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Here's the great startup myth of our time:
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"If you only have determination,
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brilliance, great timing, and above all, a great product, you too can achieve fame and fortune.
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A related misconception is that ideas are precious.
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Generally, people hesitate to reveal their ideas in public - even among friends!
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There's this nagging fear that someone can steal the idea from you. Please ...
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Sorry, but an idea is never that great. I would bet my right arm that during a lifetime,
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the average person has at least 20 awesome ideas that could be turned into commercialized and successful startups.
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And that's even when removing Elon Musk from the sample, which otherwise would have skewed the average upward by a disproportionate amount.
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The issue is not ideas, determination, brilliance or great timing even - its execution.
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We will now look at 5 advice regarding the creation of a successful business
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from "The Lean Startup", that the multi successful entrepreneur Eric Ries has written.
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Takeaway number 1: The build-measure-learn feedback loop
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Planning and forecasting are only useful when your operations of business have been rather stable and where the environment is static.
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Startups have neither of these.
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Planning for several months and releasing a product only after many thousands of hours of perfecting it, is a game of very high stakes.
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What if you build something that nobody wants anyways?
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Many entrepreneurs have realized this, and as a consequence,
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they take the approach of the opposite side of the spectrum:
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If you can't plan, then they think that you can only operate in chaos.
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So they adopt the "just do it" strategy instead.
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Nike might be correct when they tell you to put on your running shoes and "just do it!",
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but in building a successful startup, this plan is usually flawed.
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So what can we do instead?
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The solution is the build-measure-learn feedback loop.
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Too much planning makes the process rigid and very risky.
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"Just doing it" tends to turn everything into chaos.
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Quickly going through cycles in the build-measure-learn feedback loop is the solution.
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The goal of a startup is to figure out the right thing to build - that customers want and will pay for - as quickly as possible.
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We must be able to quickly kill off that which doesn't make sense, and double down on that which does.
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Although the order of the actions in the build-measure-learn framework is, well ... build, measure, learn, the planning happens backwards.
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We must first figure out what we want to learn.
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We can do this by forming hypotheses. Here are a few examples:
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"Commuters want to be able to order food from their cars"
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"People are willing to assemble their own furniture at home"
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"People are willing to pay monthly for being able to stream unlimited music online"
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In hindsight, these hypotheses seem trivial, but before these companies proved them right - they you weren't.
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After formulating these hypotheses that your startup revolves around, it's time to validate or reject them, which is our next takeaway.
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Takeaway number 2: Everything is a grand experiment
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Okay, okay. So learning as quickly as possible about your customers needs and willingness to pay for your product is important,
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but how can you do this empirically?
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The answer is experiments.
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Experiments are run together with real or potential clients.
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The common denominator among the successful ways of experimenting is this:
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Observe, don't ask.
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Customers usually don't even know what they want! But if you show them a product and they are interested, well done!
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Then you just gained some validated learning.
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First we should always ask ourselves: Do we even have to build anything at all?
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An experiment can be as simple as setting up a landing page, stating that you have a product that can do something - say -
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improving your chances of getting a match on Tinder by 500%,
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driving some traffic to the site through Google Adwords, and then seeing how many people that would sign up for it.
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At other times we must be more rigorous, and develop a so-called MVP, which is short for "Minimum Viable Product".
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In Lean Production, a concept that originally stems from Japanese car manufacturers,
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waste is defined as something that doesn't create value for the customers of the company.
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In Lean Startup, waste is defined in another way:
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Everything that doesn't lead to validated learning is waste.
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This is the reason why it's called a "Minimum Viable Product".
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It should only contain the features of utter importance, and it shouldn't be polished any more than what's absolutely
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necessary for us to prove or reject our hypothesis.
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If you are embarrassed releasing the product to your potential customers, you are on the right track.
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Takeaway number 3: Different types of MVPs
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There are many different types of MVPs that can be constructed in order to learn what solves the problems of customers, and
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what they're also willing to pay for.
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Eric Ries gives three different examples:
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The video MVP
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A famous example here is Dropbox.
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Drew Houston, the CEO of the company,
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produced a video showing an extremely easy to use file sharing tool, and published it online in communities with tech savvy members.
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The sign up list for the product went from 5,000 to
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75,000, overnight! The best thing about this story is that the video was fake. It didn't even exist such a product yet!
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The concierge MVP
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Another way of testing your initial hypothesis empirically to gain validated learning about customers is to give them the concierge treatment.
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This means focusing on a single or only a few customers, and develop the product according to their preferences.
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Slowly - but surely - after being certain that you solve the problem of a single early adopter
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(often manually) you can expand to more customers and automate more and more of the process.
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The Wizard of Oz MVP
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Aardvark, a search engine for subjective inquiries, such as: "Which YouTube channel is best - PewDiePie or T-Series?",
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famously use this approach with great success.
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Basically, it's all about pretending that you have developed a fancy technical solution, while, behind the curtains,
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it's operated by humans. In the case of Aardvark,
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they had employees who were coming up with the answers to
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inquiries from customers in the beginning, before they knew that the product was something that people actually wanted.
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Takeaway number 4: The three engines of growth
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Now, once we have confirmed that the product creates value for someone, it's time to shift focus to growth.
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Eric Ries argues that there are three different types of engines of growth that a company should concentrate on. It should pick only one
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primarily, and try to improve the metrics associated with that engine through iterations in the build-measure-learn feedback loop.
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The "sticky" engine
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These types of businesses are designed to attract customers for the long term and never let go.
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A company of this type should focus on two variables primarily - the new customer acquisition rate, and
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the so called churn rate, which is the fraction of customers that failed to stay engaged with the company's product.
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The sticky engine of growth is used by, for instance, repeat purchase companies like Gillette, and
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also by pretty much all online gaming companies.
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The viral engine
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These are businesses that focus on spreading like epidemics.
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For every new customer joining, the idea is that that person should invite one or more friends as well.
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Success in growing a company of this sort depends on something called the "viral coefficient".
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This is calculated as the number of customers
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recruited on average by every recruited customer.
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If every customer on average, say, attracts half a new customer,
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it's not an efficient engine. On the other hand,
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If every customer can attract, on average, 1.1 new customers - the product will spread like a virus.
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The viral engine of growth is used by all social networks and by multi-level marketing businesses, among others.
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The paid engine
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A company using the paid engine of growth realizes that primarily, it will have to focus on advertising in some form to reach customers.
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The two most useful metrics to a company of this kind are CPA (short for cost per acquisition), and
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LTV (short for lifetime value).
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It's simply the difference between how profitable a customer is over
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its entire lifetime, minus the cost of acquiring a customer, that will determine the growth rate of such a company.
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An example is e-commerce businesses.
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Eric Ries mentor used to tell him the following:
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"Startups don't starve - they drown"
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He's referring to that there's so much that a start-up CAN do, but it's much more difficult to determine what a start-up SHOULD do.
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The three engines of growth are a way to focus the energy of the startup in the right place.
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Takeaway number 5: Pivot or persevere?
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Successful entrepreneur does not give up after facing a little bit of headwind,
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but at the same time, he doesn't stubbornly hold on to his idea until he crashes either.
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You must possess both perseverance and flexibility.
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Sometimes a pivot is necessary, or in other words, a
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change in this strategy on how to achieve the overall vision that you have for the startup.
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But how do we know when to pivot? It's a three-step process.
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1. Establish a baseline of the current situation using an MVP.
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2. Attempt to tune the MVP towards the ideal, through multiple iterations in the build-measure-learn feedback loop.
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3. Pivot or persevere?
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The issue is that there will always be a gray zone.
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If our attempts to tune the MVP into something that is improving our engine of growth is not helping,
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it's a sure sign that we need to pivot.
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But is a 10% improvement per year enough?
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Unfortunately, there's no clear-cut threshold here, intuition is needed, and that we can only gain from experience.
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Here are some of the most common pivots to make:
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Customer segment pivot
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The initial group of customers that you intended to focus on,
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might not be as interested as you thought. But maybe another group showed a lot of enthusiasm?
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Let's focus on those people instead.
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Value capture pivot
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Deciding to give away the product for free, and then charge through advertising instead,
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is a typical pivot that many companies using the viral engine of growth tends to do.
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Engine of growth pivot
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Perhaps your hypothesis that the product would spread virally like an epidemic was rejected,
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but in the meantime, you discovered that the lifetime value of every customer is much higher than the cost of acquiring a customer.
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Then you may pivot from the viral engine of growth, to the paid engine of growth instead.
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One thing that is important to notice here is that a pivot is not a failure.
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Discovering that something doesn't work,
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might not be as useful as discovering that something does, but it's way better than trying to dig yourself out of a hole.
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Time to wrap it up!
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The goal of a startup is to figure out the right thing to build, that customers want and will pay for, as quickly as possible.
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To confirm or reject your hypothesis, experiments must be run to gain validated learning about potential customers.
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An MVP usually forms the basis of such experiments.
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Three popular types of MVPs are: video, [bloopers], and The Wizard of Oz.
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Every startup should focus on an engine of growth, either the sticky, the viral or the paid one.
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Successful entrepreneurship is about perseverance and flexibility at the same time,
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pivoting an idea does not equal failure.
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In fact, almost every successful startup has done a major change to its strategy at some point
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Have a good one!
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