Lean startup concepts

...and how to use them

Professor Craig Armstrong

Source: By Business Model Alchemist - http://www.businessmodelalchemist.com/tools, CC BY-SA 1.0, https://commons.wikimedia.org/w/index.php?curid=11892574

Source: By Business Model Alchemist - http://www.businessmodelalchemist.com/tools, CC BY-SA 1.0, https://commons.wikimedia.org/w/index.php?curid=11892574

Desirability

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Feasibility

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Viability

The Hollywood version of entrepreneurship is a lie

“There is a myth-making industry hard at work to sell us that story, but these stories are based on selection biases and after-the-fact rationalizations.” (Remember “luck” is known only in the past tense).

Why do the stories of perseverance, creative genius, and hard work persist?

These stories also downplay the role of the “mundane” actions (i.e., “management”) that must take place in order for startups to succeed.

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Entrepreneurship is “management”

• Startup success is not a consequence of good genes or being in the right place at the right time.
• Startup success can be engineered by following the right processes, which means it can be learned, which means it can be taught. (p. 3)

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The myth of “The Great Man”

Lean practices

1. Instead of engaging in months of research, entrepreneurs recognize that all they have is a series of untested hypotheses – good guesses
2. Lean startups “get out of the building” to test their hypotheses and collect evidence about whether they are true or false – this is customer development
3. Lean startups practice agile development by working iteratively and incrementally with the customer – this process leads to the minimum viable product

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Origins of Lean Startup

• Lean startup takes its name from the lean manufacturing initiative introduced by Taiichi Ohno and Shigeo Shingo at Toyota. “Lean thinking” radically alters the way supply chains and production system are run by drawing on the knowledge and creativity of line workers, reduced batch sizes, just-in-time production and inventory control, and an acceleration of cycle times.
• This approach highlighted the differences between value creating activities and waste. Measures of lean manufacturing focus on the production of high-quality products; lean startup focuses on validated learning. (Related: Decoding the DNA of the Toyota Production System, HBR, 2009)

What are the five principles of the lean startup?

1. Entrepreneurs are everywhere
2. Entrepreneurship is management
3. Validated learning
4. Build-Measure-Learn
5. Innovation accounting

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1. Entrepreneurs are everywhere

The concept of entrepreneurship applies to anyone who works within the definition of a startup: “a human institution designed to create new products and services under conditions of extreme uncertainty.” (p.8) The lean startup approach can work in any size company, sector, or industry.

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WHAT A STARTUP IS

“Existing companies execute a business model; startups search for one.”

“a human institution designed to create new products and services under conditions of extreme uncertainty.” (p.8)

2. Entrepreneurship is management

• A startup is an institution and needs a new kind of management specifically geared to its context of extreme uncertainty.
• Ries argues that “entrepreneur” should be a job title in all modern companies that depend on innovation for future growth.

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3. Validated learning

• Startups do not exist solely to make stuff, make money, or serve customers. They exist to learn how to build a sustainable business. (Note that this definition forces an attribute of “temporary” on the organization)
• This learning can be validated scientifically by running frequent experiments that allow entrepreneurs to test each element of their vision.

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Validated learning through experiments

• The lean startup methodology reconceives a startup’s efforts as experiments that test its strategy. A true experiment follows the scientific method; it should begin with a clear hypothesis that makes predictions about what is supposed to happen.
• It then tests those predictions empirically. Just as scientific experimentation is informed by theory, startup experimentation is guided by the startup’s vision.
• The goal of every startup is to discover how to build a sustainable business around that vision (pp.56-57).

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4. Build-Measure-Learn

• The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere.
• All successful startups should be geared to accelerate that feedback loop.

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Build-Measure-Learn Feedback Loop

Your goal: Minimize TOTAL time through the loop

Validated learning

Hypotheses

MVP

Evidence

5. Innovation accounting

• We need to focus on how to measure progress, how to set up milestones, and how to prioritize work.
• This requires new forms of accounting for startups and the people who hold entrepreneurs accountable.

Actionable metrics

Actionable metrics

Consider these metrics used by Scott Galloway (@profgalloway) to evaluate companies:

• craftsmanship
• iconic founder
• exceptional price point
• vertical
• global
• self expressive benefit

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Caption: "...as you move down the torso the margins get better, and the business gets better."

Click on image in present mode to see “The Four Horsemen: Amazon/Apple/Facebook/Google - Who wins, who loses”

Experimentation: Zappos

• Zappos began with a tiny, simple product; it was designed to answer one simple question above all: is there already sufficient demand for a superior online shopping experience for shoes?
• Swinmurn realized that he needed to test several aspects of his business assumptions.
• To sell the shoes, Zappos had to interact with customers; take payment, handle returns; and support customers.
• These are completely different activities than market research.

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Experimentation: Zappos

By building a product instead of market research and writing a business plan, the company learned much more:

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• It had more accurate data about customer demand because it was observing real customer behavior, not hypothetical answers to survey questions.
• It put itself in a position to interact with real customers and learn about their needs. E.g., the business plan might call for discounted pricing, but how are customer perceptions of the product affected by the discounting strategy?
• It allowed itself to be surprised when customers behaved in unexpected ways, revealing information Zappos might not have known to ask about (e.g., what if customers wanted to return shoes?).

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Zappo’s initial experiment provided a clear, quantifiable outcome: either a sufficient number of customers would buy the shoes or they would not. It also put the company in a position to observe, interact with, and learn from real customers and partners.

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An experiment is a product

Adopt a mindset in which you try to answer these questions:

1. Do consumers recognize that they have the problem you are trying to solve?
2. If there was a problem, would they buy it?
3. Would they buy it from us?
4. Can we build a solution for that problem?

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Sidebar: The concierge MVP

• Example: Food on the Table
• Unique value proposition: “FotT creates weekly meal plans and grocery lists that are based on food you and your family enjoy, then hooks into your local grocery stores to find the best deals on the ingredients”
• Origins: began with a single customer; founders had no recipes until first customer was ready to begin meal planning; company built no software, signed no bizdev agreements, and hire no chefs; each week CEO and VP of product collected a check for $9.95

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[Eric Ries, Lean Startup p.100-101]

http://www.foodonthetable.com/

Example: DoorDash - Doing Lean Startup and Things that Don’t Scale 0:00 - 15:48

Quick and Lean Startup Activities

Customer personas, value proposition canvases, and test cards

Your customers are human beings…

…with problems, needs, goals, habits, who live and work in certain environments.

Source: http://www.spikelab.org/blog/persona-development.html

...so you want to create a “customer persona”

…that identifies those problems, needs, goals, and habits

Source: http://www.spikelab.org/blog/persona-development.html

What is a persona?

Any of these five groups

1. decision maker - whoever decides to buy your product
2. economic buyer - the one with the money that will cut you the check
3. recommenders - which can be the decision maker herself or other peers
4. influencers - generally known figures in the industry your customer is in
5. end users - those that actually will use the product day in day out

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Each persona has different functions, goals, and orientations

Source: http://www.spikelab.org/blog/persona-development.html

Give me an example

• OK: Facebook. Facebook has customers and users
• A customer is someone who pays you
• A user just uses your product.
• Any product hoping to make money from advertising falls in this bucket with the people using the product being the users and the marketers being the customers.
• In a case like this you have at minimum two personas and failing to be clear about it will kill your business.
• Furthermore once you have the two persons with stated needs & goals it should also be more obvious how the two are potentially in conflict, a problem you'll have to deal with.

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Source: http://www.spikelab.org/blog/persona-development.html

Your Persona is still a hypothesis to test

• The most important thing you'll have to test for is obviously their needs and goals, which must be aligned with your product offering, but you may also find that the demographics you put down were incorrect or that the person doesn't engage in the behaviors you thought they would.
• Some of them you will have to specifically test for, others will just be side-effects of more important experiments, but it's crucial that you treat what you wrote as a living document that you need to update based on the outcomes of your experiments.

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Source: http://www.spikelab.org/blog/persona-development.html

The customer persona template

Need more insights? Watch this video on customer personas from Traffika TV

Need more insights? and this video on customer personas from Pluralsight

In this preview from his Creating Effective User Stories course, Jeremy Jarrell discusses the details that go into a persona and the steps to creating one.

Start with a customer persona

How to create your persona

1. Dump and sort: Generate ideas on your own to get them out of your head with a Sharpie, Post-it notes, and table space – THEN discuss with team
• Post-it Notes function like idea containers…they can be added, removed and easily shifted.” Sticky notes are also the perfect size for one concise idea.
2. Give it a face: name, face, place, bubble speech. After you’ve done this you should feel like you know her
3. Facts: additional information to help identify your customer, e.g., demographics (age, income, geography, marital status, etc.)
4. Behaviors: Use action verbs to describe behaviors you could observe
5. Needs and goals: what does your persona want to accomplish? what does she need? Do NOT be too generic here – everyone wants more money and more time

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Source: http://www.spikelab.org/blog/persona-development.html

Customer Development

Steve Blank and Bob Dorf

“The startup owner’s manual”

Traditional new product introduction process

Concept / seed

Product development

Alpha/beta test

Launch / 1^st ship

Concept and seed stage

• Founders capture vision and passion for company on cocktail napkin, translate these into key ideas that form the basis of the business plan
• Then define issues surrounding product. What is the concept? What are the features and benefits? Can it be built? Who are the customers and where can they be found?

Product development

• Company begins to develop and specialize based on functional areas.
• Marketing refines the market size, begins targeting first customers, writes sales materials,
• Engineering writes specs and builds the product following: requirements -> design -> implementation -> verification -> maintenance*
• [ *this is the product development innovation model ]

Alpha / Beta test

• Engineering builds upon classic waterfall development model
• Marketing develops a complete marketing communications plan and website
• Sales signs up first beta customers, begins to set up distribution channels, and staffs/scales staff outside headquarters

Alpha / Beta testing

Product launch and first ship

• Company goes into heavy spending mode
• Press events, creation of end-user demand, hire national sales rep…
• Only now does company know if it has a hit or a failure…

9 deadly sins of new product introduction model

1. “I know what the customer wants”
2. “I know what features to build”
3. Focus on a launch date
4. Execution over hypotheses testing
5. Traditional business plan assumptions

6. Confusing traditional job titles with startup needs and roles
7. Sales and marketing execute to a plan
8. Presumption of success leads to premature scaling
9. Management by crisis leads to death spiral

Customer development process

Customer discovery

Customer validation

Customer creation

Company building

Pivot

Search

Execute

Each step is a circular track with recursive arrows emphasizing the iterative nature of building, testing, and learning

The four steps

1. Customer discovery captures the founders’ vision and turns it into a set of testable business model hypotheses. Then it develops a plan to test those hypotheses and turn them into facts
2. Customer validation tests whether the resulting business model is repeatable and scalable. If not, return to customer discovery

The four steps (continued)

3. Customer creation is the start of execution. It builds end-user demand and drives it into the sales channel to scale the business
4. Company building transitions the organization from a startup to a company focused on executing a validated model

Customer discovery phase begins with the business model hypothesis

• Market size
• Large number or potential active users or customers
• Clear future-user growth in market with rapid & predictable growth
• Opportunity to attract active customers or users
• Value proposition
• Product or service vision
• Features and benefits
• Minimum viable product (MVP)

Customer discovery process

Phase I

State hypotheses

Draw business model canvas

Phase II

Test the problem

Phase III

Test the solution

Phase IV

Verify or pivot

Customer validation

Customer discovery

Start with a value proposition canvas

Value Proposition Canvas

The value proposition is derived from the business model canvas↑ Watch

What are you building?

• a unique value proposition
• built well, this is what solves your customers’ big pain or addresses their unmet needs
• you need to develop it (“making something”), and figure out how to deliver it (“selling something”)
• so you are ultimately building an institution that will support your creation and delivery of your value proposition to the customer

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The business model canvas

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The right side:

Value proposition, Customer segments, Channels, Customer relationships, and revenues

1 Customer Segments

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The Customer Segments Building Block defines

the different groups of people or organizations an enterprise aims to reach and serve

Customer Segments

Customer groups represent separate segments if:

• Their needs require and justify a distinct offer
• They are reached through different distribution channels
• They require different types of relationships
• They have substantially different profitabilities
• They are willing to pay for different aspects of the offer

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Examples of Customer Segments

• Mass market
• Niche market
• Segmented
• Diversified
• Multi-sided platforms (or multi-sided markets)

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2 Value Propositions

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The Value Propositions Building Block describes the bundle of products and services that create value for a specific Customer Segment

The Value Proposition is the reason why customers turn to one company over another.

Examples of Value Propositions

• Newness
• Performance
• Customization
• “Getting the job done”
• Design
• Brand/status
• Price

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Value proposition template

• For (target customers)
• Who are dissatisfied with (the current alternative)
• Our product is a (new product)
• That provides (key problem-solving capability)
• Unlike (the product alternative)

Key take-away from Hi presentation

Features differentiate your offering and let you deliver benefits

Benefits shape the Experience you want your customer to have

Insights into wants and needs help you shape the experience you want to deliver and determine which benefits you will offer

Use the goals and needs from the persona to create a value proposition canvas

Ever been...

Gain enablers (think in terms of benefits)

e.g., my backpack converts into a shelter for me and others

Pain relievers (think in terms of benefits)

My umbrella is there when I need it and keeps me dry

Goals

“Aspirational”

(e.g., It would be nice to keep my stuff and my friends from getting wet)

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Pains

“Tactical”

(e.g., I am getting wet)

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Problems and unmet needs

related to a specific situation your customer is in

(e.g., I’m in the middle of the Quad in a rainstorm and am getting wet)

Logical design of product or service (think in terms of features that deliver the benefits you hope to deliver to your customer)

The features of your product or service should logically map onto the problem or unmet need as the solution

The “Armstrong” value proposition canvas model

The aspirational umbrella

Lean Startup and Hypotheses

The Lean Startup methodology has as a premise that every startup is a grand experiment that attempts to answer a question. theleanstartup.com

Firms that follow a hypothesis-driven approach to evaluating entrepreneurial opportunity are called "lean startups." Entrepreneurs in these startups translate their vision into falsifiable business model hypotheses, then test the hypotheses using a series of "minimum viable products," each of which represents the smallest set of features/activities needed to rigorously validate a concept. Based on test feedback, entrepreneurs must then decide whether to persevere with their business model, "pivot" by changing some model elements, or abandon the startup. - HBS.EDU

Remember this? Actionable metrics

Focus on behaviors for hypothesis testing

Focus on Hypotheses – The 6 Step Algorithm

Posted on February 18, 2016 by Pavlo Bashmakov

By Pavlo Bashmakov(@bashmakov), Product Director/Founder at Stanfy.

https://stanfy.com/blog/focus-on-hypotheses-the-6-step-algorithm

Source: Stanfly.com

1. Learn the potential customers, problem, and market

Speak with the users. Find out how they solve their problem right now.

• What tools, services, methods do they use currently? Are they satisfied with the tools?
• Where might there be room for improvements ? Why?
• How big is the market? Is it growing?
• What is the estimation for the market size in 5-7 years?
• What technology stack is widely used in space?
• What emerging technology might be used efficiently for the current problem?

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Source: Stanfly.com

Source: Stanfly.com

Formulate your idea about the user, problem and market in an ordered list of hypotheses by priority. The top-most hypothesis will be a starting point for your experiments.

Hypothesis is a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation. – Oxford dictionary

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Source: Stanfly.com

Source: Stanfly.com

3. Create a test (the simplest one)

Create a test aimed to prove/verify or disprove your assumptions. Possible tests are:

• Simple Web page
• Facebook Ads
• Questionnaire with Google Forms
• Blog post with subscription to newsletter link or wait list
• Set of interviews with different offers for the users
• Working MVP (app, website, bot, etc) with built-in analytics to gather key metrics (Activation, Engagement, etc)
• Don’t forget about analytics for key metrics of your tests (i.e., Activation, Engagement, etc).

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Source: Stanfly.com

Source: Stanfly.com

4. Run the test and collect data

• Launch the test. Decide on the minimum amount of data points you would need to statistically measure the received results.
• You can’t learn anything if you don’t have enough data points so you should plan in advance how you will get enough users to get the statistical significance in your results.

Source: Stanfly.com

Source: Stanfly.com

5. Analyze the data and prove or disprove the current hypothesis

• It’s time to crunch the numbers and look as closely as possible at the received data.
• Do these numbers work to support your initial hypothesis?
• Or did your idea just fall short and you actually disproved the hypothesis?
• Think about other possibilities for developing your current hypothesis further. When you come up with it, create and add a new hypothesis to the list from step #2.

Source: Stanfly.com

Source: Stanfly.com

<- (click-through rate)

6. Select the top hypothesis from the list and continue

• Repeat the process until you have enough data to support the core idea.
• Once you have enough evidence from the completed tests that it is worth proceeding further, you can consider investing greater resources and building the real thing, a much better version of the initial test.
• Then build a first version of the product and iterate.

Source: Stanfly.com

Lean startup and the progress board

The test card

helps you to construct a simple hypothesis and design an experiment to test it.

Test Card forces you to make the following things explicit:

1. What needs to be true for your idea(s) to work (aka hypothesis, assumption, or simply guess)?
2. How are you going to test if that hypothesis is true or false?
3. What are you going to measure to (in)validate your hypothesis?
4. How does success look like? What's the threshold?

http://blog.strategyzer.com/posts/2015/3/5/validate-your-ideas-with-the-test-card

Value proposition design using the test card

Use the VP canvas to create experiments

Use the CP, VP, and experiment loop map to develop an MVP

For very early stage ideas, an MVP might simply be a landing page

Your turn

Customer persona

Value proposition canvas

Experiment Loop

Your goal: Design a minimum viable product