Lean Startup 101: The Essential Ideas

Lean Startup is a method for creating and sustaining innovation in all kinds of organizations. It helps you get good at answering two critical questions: Should we build this new product or service? And how can we increase our odds of success in this new thing?

When you know those answers, you can reduce unnecessary failure and instead focus your time and money on ideas that have promise. The method is equally useful in brand new companies, Fortune 500 enterprises, government agencies, educational institutions and nonprofit organizations. Although it has roots in the tech sector, it is not for tech alone and has been used profitably for nearly every kind of product or service you can imagine — from diesel turbines to middle-school math classes.

That sounds great, right? It is. But there’s a lot of confusion over what Lean Startup is, how it works, and how you can apply it. Herewith, a rundown of the essential ideas to clear things up and get you started. (From here on out, when I talk about products, I mean it as a catchphrase that includes products of all kinds — digital or physical — plus services or processes that an organization creates to sell to or serve customers. Those customers can include coworkers, or what people sometimes call internal customers.)

Monday - Startup 101 sarah milstein

1. You say the method works for established organizations. Why is the method called Lean Startup?

The word “startup” often brings to mind an image of two people working in a garage in Silicon Valley. But there’s a more useful definition laid out by my business partner, Eric Ries, who coined the term Lean Startup: “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.”

I’ve emphasized the last two words, because I want to underscore that in this definition, what determines a startup are the unknowns a new product faces — not the age, size or sector of the company. In other words, in Lean Startup terms, a startup is a group of people working on a risky new product, even if that group of people works for Exxon or the U.S. Marine Corps.

With that definition in mind, there are three areas in which a startup typically faces a very high degree of uncertainty — or risk:

Technical risk, also known as product risk. You could think of this as the question: Can we build this thing at all? For example, if you’re seeking a cure for cancer, there’s a big risk that you’ll fail to find it. If you do find it, you’ll certainly have customers, so there’s no market risk.

Customer risk, also known as market risk. This is the question: If we build this thing, will people use or buy it? Put another way: Should we build this thing? The story of Webvan illustrates this risk: At the turn of the millennium, the company spent $1 billion to build a series of high-performance warehouses and trucking fleets on the assumption that people would buy groceries online. Although it was technically possible to offer groceries online and deliver them to homes, customers weren’t interested in the service at the time, and Webvan folded after a couple of years and a lot of investor dollars down the drain.

Business model risk. This amounts to the question: Can we create a way for this thing to make us money? Strong business models aren’t always obvious. For example, you know Google as a company that makes a lot of money selling search-related ads. But when the Google website launched, it wasn’t obvious that ad sales would become the killer business model, and it took a number of years before they hit on that approach.

If you’re wondering which kind of risk you face, let me help you out: It’s customer risk. Nearly always, it’s the biggest question, because you simply don’t know the value, if any, your new product has for potential customers. When I say, “Nearly always,” I mean: This is so often the case, you should assume it’s true every time.

The tricky part is that commonly, product risk looks more urgent. After all, if you’ve hit on an exciting new idea that you’re pursuing, you’re doing so because you believe other people will be interested in it, too. And if you assume the demand will exist, you’ll be tempted to make sure you can build the product before you offer it to people. But that’s a very big assumption, and many, many startups have failed after building cool stuff, because they relied on a framework of inaccurate assumptions about how customers would behave. Good news: There’s no reason you should put time and money toward a belief you haven’t proven. Below, I’ll talk more about assumptions and how you can avoid repeating a doomed history like Webvan’s.

Note that when you think in terms of risk, rather than company history, it becomes clear that lots of existing organizations have startups within them. For instance, if you’re Gillette and you add a fifth blade to your iconic razor, you have no risks: the product, the market, and the business model are all known. But Gillette’s parent company, Proctor & Gamble, has R&D teams looking at new methods for hair removal. For those new ideas, everything is unknown. Which means the teams working on them are startups.

Incidentally, the biggest company we know of that’s systematically applying Lean Startup methods is GE. Ranked seventh largest in the world, as of May 2014 by Forbes, the company has trained 7,000 managers around the globe in Lean Startup principles and has used them to improve outcomes on things like diesel engines and refrigerators.

But what I face product risk and customer risk? Attack the customer risk first. When the founders of Litmotors learned that the vast majority of car trips involve one person going just a few miles from home, they set out to make a new kind of car that would be more efficient for these kinds of rides. Based on a two-wheeled motorcycle chassis, their prototype looked pretty funky and had a new technology that kept it stable. While they were testing the technology, the chief technology officer (CTO) had a personal emergency and had to leave the company for an extended period.

Unable to pursue the prototype tests without the CTO’s expertise and unable to replace him, the remaining team realized they could reduce their customer risk ahead of their product risk, so they finished a showroom model that didn’t actually run and offered it for presale. The results astonished them: Nearly 16 percent of people who came in to see the non-working model put down money to buy one — adding up to dozens of pre-orders in a very short time. Here’s CEO Danny Kim telling the story at the 2013 Lean Startup Conference.

That’s an encouraging story because the company was able to find customers. You can easily imagine a story in which they prove the technology works, then get the vehicle government-approved for sale, then build a terrific manufacturing and distribution system for it — each step of which takes months or years and great expense — and then discover that nobody wants to buy a two-wheeled car. (Indeed, that’s pretty much the story of Segway.)

By guiding you to answer the question, Should we build this?, Lean Startup helps you avoid the spectacular and unnecessary failure of building a perfect product that nobody buys.

For more information about Lean Startup methodologies and advice about budgets, minimum viable products, customer development, metrics and much more, continue the article here.

This article was written by Sarah Milstein, the CEO of Lean Startup Productions and is part of Lean Startup’s week-long takeover of Intuit Labs, which includes original stories and a fresh perspective. Centered around experimentation and investigating all parts of a business or product idea, this week’s posts include case studies, tips, Q&As, startup stories and more.  If you want to learn more about Lean Startup and how it’s applied at Intuit, visit the Intuit Innovation Institute.

2 Comments

Dave McCarthy

June 28, 2015 at 12:14 pm - Reply

Love it, love it, love it. I just finished reading the Lean Startup and I am a believer.

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December 26, 2015 at 12:17 am - Reply

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