By: Eric Ries
I am unreasonably skeptical of tech start-ups in silicon valley. I know it is mostly unwarranted and comes from a place of ignorance. So, naturally, we have spent the last year working on our own tech start-up. And again, naturally, I am just getting around to reading this book. I really wish I would have sooner. Really practical advice for tech start-ups. Unexpectedly, it is also really practical for established companies to continue to be creative and grow to better serve their customers.
- Start-ups need to be managed differently from established companies.
Traditional management consists of developing plans and overseeing the people executing them. This works in established companies because they know what worked in the past and therefore what could work in the future.
Start-ups can’t predict their own future because they have no past. They don’t know what their customers want…yet!
Start-ups must hold their end goal of impact tight but their methods and product form loosely.
2. The purpose of a start-up is to find a sustainable business model.
The main goal of any start-up is to find a business model that is profitable and sustainable.
If you want your company to be more than just a temporary pet project, you must find a way to acquire customers and earn money by serving them.
What do your customers actually want? What will they actually pay for? Spend your day to day getting closer and closer to that answer.
The faster a start-up finds a sustainable business model, the likelier it is to succeed.
3. Find your sustainable business model through validated learning.
To find your sustainable business, start with a process of constant learning: ideally validated learning, meaning learning through a scientific approach.
To begin the process of validated learning, you must come up with hypotheses about whether and how certain products will be successful in a given market.
To test the hypothesis don’t use questionnaires or fictional customers. Instead talk to real customers in a realistic environment. Offer your product to real people and see how they respond and document it.
4. The leap-of-faith assumptions: test your value and growth hypotheses.
Part of developing a product is the leap of faith: a founder believes in the future success of his product, even though he has no proof.
To go from “believing” to “knowing”, you have to systematically test two fundamental assumptions. Value and Growth.
Value Hypothesis: Assumes a product will deliver value to customers. (i.e. Early adopters will find and embrace the product.)
Growth Hypothesis: The product will not only appeal to the small group of early adopters but will also find a bigger market later.
Both assumptions must be tested as soon as possible. Only if they can be validated is it worth investing the time and effort into developing the product.
5. Develop a minimal viable product to test your idea in the market.
Too many founders spend too much time developing the perfect product that no one wants.
Again, the goal is to give your customers a product they are willing to pay for ASAP.
The quickest and easiest way to get real-world customer feedback on your idea is to create a minimal version of the product. This minimal viable product (MVP) should be as simple as possible and should contain only what is needed to give the customers a realistic experience of how your product would work.
Find out whether there’s actual demand for your product before you spend considerable time building it.
6. Build, measure, learn – as fast and as often as possible.
Build: Build a minimal viable product.
Measure: Gather actual customer feedback. Measure the interest (i.e. how many people clicked the purchase button). Talk to individual customers to learn about their needs.
Learn: Take that feedback and revise your product. Then repeat this cycle.
7. Use split-tests to optimize your product.
When developing and improving a product, you must distinguish between value and waste.
Value: Features that help attract more customers or increase revenue.
Waste: Features that don’t add value. Even if the founders think they’re awesome!
To determine which feature is which, create 2 versions of your product: one with the feature and one without. Then measure the customer response.
8. To find the right business model for your company, you usually have to pivot.
If your business isn’t taking off like it should, you may need to take a hint and realize that you are working hard to sell a product the market simply doesn’t want.
To avoid this, you should keep asking yourself how you need to change your product to improve it and help it find its market.
You may need to pivot!
A main characteristic of a pivot is that the core assumptions behind the start-up have changed, and therefore new hypotheses must be tested.
9. Every start-up should initially focus on one engine of growth.
There are 3 different kinds of growth engines.
Sticky Engine: Retain existing customers. Make them use the product more by offering new features or great service.
Viral Engine: Get existing customers to take care of your marketing. Awareness spreads to target customers by word-of-mouth.
Paid Engine: Investing in marketing to bring new customers. Only works if existing customers bring in enough revenue to cover this expense.
Focus on one engine of growth. This makes it easier to assess the success of new features during development. (i.e. less variables.)
10. Vanity metrics are often flattering but misleading – they won’t help you find a sustainable business model.
Facebook followers or Instagram likes do not pay the bills.
- Increases in sales
- Increases in number of paying customers,
- Average session length per customer,
- Number of recommendations generated per 1,000 customers
Meaningful KPIs that drive your business toward your goals deserve your attention. Look at that data and interpret what it is telling you, then adjust.
Write a plan to test the value and growth hypotheses.