Afteral,itwasmyworkoverthepriormonthsthat

    neededtobethrownaway.Ihadslavedoverthesoftwarethatwas

    requiredtomakeourIMprograminteroperatewithother

  • networks,whichwasattheheartofouroriginalstrategy.Whenit

    cametimetopivotandabandonthatoriginalstrategy,almostalof

    cametimetopivotandabandonthatoriginalstrategy,almostalof

    myworkthousandsoflinesofcodewasthrownout.I

  • felt

    betrayed.Iwasadevoteeofthelatestinsoftwaredevelopment

    methods(knowncolectivelyasagiledevelopment),which

    promisedtohelpdrivewasteoutofproductdevelopment.

    However,despitethat,Ihadcommitedthebiggestwaste

  • ofal:

    buildingaproductthatourcustomersrefusedtouse.Thatwas

    realydepressing.

    Iwondered:inlightofthefactthatmyworkturnedouttobea

    wasteoftimeandenergy,wouldthecompanyhave

  • beenjustas

    weloifIhadspentthelastsixmonthsonabeachsipping

    umbreladrinks?HadIrealybeenneeded?Wouldithavebeen

    beterifIhadnotdoneanyworkatal?

    Thereis,asImentionedat

  • thebeginningofthischapter,always

    onelastrefugeforpeopleachingtojustifytheirownfailure.I

    consoledmyselfthatifwehadntbuiltthisrstproductmistakes

    andalweneverwouldhavelearnedtheseimportantinsights

  • aboutcustomers.Weneverwouldhavelearnedthatourstrategy

    wasawed.Thereistruthinthisexcuse:whatwelearnedduring

    thosecriticalearlymonthssetIMVUonapaththatwouldleadto

    oureventualbreakoutsuccess.

  • Foratime,thislearningconsolationmademefeelbeter,but

    myreliefwasshort-lived.Heresthequestionthatbotheredme

    mostofal:ifthegoalofthosemonthswastolearntheseimportant

    insightsaboutcustomers,whydidittakesolong?How

  • muchofour

    eortcontributedtotheessentiallessonsweneededtolearn?

    CouldwehavelearnedthoselessonsearlierifIhadntbeenso

    focusedonmakingtheproductbeterbyaddingfeaturesand

  • fixingbugs?

    VALUEVS.WASTE

    Inotherwords,whichofoureortsarevalue-creatingandwhich

    arewasteful?Thisquestionisattheheartoftheleanmanufacturing

    revolution;itistherstquestionanylean

  • manufacturingadherent

    istrainedtoask.Learningtoseewasteandthensystematicaly

    istrainedtoask.Learningtoseewasteandthensystematicaly

    eliminateithasalowedleancompaniessuchasToyotato

    dominateentireindustries.In

  • theworldofsoftware,theagile

    developmentmethodologiesIhadpracticeduntilthattimehad

    theiroriginsinleanthinking.Theyweredesignedtoeliminate

    wastetoo.

    Yetthosemethodshadled

  • medownaroadinwhichthemajority

    ofmyteamsefortswerewasted.Why?

    Theanswercametomeslowlyoverthesubsequentyears.Lean

    thinkingdenesvalueasprovidingbenettothecustomer;

  • anythingelseiswaste.Inamanufacturingbusiness,customersdont

    carehowtheproductisassembled,onlythatitworkscorrectly.But

    inastartup,whothecustomerisandwhatthecustomermightnd

    valuableareunknown,partoftheveryuncertaintythatisan

  • essentialpartofthedenitionofastartup.Irealizedthatasa

    startup,weneededanewdenitionofvalue.Therealprogresswe

    hadmadeatIMVUwaswhatwehadlearnedoverthoserst

    monthsaboutwhatcreatesvalueforcustomers.

  • Anythingwehaddoneduringthosemonthsthatdidnot

    contributetoourlearningwasaformofwaste.Wouldithavebeen

    possibletolearnthesamethingswithlesseort?Clearly,the

    answerisyes.

    Foronething,thinkofalthe

  • debateandprioritizationofeort

    thatwentintofeaturesthatcustomerswouldneverdiscover.Ifwe

    hadshippedsooner,wecouldhaveavoidedthatwaste.Also

    consideralthewastecausedbyourincorrectstrategicassumptions.

  • IhadbuiltinteroperabilityformorethanadozendierentIM

    clientsandnetworks.Wasthisrealynecessarytotestour

    assumptions?Couldwehavegotenthesamefeedbackfromour

    customerswithhalfasmanynetworks?Withonlythree?

  • Withonly

    one?SincethecustomersofalIMnetworksfoundourproduct

    equalyunatractive,theleveloflearningwouldhavebeenthe

    same,butourefortwouldhavebeendramaticalyless.

    Heresthethoughtthatkept

  • meupnights:didwehaveto

    supportanynetworksatal?Isitpossiblethatwecouldhave

    discoveredhowawedourassumptionswerewithoutbuilding

    anything?Forexample,whatifwesimplyhadoeredcustomers

  • anything?Forexample,whatifwesimplyhadoeredcustomers

    theopportunitytodownloadtheproductfromussolelyonthe

    basisofitsproposedfeaturesbeforebuildinganything?Remember,

    almostnocustomerswerewilingtouseouroriginal

  • product,so

    wewouldnthavehadtodomuchapologizingwhenwefailedto

    deliver.(Notethatthisisdierentfromaskingcustomerswhatthey

    want.Mostofthetimecustomersdontknowwhattheywantin

  • advance.)Wecouldhaveconductedanexperiment,oering

    customersthechancetotrysomethingandthenmeasuringtheir

    behavior.

    Suchthoughtexperimentswereextremelydisturbingtome

  • becausetheyunderminedmyjobdescription.Astheheadof

    productdevelopment,Ithoughtmyjobwastoensurethetimely

    deliveryofhigh-qualityproductsandfeatures.Butifmanyofthose

    featureswereawasteoftime,whatshouldIbedoing

  • instead?How

    couldweavoidthiswaste?

    Ivecometobelievethatlearningistheessentialunitofprogress

    forstartups.Theeortthatisnotabsolutelynecessaryforlearning

    whatcustomerswantcanbeeliminated.Icalthis

  • validated

    learningbecauseitisalwaysdemonstratedbypositive

    improvementsinthestartupscoremetrics.Asweveseen,itseasy

    tokidyourselfaboutwhatyouthinkcustomerswant.Itsalsoeasy

    tolearnthingsthatare

  • completelyirrelevant.Thus,validated

    learningisbackedupbyempiricaldatacolectedfromreal

    customers.

    WHEREDOYOUFINDVALIDATION?

    AsIcanatest,anybodywhofailsinastartupcanclaim

  • thatheor

    shehaslearnedalotfromtheexperience.Theycantela

    compelingstory.Infact,inthestoryofIMVUsofar,youmight

    havenoticedsomethingmissing.Despitemyclaimsthatwelearned

    alotinthoseearlymonths,

  • lessonsthatledtooureventualsuccess,

    Ihaventoeredanyevidencetobackthatup.Inhindsight,itseasy

    tomakesuchclaimsandsoundcredible(andyoulseesome

    evidencelaterinthebook),butimagineusinIMVUsearlymonths

  • evidencelaterinthebook),butimagineusinIMVUsearlymonths

    tryingtoconvinceinvestors,employees,familymembers,andmost

    ofalourselvesthatwehadnotsquanderedourtimeandresources.

    Whatevidencedidwehave?

  • Certainlyourstoriesoffailurewereentertaining,andwehad

    fascinatingtheoriesaboutwhatwehaddonewrongandwhatwe

    neededtodotocreateamoresuccessfulproduct.However,the

    proofdidnotcomeuntilweputthosetheoriesinto

  • practiceand

    builtsubsequentversionsoftheproductthatshowedsuperior

    resultswithactualcustomers.

    ThenextfewmonthsarewherethetruestoryofIMVUbegins,

    notwithourbriliantassumptionsandstrategies

  • andwhiteboard

    gamesmanshipbutwiththehardworkofdiscoveringwhat

    customersrealywantedandadjustingourproductandstrategyto

    meetthosedesires.Weadoptedtheviewthatourjobwastonda

  • synthesisbetweenourvisionandwhatcustomerswouldaccept;it

    wasnttocapitulatetowhatcustomersthoughttheywantedorto

    telcustomerswhattheyoughttowant.

    Aswecametounderstandourcustomersbeter,wewereableto

  • improveourproducts.Aswedidthat,thefundamentalmetricsof

    ourbusinesschanged.Intheearlydays,despiteoureortsto

    improvetheproduct,ourmetricswerestubbornlyat.Wetreated

    eachdayscustomersasanewreportcard.Wedpayat

  • entionto

    thepercentageofnewcustomerswhoexhibitedproductbehaviors

    suchasdownloadingandbuyingourproduct.Eachday,roughlythe

    samenumberofcustomerswouldbuytheproduct,andthatnumber

  • waspretyclosetozerodespitethemanyimprovements.

    However,oncewepivotedawayfromtheoriginalstrategy,things

    startedtochange.Alignedwithasuperiorstrategy,ourproduct

    developmenteortsbecamemagicalymoreproductive

  • not

    becausewewereworkingharderbutbecausewewereworking

    smarter,alignedwithourcustomersrealneeds.Positivechangesin

    metricsbecamethequantitativevalidationthatourlearningwas

  • real.Thiswascriticalyimportantbecausewecouldshowour

    stakeholdersemployees,investors,andourselvesthatwewere

    makinggenuineprogress,notdeludingourselves.Itisalsotheright

    waytothinkaboutproductivityinastartup:not

  • intermsofhow

    waytothinkaboutproductivityinastartup:notintermsofhow

    muchstuwearebuildingbutintermsofhowmuchvalidated

    learningweregetingforoureforts.4

    Forexample,inoneearly

  • experiment,wechangedourentire

    website,homepage,andproductregistrationowtoreplace

    avatarchatwith3Dinstantmessaging.Newcustomerswere

    splitautomaticalybetweenthesetwoversionsofthesite;halfsaw

  • one,andhalfsawtheother.Wewereabletomeasurethe

    dierenceinbehaviorbetweenthetwogroups.Notonlywerethe

    peopleintheexperimentalgroupmorelikelytosignupforthe

    product,theyweremorelikelytobecomelong-termpaying

  • customers.

    Wehadplentyoffailedexperimentstoo.Duringoneperiodin

    whichwebelievedthatcustomerswerentusingtheproduct

    becausetheydidntunderstanditsmanybenets,wewentsofaras

  • topaycustomerserviceagentstoactasvirtualtourguidesfornew

    customers.Unfortunately,customerswhogotthatVIPtreatment

    werenomorelikelytobecomeactiveorpayingcustomers.

    EvenafterditchingtheIMadd-onstrategy,itstiltook

  • monthsto

    understandwhyithadntworked.Afterourpivotandmanyfailed

    experiments,wenalyguredoutthisinsight:customerswanted

    touseIMVUtomakenewfriendsonline.Ourcustomersintuitively

  • graspedsomethingthatwewereslowtorealize.Altheexisting

    socialproductsonlinewerecenteredoncustomersreal-life

    identity.IMVUsavatartechnology,however,wasuniquelywel

    suitedtohelppeoplegettoknoweachotheronline

  • without

    compromisingsafetyoropeningthemselvesuptoidentitytheft.

    Onceweformedthishypothesis,ourexperimentsbecamemuch

    morelikelytoproducepositiveresults.Wheneverwewouldchange

  • theproducttomakeiteasierforpeopletondandkeepnew

    friends,wediscoveredthatcustomersweremorelikelytoengage.

    Thisistruestartupproductivity:systematicalyguringouttheright

    thingstobuild.

  • Thesewerejustafewexperimentsamonghundredsthatweran

    weekinandweekoutaswestartedtolearnwhichcustomers

    wouldusetheproductandwhy.Eachbitofknowledgewe

    wouldusetheproductandwhy.Eachbitofknowledge

  • we

    gatheredsuggestednewexperimentstorun,whichmovedour

    metricscloserandclosertoourgoal.

    THEAUDACITYOFZERO

    DespiteIMVUsearlysuccess,ourgrossnumberswerestilprety

  • smal.Unfortunately,becauseofthetraditionalwaybusinessesare

    evaluated,thisisadangeroussituation.Theironyisthatitisoften

    easiertoraisemoneyoracquireotherresourceswhenyouhave

    zerorevenue,zerocustomers,andzerotractionthanwhen

  • youhave

    asmalamount.Zeroinvitesimagination,butsmalnumbersinvite

    questionsaboutwhetherlargenumberswilevermaterialize.

    Everyoneknows(orthinksheorsheknows)storiesofproductsthat

  • achievedbreakthroughsuccessovernight.Aslongasnothinghas

    beenreleasedandnodatahavebeencolected,itisstilpossibleto

    imagineovernightsuccessinthefuture.Smalnumberspourcold

    wateronthathope.

  • Thisphenomenoncreatesabrutalincentive:postponegetingany

    datauntilyouarecertainofsuccess.Ofcourse,aswelsee,such

    delayshavetheunfortunateeectofincreasingtheamountof

    wastedwork,decreasingessentialfeedback,and

  • dramaticaly

    increasingtheriskthatastartupwilbuildsomethingnobody

    wants.

    However,releasingaproductandhopingforthebestisnota

    goodplaneither,becausethisincentiveisreal.Whenwe

  • launched

    IMVU,wewereignorantofthisproblem.Ourearliestinvestorsand

    advisersthoughtitwasquaintthatwehada$300-per-month

    revenueplanatrst.Butafterseveralmonthswithourrevenue

  • hoveringaround$500permonth,somebegantolosefaith,asdid

    someofouradvisers,employees,andevenspouses.Infact,atone

    point,someinvestorswereseriouslyrecommendingthatwepul

    theproductoutofthemarketandreturntostealthmode.

  • Fortunately,aswepivotedandexperimented,incorporatingwhat

    welearnedintoourproductdevelopmentandmarketingeorts,

    ournumbersstartedtoimprove.

    ournumbersstartedtoimprove.

  • Butnotbymuch!Ontheonehand,wewereluckytoseea

    growthpaternthatstartedtolooklikethefamoushockeystick

    graph.Ontheotherhand,thegraphwentuponlytoafew

    thousanddolarspermonth.Theseearlygraphs,although

    promising,werenotby

  • themselvessucienttocombatthelossof

    faithcausedbyourearlyfailure,andwelackedthelanguageof

    validatedlearningtoprovideanalternativeconcepttoralyaround.

    Wewerequitefortunatethatsomeofourearlyinvestors

  • understooditsimportanceandwerewilingtolookbeyondour

    smal