The lean startup

Introduction

Hey there I’m [your name] and I’m just curious to know that when you hear the word “startup”, what comes into your mind? You probably picture a garage where a group of friends develop a new product. It’s a very exciting venture, with a promise of earning big. That is how most dot com companies in Silicon Valley started. In fact, as you probably know, that is how Apple, Amazon started. But did you know that there can be a startup even within an established company? You will learn that and a lot of other interesting ideas in this class. The world of business is changing. And so, the traditional approach must be changed as well.  The Lean Startup presents a modern approach in business.
 
There are startups which have very good planning. They have a well-thought of product and marketing strategy. They have a team of intelligent members. But, after investing so much time, money and effort, why do these startups still fail? What could be missing? Is the planning not enough? You may want to start a business of your own. Or  you may already be an entrepreneur looking for a new venture. Either way this class is for you.

 The Lean Startup offers both entrepreneurs and wantrepreneurs a semi-scientific, real-world approach to building a business by using validation, finding a profitable business model and creating a growth engine. If you’re curious on how startups can become multi-million companies, let’s begin.

Think Big, Start Small

In the early 2000s, the author Eric Ries was in a startup with his college friends. Their product is an online site where people can share their profiles to potential employers. They have a brilliant product. They have an amazing team and excellent technology. But ultimately, the startup failed, along with a plenty of others when the dot com bubble burst.Eric Ries was disillusioned. He thought the stories of success featured in the magazines are lies. Even if you work hard and persevere, you would still fail. Even if you have determination and good ideas, you would still fail. Over the years, Eric thought that this is where most startups ended. Many great new products do not succeed.
 
Through experience, Eric learned that there is a guaranteed process by which startups can achieve success. There is a right process which can be learned and followed. In 2004, Eric co-founded another startup. The new product is an online platform where members can have their avatars. They can connect with friends. What’s exciting about the startup is that the customers would be the ones to create everything, including clothes, accessories and furniture of their avatars. It’s a big challenge for Eric’s team. It’s a lot of work to engineer a virtual world and the 3D avatar technology. They also have to device the payment and customer buying features. 
 
Eric’s new company is IMVU. For this new venture, he and his co-founders did an experiment. They did everything wrong. They engineered an early version of the product. They released and sold it immediately to the customers. Instead of allotting so much time to perfect the virtual world, they let the customers send their feedback.This approach is a big mistake in the traditional way of business. Everything should be prepared before release. The strategy, products and market prediction should already be ready. But Eric’s new approach became the trend for modern businesses today. It became the basis for the new principle, The Lean Startup.

What is the Lean Startup?

The Lean Startup is essentially based on experimentation. The main idea is learning from mistakes. You don’t spend years on perfecting the product. You don’t spend years on thinking whether the product would sell or how the customers would respond. Using the Lean Startup method, you create an early version of the product in small amounts. Then, you make the necessary changes along the way. The term is continuous innovation.This prevents new products from getting wasted and pulled out from the shelves.
 
True enough, the Lean Startup became a global movement. It was adopted by many organizations worldwide. It created a renaissance in the world of business. Not only new companies applied the principle, but also the most elite businessmen and the Fortune 500. Interestingly, Eric Ries’ company, the IMVU, earned $50 million total in 2011. 

What are the principles of the Lean Startup?

There are five key important ideas in the Lean Startup method.

Number One is you don’t have to be in a garage to start a new business. It doesn’t matter where you are. You can choose to be an entrepreneur. A starup is defined by uncertainty. Any organization that wants to create a new service or product is a startup, that is if they are faced with extreme uncertainty. The Lean Startup can apply to companies of all sizes, no matter the industry or sector.
 
Number 2 is management. When you say startup, you are not only referring to a product. You are also referring to the people behind the product. The people or the institution needs to be managed. A special type of management is needed, especially that they are dealing with great uncertainty.

Number 3 is validated learning. Validated learning is a series of experiments where entrepreneurs can test what works for their business. It is familiar with testing a scientific hypothesis. This is important because the goal of startups is to make the business sustainable. It is not just to make profit.
 
Number 4 is build-measure-learn. The primary tasks of a startup are to build products from the ideas, measure the feedback of customers and learn from the feedback, if it is better to pivot or persevere. To pivot means to turn and try a different approach. To persevere means to go on and continue. You need to pivot if the feedback is not good, persevere if the feedback from the experiment is positive.
 
Number 5 is progress. The startup must get used to the build-measure-learn cycle. It must learn more from the feedbacks in a shorter amount of time. The startup must know which process to persevere in order to achieve sustainable business.

Zappos

Zappos is an online shop for shoes. Its best asset is being customer-friendly. Zappos is one of the largest e-commerce businesses internationally. In fact, it is the most successful with annual sales of up to $1 billion. But like all startups, the company has a humble beginning.The founder of Zappos is Nick Swinmurn. Years ago, he got frustrated because there was no single online site which showcases all kinds of shoes out in the market. He wanted customers to have the best buying experience. 
 
Swinmurn could have spent a long time planning. He should have figured out everything first starting from the warehouses, to distribution partners and the potential sales. That was the trend for the pioneers of e-commerce. However, Swinmurn began Zappos with an experiment. He had the hypothesis that people are already confident of buying shoes online. What he did was to ask the local shoe brands for permission to take pictures of their products. In exchange, Swinmurn would upload the photos online. He would go back to the stores to buy the shoes if customers ordered. 
 
Zappos began as a simple functioning site. Swinmurn was set to answer if there is really a demand for online shopping of shoes. By interacting with actual customers, he was also able to derive the best payment, returns and customer support system.Doing this experiment is very different from market research. IfSwinmurn had conducted a survey, he would have got what the customers wanted. By building the site, he learned so much more. 
 
First, by having real customers, he got more accurate data than made-up situations on a survey. Second, he learned the actual needs of the customers. He learned that Zappos might need to have discounted pricing. Third, he was able to deal with customer behaviour. He learned how to react with return issues. Zappos gained a lot from Swinmurn’s experiment. Though the company started small-scale, it yielded good results. Swinmurn learned best what needs to be included in the online store. Zappos became an established brand. In 2009, the company was bought by Amazon for $1.2 billion.
 
The story of Zappos proved the efficiency of Lean Startup. The experiment saved the company time, effort and money. Instead of having stocks of shoes, Swinmurn was right to ensure the orders first. In this way, he didn’t have shoes in the inventory which no one wanted to buy. It also prevented the need for a customer survey. Actual customer interaction was more accurate. He was also able to deal with actual problems and achieve customer satisfaction. Swinmurn started with a raw product. But through experiment, Zappos became the perfect customer-friendly site.
 
The simple functioning site he made is called a Minimum Viable Product. An MVP is an initial version of the product. It is cheap, easy and quick to develop. It would evolve into a perfect final product through the results of experimentation.Based on the Lean Start-up principle, we can see that Zappos began with a lot of uncertainty. There was no existing online shop for shoes. Besides, Swinmurn wasn’t sure if there is evena demand for one.
 
But he applied validation learning.Swinmurn tested his hypothesis by launching the experiment site. Then, he applied build-measure-learn as he dealt with real customers. Swinmurn learned which approaches to pivot or persevere, like discounts and return system. Eventually, Zappos became a sustainable business.

Village Laundry Service

Many years ago, only a few homes in India have a washing machine. Because washing machines are expensive, only 7% of the population can afford to buy one. Majority of the people wash their clothes by hands. If not, they hire a dhobi to do the laundry for them.The Dhobi would bring the clothes to the river. They would bang the clothes against rocks and wash them with river water. It would take ten days before the Dhobi could return the clothes, which probably are not so clean.
 
AkshayMehra saw this as an opportunity. He was a brand manager in Procter & Gamble Singapore for 8 years. He was responsible for the Pantene and Tide brands in India and Southeast Asia. AkshayMehra wanted to provide affordable laundry services to the people.Upon his return to India, AkshayMehra collaborated with Village Laundry Services. Together, they did experiments to figure out the best business approach. As a first experiment, VLS had a washing machine loaded on a pickup truck. They had the truck parked in a busy street of Bangalore.
 
The pickup truck idea only cost VLS $8,000. They wanted to know, first of all, if people are willing to give their clothes and pay to get them washed. The clothes are not actually cleaned right there and there on the truck. It was just for marketing purposes. VLS take the clothes somewhere to get them cleaned. The customers would have them back in 24 hours.The VLS parked the truck on different places within a week so that they would learn more about the customers. How can they encourage more people to bring their laundry? Do the people want faster cleaning time? Are they concerned about cleanliness? Do the customers have specific requests?
 
VLS learned that the customers are worried that the truck would run off with their clothes. To resolve the issue, VLS replaced the pickup truck with a customer-friendly mobile kiosk. In another experiment, they brought the kiosk near a local grocery store. VLS found out that customers also want their laundry to be ironed. They also found out that they can pay twice as much to get their clothes back within 4 hours.The experiments done by VLS are productive. They came up with a final product that is a 3ft. by 4ft. mobile kiosk. It has an efficient washing machine and dryer. It uses quality detergents and clean water supply.
 
After the successful experiments, Village Laundry Service had 14 mobile kiosks spread in major cities including Mumbai and Bangalore. AkshayMehra, CEO, proudly shared, “We have serviced 116,000 kg.in 2010…We have serviced more than 10,000 customers in the past year alone across all the outlets.”Like in story of Zappos we can see how the principles of Lean Startup were applied by VLS. First, AkshayMehra was faced with uncertainty. He did not know if the people would patronize the laundry service.
 
Second, they produced an initial product as an experiment. The pickup truck is an MVP or Minimum Viable Product. It did not cost them plenty of money, time and effort to develop. They were able to test their hypothesis immediately.Third, VLS was able to build-measure-learn from the feedbacks of the customers. They got the idea to pivot the pickup trucks and persevere with the ironing service.
 
The result of the experiment is that they got the perfect product that would satisfy customer needs.  It was a huge hit. The Village Laundry Service became a sustainable business. What if VLS finalized their product before launching in the market? What if they spent years planning the perfect marketing strategy? What if they conducted a survey first? All these would have worked in the traditional method of business. But these are all inefficient for startups.
 
Starting a business is a situation of great uncertainty. Startups should not invest so much on products or strategies which are not guaranteed to succeed in the first place. The thing is, unless you deal with actual customers, you cannot be 100% sure.    As a new business, it is better to start small. Through experiments and the build-measure-learn method, you will eventually come up with the perfect sustainable product. 

Groupon

Have you heard of Groupon? It is the first online site to offer group coupon to the customers. Since the company’s fast-growing success, many sites imitated the idea of Groupon. But the company didn’t start out successfully. The first customers of Groupon were a bunch of 20 people who bought buy 1 take 1 pizza coupons.Andrew Mason, the founder of Groupon, did not intend it to be a social commerce platform. But Mason and his team created a minimum viable product. Here’s the story.
 
Groupon started out as a WordPress blog. Mason and his team would post something new everyday. Their first blog was “This T-shirt will come in the color red, size large. If you wanta different color or size, e-mail that to us.” Groupon did not even have a form for orders yet.The idea was very simple but it worked. Their experiment proved that there is a demand. There are customers who will find Groupon valuable. Next, Mason and his team created actual coupons, using only the FileMaker program. The first coupons of Groupons are actually in PDF format. They would email the PDF coupons to the customers.
 
One day, they had a demand for 500 coupons of sushi. They had to email all the 500 customers with the PDF file. In the first year of Groupon, the company was really just trying to piece things up together.But the Wordpess blog, the FileMaker PDFs and 20 pizza coupons were all important in the success of Groupon. The growth of the company is record-breaking. They are one of the fastest to reach the $1 billion benchmark. Today, Groupon helps local businesses to gain new customers. It offers special affordable deals to 375 cities all over the world.
 
Minimum Viable Products are meant to help the startups find out the demands of the customers. That is why MVPs are only easy, cheap and quick to develop. Through MVPs, startups can immediately begin their build-measure-learn cycle.In the traditional mode of business, products must go through a long development period to achieve perfection. But MVPs are more effective. It helps the startups figure out the best product design and know the technical issues. Moreover, MVPs answer a lot of questions about business and marketing strategy. 

Toyota
 

Genchi Gembutsu means “go and see for yourself”. For managers to arrive at the best decision, they must go and see for themselves first hand. That is the core principle of Toyota. Genchi Gembutsu must be applied starting from the product development, manufacture, distribution, to sales, and even public affairs. It is the Toyota Way.There is no means for the managers to really understand the problem except togo and see for themselves. That is what Yuji Yokoya did as the manager for the 2004 Sienna minivan. He was assigned to oversee everything from concept making to the production of Sienna.
 
Majority of the market for the minivan is in North America. That year, Yokoya set out for a bold business move. He went on a road trip on all the 50 states of U.S. Yokoya also drove the whole countries of Canada and Mexico. All in all, he covered a total of 53,000 miles on the wheels.In every town and city, Yokoya rented the 2003 model of Sienna to know what needs to be improved. He also observed and talked to real drivers of the minivan. What Yokoya found out was critical to the success of the 2004 model. 
 
Yokoya said, “The parents and grandparents may own the minivan. But it’s the kids who rule it. It’s the kids who occupy the rear two-thirds of the vehicle. And it’s the kids who are the most critical—and the most appreciative of their environment. If I learned anything in my travels, it was the new Sienna would need kid appeal.”
 
And so, Yokoya invested a lot of budget on the inside comfort features of the 2004 Sienna minivan. Comfort is important to the kids especially that family road trips in America tend to be long distance. In Japan, Yokoya would not have learned this since long road trips are not that common.The improved comfort features had very positive results. The sales of the 2004 model are 60% more than the 2003 model. Yokoya’s travels resulted in great success. 
 
Manager Yokoya proved the effectiveness of GenchiGembutsu. He is best at what he does. If applied to startups, there is also no other way than to go see for yourself. Experiments are very important. They are more effective than other business strategy especially in new companies. If you do not come up with an MVP and experiment with real customers, you would not know what the customers really want. It is the best way to learn for startups. Experiments do not need to be long, costly, and difficult. But they yield impressive results.

Conclusion

So you have a great business idea. Test that hypothesis by creating an MVP. Remember that your minimum viable product should not be costly. Since you’re only beginning, you can start small. Develop a simple product in a short amount of time. When you have your MVP, you can already start with your learning process. You can now begin with experimentation. Remember the build-measure-cycle. Build your product. Measure the feedback of the customers and learn from them. You will know what ideas need to be pivoted and persevered.
 
Repeat the build-measure-learn loop until you have tested all your assumptions, until you have answered all the uncertainties. In this way, you will come up with the best final product and the best business strategy. 

5 Key Takeaways

  1. There is a process to entrepreneurship that can be learned.
  2. The goal of a startup is to figure out the right thing to build – the thing customers want and will pay for – as quickly as possible.
  3. Customers do not tell us what they want. They reveal the truth through their action or inaction.
  4. Test and validate your value and growth hypothesis.
  5. Use MVPs to cycle through the Build-Measure-Learn feedback loop as fast as possible.

By applying the Lean Startup, you are not only set to make profit. You have a great chance of achieving your very own sustainable business. That is guaranteed since you interacted with real customers. Fight the uncertainties now and be on your way to success. Ready to start a business? I hope you are, because this is it!

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