ERIC RIES IS A serial entrepreneur, teacher, and author of the New York Times bestseller The Lean Startup. Andy Rachleff has described Eric’s book as “the New Testament” of the lean startup movement. Not often can you say that someone has created a movement, but Eric certainly did. Like Steve Blank, Eric teaches based on personal experience. He has founded a number of startups, including the social network IMVU, and has a thriving seminar and consulting business. His next book, The Startup Way: Making Entrepreneurship a Fundamental Discipline of Every Enterprise, will publish in the fall of 2017. Eric serves on the board of directors of Code for America and on the advisory board of a number of technology startups and venture capital firms.
1. “The minimum viable product is that product which has just those features (and no more) that allow you to ship a product that resonates with early adopters, some of whom will pay you money or give you feedback. The lesson of the MVP is that any additional work beyond what was required to start learning is waste, no matter how important it might have seemed at the time.”
The goal of the MVP process is to validate the hypothesis in a speedy and cost-efficient manner. The key word in this quote is “feedback,” since it is through feedback that people learn. The most effective processes are feedback loops based on the scientific method: Build, measure, learn. What a startup offers as its MVP should be complete in what it does to deliver and capture value, but not a fully complete implementation of the vision. The MVP is an experiment intended to generate validated learning about what customers value enough to pay for.
An MVP approach is not the only way to go forward with a startup. Eric Ries describes two extreme alternatives:
One, which I call maximizing chance of success, says, “Look, we’ve only got one chance at this, so let’s get it right.” We’re going to ship it when it’s right, and that actually is perfectly rational. If you only have one shot, you want to take the best shot you can and build the most perfect product you can. The issue is, of course, that you can spend something like five years of stealth R&D building a product you think customers want and then discover to your chagrin that they don’t. The other possible extreme approach is to say, “Well, let’s just do ‘release early, release often.’ ” This approach is, “Look, we’ll just throw whatever crap we have out there, and then we’ll hear what customers say, and we’ll do whatever they say.” But the issue there is if you show a product to three customers, you get thirty opinions, and now what do you do? So minimum viable product is kind of a synthesis of those two possible extremes.
2. “The question is not ‘Can this product be built?’ Instead, the questions are ‘Should this product be built?’ and ‘Can we build a sustainable business around this set of products and services?’ ”
Products a startup builds are experiments. Learning about how to build a sustainable business is the outcome of those experiments which should follow a three-step process: Build, measure, learn.
A startup is an organization dedicated to creating something new under conditions of extreme uncertainty.
As you consider building your own minimum viable product, let this simple rule suffice: Remove any feature, process, or effort that does not contribute directly to the learning you seek. If you want to do minimum viable product, you have to be prepared to iterate. And so you have to have the courage to say, “Yeah, we’ll ship something, get negative feedback, and respond.”
A minimum feature set in an MVP is not a goal but a tactic to create cost-effective and speedy validated learning about the hypothesis. The goal is to learn and steer based on feedback rather than try to predict and emerge with a fully formed product. The MVP process is depicted as a flywheel or loop for a reason. Most of the time, actual hypothesis testing will reveal that customers do not value the product or even the vision the product represents. If the hypothesis is not validated by the experiment, the business must iterate by revising the hypothesis or shut down.
3. “The nice thing about relying on human judgment and using the scientific method is that we develop a system for training judgment to get better over time.”
Ries’s point is that learning to be a better entrepreneur is a trained response. People who are paying attention while engaging in the startup creation process can learn by doing. Ries is also saying that judgment about company formation improves when it is systematized based on the scientific method. The primary cause of good judgment is experience, which often comes from bad judgment, so it is best to (1) jump into the fray and learn via making some mistakes and having some successes, and (2) engage with a community of others doing the same thing so you can learn vicariously from the successes and mistakes of others.
4. “Every action you take in product development, in marketing, every conversation you have, everything you do—is an experiment. If you can conceptualize your work not as building features, not as launching campaigns, but as running experiments, you can get radically more done with less effort.”
Here, Ries is describing the process of expanding the Lean Startup concept beyond creating the product offering. Many aspects of a business, and life generally, can be turned into lean experiments. Marketing, for example, can be systematized to reduce inefficiency.
5. “The two most important assumptions entrepreneurs make are what I call the value hypothesis and the growth hypothesis. The value hypothesis tests whether a product or service delivers value to customers once they are using it. The growth hypothesis tests how new customers will discover a product or service.”
A business provides core product value when it solves a genuine customer problem. Andy Rachleff (a cofounder and the current CEO of Wealthfront and a cofounder of Benchmark) created definitions of these hypotheses and the correct sequencing of them:
Eric (and I) believe to increase the likelihood of succeeding, a startup should start with a minimally viable product to test what he calls a value hypothesis. The value hypothesis should state the founder’s best guess as to what value will drive customers to adopt her product and indicate which customers the product is most relevant to, as well as what business model should be used to deliver the product. It’s highly unlikely that a founder’s initial hypothesis will prove correct, which is why an entrepreneur has to iterate on her hypothesis through a series of experiments before product–market fit is achieved.
As a consumer company, you know you have proved your value hypothesis if your business grows organically at a rapid pace with no marketing spend. Only once the value hypothesis has been proven should an entrepreneur test her growth hypothesis. The growth hypothesis covers the best way to cost-effectively acquire customers. Unfortunately, many founders mistakenly pursue their growth hypothesis before their value hypothesis.
Rachleff also created and named the product–market fit (PMF) concept. The core of Rachleff’s idea for PMF was based on his analysis of the investing style of the pioneering venture capitalist and the founder of Sequoia Don Valentine, who stated, “Give me a giant market—always.” On this topic, Valentine once said,
Arthur Rock is the representative of “You find a great entrepreneur and you back him.” My position has always been “You find a great market and you build multiple companies in that market.” Our view has always, preferably, been “Give us a technical problem, and then give us a big market when that technical problem is solved so we can sell lots and lots and lots of stuff.” Do I like to do that with terrific people? Sure. Are we unwilling to invest in companies that don’t have them? Sure. We invested in Apple when Steve Jobs was about eighteen or nineteen years old—not only didn’t he go to Harvard Business School, he didn’t go to any school.
Cisco provided a famous example of what can happen when you change the people involved in a business when its board of directors replaced the then-husband-and-wife team who had founded the company. In other cases, new team members are brought in to supply new skills, adding to the team instead of replacing people. Eric Schmidt’s recruitment to Google is a famous example of this approach. Marc Andreessen believes,
The life of any startup can be divided into two parts: before product–market fit (BPMF) and after product–market fit. When you are BPMF, focus obsessively on getting to product–market fit. Do whatever is required to get to product–market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital—whatever is required.
Rachleff adds this important point: “You know you have fit if your product grows exponentially with no marketing. That is only possible if you have huge word of mouth. Word of mouth is only possible if you have delighted your customer.” Tying these concepts together, Rachleff shares that entrepreneurs too often confuse product–market fit with growth in what Ries calls vanity metrics: “numbers or stats that look good on paper but don’t really mean anything important.”
6. “All of our process diagrams [in major corporations] are linear, boxed diagrams that go one way. But entrepreneurship is fundamentally iterative. So our diagrams need to be in circles. We have to be willing to be wrong and to fail.”
The “build, measure, learn” process is one loop in a process that will often be repeated. Sometimes a failure is so significant and the blockers to success with a given direction so large that a pivot is necessary. A pivot happens when a startup pursues a new direction by leveraging what it has learned from previous iterations (pivots are not complete restarts). A decision to pivot should not be taken lightly. Some founders pivot their way right into bankruptcy. Failing is not a good thing. Instead, the ability to fail—and then recover—is a good thing.
7. “Innovation accounting works in three steps: (1) Use a minimum viable product to establish real data on where the company is right now. (2) Startups must attempt to tune the engine from the baseline toward the ideal. This may take many attempts. After the startup has made all the micro changes and product optimizations it can to move its baseline toward the ideal, the company reaches a decision point. That is the third step: (3) Pivot or persevere.”
The most efficient way to determine if the dogs will eat the dog food is via the outcome of a trial-and-error experimentation process in the real world. In one sense, the tuning process involves many small pivots that improve the offering. The better outcome is making some great choices, having a bit of luck, and being able to stay the course and persevere. If a business ends up being forced to pivot, it often still has a shot at recovering. That a business might be able to pivot and still win is a feature of the Lean Startup process, but it is not a goal.
8. “The mistake isn’t releasing something bad. The mistake is to launch it and get PR people involved. You don’t want people to start amping up expectations for an early version of your product. The best entrepreneurship happens in low-stakes environments where no one is paying attention, like Mark Zuckerberg’s dorm room at Harvard.”
Some people argue that early adopters can be skeptical if a product offering from a startup is too polished. This is an interesting but unproven thesis. I look at it this way: A business that over-promises and under-delivers can quickly die. You can spend the rest of your life recovering from a bad first impression in business, and in life.
9. “The Lean Startup process is a method that can be used to create or refine a business model, a business strategy, and/or a business design.”
A business model, strategy, or design is only as good as the assumptions that underlie it. I have previously defined a business model. A business strategy is the manner in which a company strives to be unique. Business design is the totality of things a business must do to be a success. Steve Blank points out that unless you have tested the assumptions in your business model strategy and design outside the building, your plans are just creative writing.
10. “You need the ability to ignore inconvenient facts and see the world as it should be and not as it is. This inspires people to take huge leaps of faith. But this blindness to facts can be a liability. The characteristics that help entrepreneurs succeed can also lead to their failure.”
Convexity is most often found in places where others are not looking or where they are not seeing what is actually happening. This is why you will sometimes hear venture capitalists say they are looking for business opportunities that seem “half-crazy.” Most things that are crazy are actually nuts, but once in a while, entrepreneurs find a tremendous opportunity that no one else has discovered yet. The entrepreneur’s faith in his or her vision is both how new products and services are discovered and why most businesses fail. Failures vastly outnumber successes, but the impact of the successes outweighs all the failures. It is the magnitude of success, not the frequency of success, that makes the process worthwhile for society (this is the so-called Babe Ruth effect).
11. “New customers come from the actions of past customers.”
Virality occurs when existing customers introduce new customers to a product they are delighted with. Virality allows a business to grow organically. The key point is simple: If customers love a product, they are going to tell their friends. If someone tells you about a product and it is not lovable, you will stop using it.
12. “Anybody can rent the means of production, which means entrepreneurship is becoming truly democratized, which means nobody is safe.”
The lower cost of starting and running a business is both a key opportunity and challenge in business today. Profit is generated by a barrier to entry (otherwise, price drops to opportunity costs). Unfortunately, barriers to entry (moats) now have shorter lives than ever before. Even if a business discovers solutions to the value and growth hypotheses, without a moat the probability of the business being financially successful over time is remote. Revenue alone is not enough to sustain a business, given the inevitable competitive response. Warren Buffett writes, “All economic moats are either widening or narrowing, even though you can’t see it.” Moats are more important than ever, but they need to be renewed more than ever, as well. More startups than ever are being created, and this means that someone somewhere right now is thinking about disrupting your business. Factors that can create a moat are constantly in flux, because they often interrelate to create nonlinear positive and negative changes. Moat creation is incredibly difficult and rare, and maintaining one is also difficult. For every business creating disruption, some other businesses are being disrupted.