Value vs. Waste

• Question: Which of our efforts are value-creating and which are wasteful?

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• Lean thinking defines value-creation as providing benefits to the customers; anything else is a waste!

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• But, how can you know whether you are providing benefits (i.e., creating value) to your potential customers?
• Note: True startup productivity CANNOT be measured in terms of how much you are building every day, but rather in terms of systematically figuring out the right thing to build every day

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Towards Value Creation

• Success is not about delivering a product; success is about delivering a product (or a feature of a product) that customers will use

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• The way to do this is to continuously align your efforts with your customers’ real needs
• Note: This is not about asking your customers what they need because customers typically do not know what they need

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• The Build-Experiment-Learn feedback loop allows you to discover your customers’ needs and methodically align with them

Build-Experiment-Learn Feedback Loop

Idea

Build

Product

Experiment

Data

Learn

Build-Experiment-Learn Feedback Loop

Idea

Build

Product

Experiment

Data

Learn

The Build Phase

The Build Phase: MVP

• The build phase can be entered as quickly as possible with a Minimum Viable Product (MVP)

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• An MVP ranges in complexity from extremely simple smoke tests (little more than an advertisement) to early prototypes

Prototypes

A product with problems and missing features

Smoke Tests

No product is built yet!

Example of MVP: Dropbox

• Dropbox is an easy-to-use file sharing (or synchronization) tool, which uses a push-based caching (or full replication) technique

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Push immediately to �Dropbox service &�all sharing devices

Example of MVP: Dropbox

• Dropbox requires integration with a variety of computer platforms and OSs: Windows, Macintosh, iPhone, Android, and so on

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• It also necessitates deep understanding and expertise of distributed systems (caching, replication, consistency, reliability, availability, etc.)

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• To avoid the risk of waking up after years of development with a product that nobody wanted, Drew Houston (founder & CEO of Dropbox) did something unexpectedly easy
• He made a video!

Example of MVP: Dropbox

• The video was a 3-minute demonstration of the technology as it is meant to work
• It was narrated by Drew himself (it was really banal!)
• It targeted early adopters, who do not need a perfect solution to get intrigued

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• Drew recounted: “It drove hundreds of thousands of people to the website. Our beta waiting list went from 5000 people to 75000 people literally overnight. It totally blew us away.”

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• Today, Dropbox is worth more than $10 billion
• Lesson: Think big but start small!

The Build Phase: MVP

• Deciding how complex an MVP cannot be done formulaically
• It requires judgment!
• When in doubt, simplify
• Avoid overbuilding and overpromising
• Any additional work beyond what needs to get you starting the loop might be a waste

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• An MVP does not only speak to product design and technical questions, but also serves in testing fundamental business hypotheses
• Thus, it serves in providing a needed dose of reality

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Build-Experiment-Learn Feedback Loop

Idea

Build

Product

Experiment

Data

Learn

The Experimentation Phase

Dilemma: The Audacity of Zero

• It is often easier to raise money when you have:
• zero revenue
• zero customers
• zero traction
• than when you have a small amount of each!

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• Zero invites imagination, but small numbers invite questions about whether large numbers will ever materialize

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• This phenomenon (called the audacity of zero) creates a brutal incentive:
• Postpone getting any version of a product out until you are certain of success

Dilemma: The Audacity of Zero

• If you postpone experimenting with your MVP, some unfortunate results will emerge like:
• The amount of wasted work may increase
• Essential feedback will be missed
• The risk that your startup will build something nobody wants may increase

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• But fund is important (a dilemma!), so what is the way out?
• Tradeoffs:
• Would you prefer to attract venture capital and potentially squander it?
• Or, would you prefer to attract venture capital and wisely use it?
• Use an MVP to experiment (initially, silently) with early adopters within your beachhead market
• Verify your concept via testing ALL its elements, starting with the riskiest ones
• Scale out on a solid slate– fund will come naturally!

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Leap-of-Faith Assumptions

• The riskiest elements of a startup’s plan/concept (i.e., the parts on which everything depends) are called leap-of-faith assumptions

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• E.g., What was the main leap-of-faith assumption of Dropbox?
• File synchronization is a problem

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• Note: Most people do not know about a certain solution (or even a problem); but once they experience the solution, they cannot imagine how they ever lived without it!

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Leap-of-Faith Assumptions

• The two most important leap-of-faith assumptions of any startup are the value hypothesis and the growth hypothesis

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• The value hypothesis:
• It tests whether the product is really delivering value to customers after they start using it
• A testing metric: retention rate

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• The growth hypothesis:
• It tests how new customers will discover the product
• A testing metric: referral rate or Net Promoter Score (NPS)

Example: Facebook

• In 2004, Facebook had 150,000 registered users �with very little revenue

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• Yet, that summer they raised their first $500,000 in venture capital

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• Less than a year later, they raised an additional $12.7 million

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• How Facebook was able to raise so much money when its actual usage was small?

Example: Facebook

• To answer this question, it suffices to look at �Facebook’s value and growth hypotheses:
• Validated value hypothesis:
• More than half of the users came back to the site every single day

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• Validated growth hypothesis:
• Facebook launched on Feb 4, 2004, and by the end of that month, almost ¾ of Harvard’s undergraduates were using it (without spending a dollar on marketing or advertising!)

Next Class

• Product development: the lean approach- Part II

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