Lean Startup

1. Lean Startup Minder Chen, Ph.D. Professor of MIS Martin V. Smith School of Business & Economics CSU Channel Islands minder.chen@csuci.edu

2. Lean Startup “The Lean Startup method teaches you how to drive a startup − how to steer, when to turn, and when to persevere − and grow a business with maximum acceleration.” http://theleanstartup.com/principles Start Your Business Lean and Quick: The Lean Startup Approach Introduce an innovative method to build a new business in the context of lean startup approach. The application and cases of deploying the Build-Measure-Learn cycle to measure user feedbacks and to validate assumptions in a startup’s business model will be discussion.

3. The Lean Startup A startup is a temporary organization designed to search for a repeatable and scalable business model (under extreme uncertainty). - Steve Blank, The Startup Owner’s Manual

4. Definition of Innovation Innovation = Imagination +    Creativity  +  Implementation (Execution) +  Value An innovation is the application of creative ideas, knowledge, or new technology, to a product/service, process, or business model that is accepted by markets and society. • Adapted from OECD 2005 and Wikipedia.

5. The Lean Startup Principles ** http://theleanstartup.com/principles • Entrepreneurs are everywhere (even in well-established firms). • Entrepreneurship is management (but different from managing traditional firms). • Validated learning (about customers). • **Build-Measure-Learn feedback loop. • Innovation accounting (using actionable metrics – mostly about customer behaviors). • Eric Ries, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, 2011.

6. Resources • Why the Lean Startup Changes Everything https://hbr.org/2013/05/why-the-lean-start-up-changes-everything • Eric Ries, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, September 13, 2011. http://theleanstartup.com/principles • **Lean Startup-Visual Summary (link) • The Lean Approach (The Kauffman Founders School) • http://www.entrepreneurship.org/Founders-School/The-Lean-Approach • *Eric Ries: "The Lean Startup" | Talks at Google (video) ~ 1 hour • **Steve Blank How to Build a Startup: The Lean LaunchPad free course on Udacity (link) or (YouTube video list)

7. **Lean Startup: 3 Components The Lean Startup method consists of three parts: • The Business Model Canvas – to frame hypotheses. • Customer Development – to test those hypotheses in front of customers. • Agile Engineering – to build Minimum Viable Products to maximize learning.

8. Product Development vs. Customer Development

9. The Customer Development Process More startups fail from a lack of customers than from a failure of product development • Try many times before you get it right. • It is OK to fail so plan to learn from it. • Only move to the next stage when you learn enough and reach the “escape velocity” http://www.ctinnovations.com/images/resources/Startup%20Owners%20Manual%20-%20BlankDorf.pdf

10. The Lean Start-Up Read this Steve Blank, "Why The Lean Start-up Change Everything," HBR, May 2013. (link)

11. Lean Startup Cycle: Build Measure Learn * * Legend: *Process * Outcome http://www.agileacademy.co/wp-content/uploads/2014/09/LeanStartupCycle.png http://entrepreneurship.saddleback.edu/Resources/Lean%20Startup/Lean%20Startup-Visual%20Summary.pdf

12. Build-Measure-Learn and MVP A core component of Lean Startup methodology is the build-measure-learn feedback loop. The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a startup can work on tuning the engine. This will involve measurement and learning and must include conducting experiments and using actionable metrics that can demonstrate cause and effect question. (link) Utilize an investigative development method called the "Five Whys"-asking simple questions to study and solve problems along the way – Gaining insights http://theleanstartup.com/principles

13. Rent the Runway (RTR) Case Todd Heisler/The New York Times Nathan Furr and Jeff Dyer, The Innovator’s Method: Beginning the Lean Startup into Your Organization, Harvard Business Review Press, 2014. (read this introduction (Rent the Runway case is an great example illustrating Lean Startup principles) and Chapter 1 at • Read the case study at Introduction session of The Innovation Method (pdf) focusing on how they tested some of the assumptions in RTR’s business model

14. Business Plan Show **Rent the Runway: An inside look at the tech startup's success https://www.youtube.com/watch?v=cyvfsi3MX-M Fill out the Business Model Canvas based on the RTR case presented in the video Business Plan would identify the customer need, describe the product or service, estimate the size of the market, and estimate the revenues and profits based on projections of pricing, costs, and unit volume growth.

15. Rent the Runway Case • Rent the Runway Case • ***The Supply & Demand of Rent the Runway | Jennifer Hyman https://www.youtube.com/watch?v=JYFWpJvq6DU  (about testing business ideas) • Read the case study at Introduction session of The Innovation Method (pdf) focusing on how they tested some of the assumptions in RTR’s business model

16. Business Model Canvas https://fivewhys.files.wordpress.com/2012/02/canvas1.jpg (Video)

17. Do Things That Don't Scale • Do Things That Don't Scale http://paulgraham.com/ds.html • Startup Class Lecture 8 http://startupclass.samaltman.com/ or https://www.youtube.com/watch?v=oQOC-qy-GDY

18. Food on the Table http://www.macworld.com/article/2109727/food-on-the-table-makes-meal-planning-and-grocery-shopping-a-piece-of-cake.html The Concierge Minimum Viable Product (MVP) http://mealplanning.food.com/ Food on the Table will ask you for your preferences—the types of foods you like and dishes you enjoy, and the grocery stores you shop at. Then it will recommend dishes for you for the week so that you don’t have to scramble to figure out what to make for dinner. The app helps you save money by listing the items on sale each week at your chosen grocery stores and recipes based on those sale items. Add the recipes to your meal plan and the foods to your grocery list. The mobile app syncs up with your account on the website.

20. Food On The Table’s Lean Startup This case exemplifies Paul Graham’s argument that at the beginning, a startup company should “Do Things That Don't Scale” http://paulgraham.com/ds.html Food on the Table (FotT) began life with a single customer. Instead of supporting thousands of grocery stores around the country as it does today, FotT supported just one. How did the company choose which store to support? The founders didn’t—until they had their first customer. Similarly, they began life with no recipes whatsoever—until their first customer was ready to begin her meal planning. In fact, the company served its first customer without building any software, without signing any business development partnerships, and without hiring any chefs.

21. Paul Graham artcle (link)

22. MVP In product development, the Minimum Viable Product (MVP) is a strategy used for fast and quantitative market testing of a product or product features. It is an iterative process of idea generation, prototyping, testing the prototype, data collection, analysis and learning.

23. MVP and Product/Market  Fit Minimum  Viable Product (MVP) is a bare-bones offering that has just enough features to allow useful feedback from early adopters. It allows the team to collect customer feedback and to validate concepts and assumptions that underlie the business idea. Customers will use the MVP and pay for it. Product/Market Fit—the idea that they were crafting a solution the market wants, one that customers are willing to pay for, and one that will scale into a large, profitable business. 

24. Hypotheses Testing and Insight Identify Business Model Hypotheses Gain based on Facts Collect Data/Facts By conducting experiments Develop MVP

25. Lean Startup- Assumptions and Experiments Mapping Map the key assumptions & attached them to the various parts of your business model. Develop quick and inexpensive experiments to validate or invalidate the assumptions quickly. Pivot if assumptions are invalidated. This is the central idea of the Lean Startup Movement. http://www.alexandercowan.com/business-model-canvas-templates/

26. Business Model Design Meets Customer Development https://steveblank.com/2010/11/11/get-out-of-the-building-and-win-50000/

27. What Is Pivot? • Pivot: A change to business model components based on customer feedbacks. A pivot is not a failure. • Pivot is a structured course correction designed to test a new fundamental hypothesis about the product, strategy, engine of growth, etc. • Eric Ries, The Lean Startup, 2013. • Pivots are vision driven.

28. Top Ten Types of Pivots Source: Top 10 Ways Entrepreneurs Pivot a Lean Startup (link) • Zoom-in pivot • Zoom-out pivot • Customer segment pivot • Customer need pivot • Platform pivot • Business architecture pivot • Value capture pivot • Engine of growth pivot • Channel pivot • Technology pivot.

29. Learning and Assumptions Testing High  Certainty of the Business Model  Low

30. Produce Evidence with a Call to Action (CTA) Use experiments to test if customers are interested, what preferences they have, and if they are willing to pay for what you have to offer. Get them to perform a call to action (CTA) as much as possible in order to engage them and produce evidence of what works and what doesn’t.

31. Use Experiments to Test Interest and Relevance Priorities and Preferences Willingness to Pay

32. Test Customer Interest with Google AdWords We use Google Ad Words to illustrate this technique because it’s particularly well suited for testing based on its use of search terms for advertising (other services such as LinkedIn and Facebook also work well). • Select search terms. Select search terms that best represent what you want to test (e.g., the existence of a customer job, pain, or gain or the interest for a value proposition). • Design your ad/test. Design your test ad with a headline, link to a landing page, and blurb. Make sure it represents what you want to test. • Launch your campaign. Define a budget for your ad/ testing campaign and launch it. Pay only for clicks on your ad, which represent interest. • Measure clicks. Learn how many people click on your ad. No clicks may indicate a lack of interest.

33. Split Testing (A/B testing) Split testing, also known as A/B testing, is a technique to compare the performance of two or more options. We can apply the technique to compare the performance of alternative value propositions with customers or to learn more about jobs, pains, and gains.

34. What to Test? Here are some elements that you can easily test with A/B testing: • Alternative features • Pricing • Discounts • Copy text • Packaging Website variations . . . Call to Action: How many of the test subjects perform the CTA? • Purchase / Rent • E-mail sign-up • Click on button • Survey • Completion of any other task • Osterwalder, Alexander; Pigneur, Yves; Bernarda, Gregory; Smith, Alan (2015-01-23). Value Proposition Design: How to Create Products and Services Customers Want (Strategyzer) (Kindle Locations 3196-3202). Wiley. Kindle Edition.

35. Product Market Fit http://andrewchen.co/when-has-a-consumer-startup-hit-productmarket-fit/ • Product/market fit (PMF) means being in a good market with a product that can satisfy that market. • You can always feel when product/market fit isn't happening. The customers aren't quite getting value out of the product, word of mouth isn't spreading, usage isn't growing that fast, press reviews are kind of "blah", the sales cycle takes too long, and lots of deals never close. • I believe that the life of any startup can be divided into two parts: before product/market fit (call this "BPMF") and after product/market fit("APMF"). • Marc Andreessen ***(link)

36. Customer Development Process & 3 Stages of Fit Business Model Fit (Scaling) Problem/Solution Fit Product/Market Fit

37. Customer Development The process to scale the sales & operations. The process to search for the right business model! Search Execution Scaling

38. The Art of Boot Strapping A bootstrappable business model has the following characteristics: • Low up-front capital requirements • Short (under a month) sales cycles • Short (under a month) payment terms • Recurring revenue • Marketable through social media and word of mouth Source: http://guykawasaki.com/the_art_of_boot/

39. The Art of Boot Strapping • Sweat the Big Stuff • Developing your MVP • Selling your product • Enhancing your product • Focus on cash flow, not profitability • Forecast from the bottom up • Ship, then test • Forget the ”proven“ team • Start as a service business • Focus on function, not form • Pick your battles • Understaffand outsource • Go direct • Position against the leader • Take the “red pill.”The red pill led to learning the whole truth about your chance of survival. A simple calculation: Amount of cash divided by cash burn per month. “The leading cause of failure of startups is death, and death happens when you run out of money.” As long as you have money, you’re still in the game. http://guykawasaki.com/the_art_of_boot/

40. The Bootstrapper’s Bible A bootstrapper is determined to build a business that pays for itself every day. http://www.sethgodin.com/sg/docs/bootstrap.pdf

41. Lean Canvas Project Name 01-Jan-2014 Iteration #x Problem Top 3 problems Solution Top 3 features Unique Value Proposition Single, clear, compelling message that states why you are different and worth paying attention  Pitchable Sentence Unfair Advantage Can’t be easily copied or bought Customer Segments Target customers Key Metrics Key activities you measure Channels Path to customers Cost Structure Customer Acquisition costs Distribution costs Hosting People, etc. Revenue Streams Revenue Model Life Time Value Revenue Gross Margin PRODUCT MARKET http://debane.org/franck/power-point-template-lean-canvas/ https://leanstack.com/lean-canvas/

42. Lean Startup Cycle • Ideas/Business Model • Technologies • Social trends • Pains/Gains Think with your hands Pivot/ Persevere • Build • Prototyping • Minimum viable products (MVP) • Learn • Insights • Hypotheses • 5 Whys Minimize the total time & resource through the Learning Cycle • Product/service • Address Job to be done • Fit (P-S, P-M) • Data • Innovation Accounting • Net Promoter Score • AARRR • Measure • Split tests • Observations • Click streams Find/get real customers

43. Lean vs. Traditional

44. Lean vs. Traditional https://hbr.org/2013/05/why-the-lean-start-up-changes-everything

45. Revising & Pivoting via Speedy Learning Cycles Business Model Canvas version X Identify Hypotheses Design Prototypes & Tests Revise, Redesign, and Pivot current BMC Conduct Tests Analyze Data & Obtain Insights Business Model Canvas version x+1 Measure Results & Build Actionable Metrics

47. Entrepreneurship Problem Validation Essential Question: What is the best way to validate assumptions about an entrepreneurship idea (in your BMC)? Objectives: Students will learn: • To develop a testable hypothesis • To validate their assumptions by talking to potential customers Introduction: Elements of a Quality Hypothesis Plan • The Hypothesis: “I believe [target customer] will [do this action / use this solution] for [this reason]” • The Test: “I will test this by interviewing [# of target customer] at [where to find them]” • The Analysis: “I am right if more than [% of target customers interviewed] say [statement indicating they will take desired action]” Source: Problem validation

48. A Balancing Act of Art (Creativity) & Science https://blog.ycombinator.com/the-scientific-method-for-startups/ In reality, executing a startup is a balance between creativity/intuition/instinct and the scientific method: hypothesize > a/b test > conclude > repeat. Inspiration will help you find a problem to solve. Creativity will allow you to brainstorm potential solutions to that problem. The scientific method will guide you toward which of these solutions will actually solve your customer’s problem.

49. Testing Your Business Model http://businessmodelalchemist.com/blog/2011/01/methods-for-the-business-model-generation-how-bmgen-and-custdev-fit-perfectly.html

50. Lean Innovation https://steveblank.files.wordpress.com/2016/08/nga-lean-innovation.png