Author: Ash Maurya
Date Published: February 24, 2012
The odds of a successful startup has not improved much. Most startups still fail. Yet the cost of building products is at an all time low. Additionally, 66% of successful startups dramatically changed their plans along the way. It is not that these startups had a better initial plan (Plan A) but they developed a systematic approach to finding a plan that worked before running out of resources. This book is a systematic approach for iterating from Plan A to a plan that works.
Disclaimer: Running Lean is a workbook. I have distilled some of the major points out of the text but this is a book that is meant to be referenced over and over.
PART 1: ROADMAP
Chapter 1: Meta Principles
The process can be broken down into three key steps.
Step 1: Document your Plan A
It is critical you capture your business model and all the corresponding hypothesis on paper. This is most easily done by completing a Business Canvas that covers all the key components for your Product and your Market and then share it with at LEAST one other person.
“Too many founders carry their hypotheses in their heads alone, which, though the fastest way to iterate, only helps to further support their own ‘reality distortion fields.'”
Your Product is not “the Product”. The solution section of the Business Canvas is small for a reason. It is because we spend too much time focusing on it and not enough time focusing on the entire business model.
“Your job isn’t just building the best solution, but owning the entire business model and making all the pieces fit.
Step 2: Identify the Riskiest Parts of your Plan
“Startups are risky business, and our real job as entrepreneurs is to systematically de-risk our startups over time.”
De-risking a business model happens in three key stages or phases. And, at each stage we can ask questions.
Stage 1: Problem/Solution Fit
Do I have a problem worth solving?
- Is it something customers want? (must-have)
- Will they pay for it? If not, who will? (viable)
- Can it be solved? (feasible)
Stage 2: Product/Market Fit
Have I built something people want?
Stage 3: Scale
How do I accelerate growth?
Step 3: Systematically Test Your Plan
“The Lean Startup methodology is strongly rooted in the scientific method, and running experiments is a key activity.”
Chapter 2: Running Lean Illustrated
This chapter uses the creation of the book Running Lean to illustrate how the three steps play out in a real business. This is the timeline from page
Brainstorm Possible Customers
- Get narrow on customer segments – It is possible that you have a solution that appeals to a wide customer segment. However, try to get as narrow as you can. Example Facebook. They started with a customer segment of “Harvard Students”.
- Start with one customer canvas, split as necessary – To start, create one customer canvas and list the top three customer segments. As you evolve your canvas, you might need to develop a separate canvas for each customer segment.
Sketching a Lean Canvas
- Finish canvas in one day – You can end up in analysis paralysis, iterating endlessly. Thats not the goal. Try to get the first pass one in one hour. If you need to, leave sections blank or insert your best guesses.
- Be Concise – The whole point is to try to distill your message down to the essence. That is why there is not a ton of room on the canvas to write.
- Stay Customer Centric – Remember, you exist for your customers. They care only about their problem, not your technology or even at times your solution.
Problem and Customer Segments (#1 & #2)
These two sections together are where you should start. The rest of the canvas can be built around the data in these two areas.
- List the top 1 to 3 problems and include existing alternatives – What problems do your customers have? What jobs do they need done that currently cannot be done well? Also, list if possible how people are completing these tasks or jobs today? List the existing alternatives below or interweave into the problems.
- Early Adopters – If possible, pick the group of users you want to target first, your early adopters.
Unique Value Proposition (#3)
This is perhaps the most critical piece of your canvas, it is also the hardest piece to get right. Why are you different and worth buying? You distill the essence of your product so that it would fill the heading of a landing page.
- Target Early Adopters – This means get specific, bold and clear on messaging them. You can change your UVP later to appeal to the masses.
- Tell a Story, Pick your Words Carefully – Tell a story that your early adopters can relate to. And, make sure that you pick words that you can live up to. Not just for marketing hype.
- Answer the What, Who and Why – Make sure you answer the what and who. Why can be hard, try using a sub-heading to answer that part.
- Study other GOOD UVP’s
- Create a High-Concept Pitch – This is fun and I recommend it. Here is a fun one from Hollywood, “Liar Liar: a movie where a lawyer is forced to tell the truth for 24 hours.” Guessing you have a fun visual on that one.
The simple idea here, look at the problem section, what solutions will you build to directly solves the problems listed. Keep it simple and concise.
Growth Channels (#5)
This is one of the top reasons startups fail. No clear path to the customer and growth. Even though you’re primarily concerned with learning at this stage, you definitely want to test your growth hypotheses as early as you can.
- Freer vs. Paid – There is no such thing as a free channel. Every growth hypothesis has an associated cost.
- Inbound vs. Outbound – Inbound uses the concept of pull for lead generation. Outbound is a push message with some conversion rate.
- Direct vs. Automated – Sell manually to start, automate once you’ve learned all that you can from it.
- Direct vs. Indirect – You have to sell first, then you can hire other folks to sell for you.
- Retention before referral – Affiliate and referral programs are wonderful but make sure your product is world class before you start these.
Revenue Streams & Price (#6)
The next two sections, revenue and cost, help us validate the viability of the business. This is NOT intended to be a 5 year pro forma or financial model or margin analysis. Key: Model what you’d need to get to your MVP in terms of revenue, pricing and costs. Answer the question: Does it make sense?
- Charge from Day 1 – Perhaps the riskiest part of a business canvas is charging for your products and the price you select. Although there are some arguments for delaying the revenue component in exchange for learning and less friction, the best path is to charge as early as you possible can. Optimally from Day 1.
- Price can change your perception of the product and defines your customers – Its hard to ignore the affects price has. If viewing two objects that are similar, one is $2 and one is $10, you will likely wonder what is so amazing about the $10 item. Similarly, your price will determine what segment of the market you’re trying to attract.
- Pricing is an ART – yes, there is science involved but pricing ultimately is more art. One good technique is to set price against one of the alternates you identified on the canvas.
Cost Structure (#7)
Determine as best as you can all the major costs that will help you get to the MVP finish line. Do the best you can. Assign cost amounts to the items.
Key Metrics (#8)
What are the key metrics that help you full-fill your sales funnel? Which numbers would you want to know daily that help you know if you’re on track to hit revenue numbers long before the month is over?
- Acquisition – How to users find you?
- Activation – Do users have a great first experience?
- Retention – Do users come back?
- Revenue – Did the buy something?
- Referral – Did they tell someone else? Good review?
Unfair Advantage (#9)
This is super important to think about. One business FoodStirs.com listed as an unfair advantage, having a celebrity as the co-founder and Jessica Alba on the board. I would agree that is unfair. 🙂 Do you have something like this? Leave blank if not.
PART 2: DOCUMENT YOUR PLAN A
Chapter 3: Create Your Lean Canvas
Chapter 3 is a step by step guide with tips and tricks, for building your business canvas.
Brainstorm Possible Customers
- Start broad and then go narrow. Start with the whole customer group and then start to break it up into segments.
- Eventually have a Lean Canvas for each customer segment as much of the canvas will be unique to that group.
Sketching a Lean Canvas
- The Lean Canvas is intended to be done quickly, in one sitting.
- Be Concise and customer centric in your thinking.
Problem and Customer Segments
- Problem – List the top three problems and list the alternatives to your product. What would they do if your product didn’t exist?
- Customer – Pay particular attention to early adopters.
Unique Value Proposition
- Be different, Focus on on what matters and pick your words carefully.
- Answer the WHO, WHAT & WHY.
- Study other UVP’s and consider adding a high concept pitch.
- Work on the solution as late as you can in the process. Focus instead on the problem.
- There is no such thing as a FREE growth channel.
- Understand the difference between INBOUND and OUTBOUND growth channels.
Revenue Channels & Cost Structures
- These two sections are used to model the viability of the business.
- Don’t defer price. In other words, don’t give ANYTHING away for free.
- The costs outweigh the benefits here. Price is PART of the product, so, you won’t be testing true value and commitment if you don’t charge.
- Price also defines your customers and getting paid is the TRUE form of validation.
- Cost and Revenue – Used to model first year and viability, not to be used for 3 or 5 year models.
Key Metrics (or Key Performance Indicators)
- The metrics that you watch and know long before the Income Statement is complete how you’re doing. What are the 1, 3 or 5 things that you need to watch to ensure your success?
- These are true unfair advantages, like insider information or strategic influencer.
PART 3: IDENTIFY THE RISKIEST PARTS OF YOUR PLAN
Chapter 4: Prioritize Where to Start
Understanding Risk – A “risk” is anything that has some probability of occurring and if that event does occur, will have some level of negative impact. By definition, all risks are uncertain or have a some probability of happening or not happening. Our job is to de-risk the model. Find the things on the model that have the biggest possible negative impact (if they occur) and then see how likely they are to occur. Phew, long winded way of explaining it.
Risks can be broken into three categories. Product, Customer and Market. It’s an interesting way to break down your business canvas.
- Point of interest, I disagree with the Problem being categorized as a Product Risk, it is most certainly a Customer Risk. Since, it is the CUSTOMER who has the PROBLEM that we are trying to solve WITH our SOLUTION. See page 50.
How to Attack Your Business Canvas Risk (order) – The book suggests a good order to approach your business canvas with.
- Customer Pain Level (Problem) – Most misunderstood and often mistaken area of the canvas.
- Ease of Reach (Channels) – If you build it, they won’t probably come. 🙂
- Price/Gross Margin (Revenue Streams / Cost Structure) – Overestimation of revenue, underestimation or incomplete costs means smaller margin than predicted.
- Market Size (Customer Segments)
- Technical Feasibility (Solution)
Seek External Advice
You need to meet with, have discussions with and learn from two main categories of folks. This process takes time! You will not be able to do this in a day, or even at times a week or a month. This is a process of learning, iterating, re-presenting and learning some more. Both of the two groups below are critical to the learning process as BOTH add unique value.
First, your hypothesized customer segment! What do they say, think about your model? You’re not looking for nodding heads here but rather that jumping out of the seat excitement. “Wow, you’re going to help a lot of people with this!” Not, “Cool, that looks interesting.” Hard to describe the reaction you’re looking for but you know when you get it. Body language will change if you got it right! Read that, not just the words.
Second, trusted advisors – These folks tend to approach the business canvas holistically. They will give you more pragmatic advice on the whole model including growth channels, revenue and costs.
Get feedback from at LEAST 3 advisors and 10 potential customers.
Chapter 5: Get Ready to Experiment
Assemble a Problem/Solution Team
“While it is possible to build a product by yourself, I highly recommend working with at least one other person who can, at a minimum, help to enforce periodic reality checks. Ideally, this is a cofounder, but advisors, investors, and even an ad hoc board made up of other startup founders can fill this role.”
I constantly run across teams that try to outsource one of more of these three areas (development, design, marketing) which is usually a bad idea.”
Running Effective Experiments
- Focus on the intersection of Speed, Focus and Learning.
- Focus on one key metric or goal at a time.
- Formulate “falsifiable” hypotheses – This means, ones that can be proven wrong. So, that you know if its true or false, not somewhere in between.
- Communicate learning early and often – This is humbling stuff at times but make sure to keep the team up to date on all the latest findings.
Applying the Iteration Meta-Patterns to Risk
- This stage is largely qualitative in nature.
- Don’t be overly optimistic about favorable reaction or overly pessimistic about negative reactions.
PART 4: SYSTEMATICALLY TEST YOUR PLAN
Chapter 6: Get Ready to Interview Customers
No Surveys or Focus Groups, Please
- Survey’s assume you know the right questions to ask!
- And, you cannot see the customer through a survey, and body language is critical here.
- Surveys become useful once you have preliminary validation on your hypotheses.
But Talking to People is Hard
- Build a framework around learning, not pitching.
- Don’t ask customers what they want, measure what they do.
- Cast a wider net initially and stick to a script.
- Prioritize finding prospects through a channel you want to use to grow your business.
- Start with first degree contacts, ask for introductions and make sure to give something back!
Chapter 7: The Problem Interview
What you’ll need to learn though this section is:
- Product Risk: What are you solving?
- Market Risk: Who is the competition?
- Customer Risk: Who as the pain?
Testing The Problem
- You’ll want to measure how customers react to your top problems.
- You will want to make sure you understand the problems they currently face and how they solve them today.
Conduct Problem Interviews
- Collect Demographic Information – User Persona details.
- Problem Ranking – Make sure you ask the top three problems you list and rank how big those problems really are for your customer.
- Explore the Customers Worldview – Ask in real world examples how the customer solves these problems today?
Do You Understand the Problem?
- Refine the Problems – If you don’t get a hit, drop that problem from the list. Focus on the problems that customer actually have and you can actually solve.
- Really Understand Their Existing Alternatives – What would they do without you?
- Pay Attention to Words Customers Use – These will be very helpful in developing the UVP.
Chapter 8: The Solution Interview
What you’ll need to learn through this section is:
- Customer Risk – Who has the pain?
- Product Risk – Will you be able to solve these problems?
- Marketing Risk – What is the pricing model?
Testing Your Solution
- Build a Demo or Mockup – It needs to be realizable, look real.
- Can be a video, pictures, as real as you can get quickly.
Testing Your Pricing
When it comes to price, give them a price, see how they react. Don’t ask for them to tell you the max they’d pay.
“There is no reasonable economic justification for a customer to offer anything but a low-ball figure. Customers might honestly not know how much they’d pay, and this question only makes them uncomfortable.”
Conduct Solution Interviews
- Set the Stage – What are you working on, what problems are you trying to solve, where are you at.
- Collect Demographics – Who, what where user persona stuff.
- Tell a Story & Do A Demo – Illustrate the three problems and then tell the story.
- Test Pricing – Tell them what you want to charge, gauge their immediate response.
Do You Have a Problem Worth Solving
- Based on the interviews, you should be able to quantify through features, hypotheses and price whether you have a problem worth solving or not.
Chapter 9: Get to Release 1.0
Reduce Your MVP
- Eliminate nice to haves and don’t needs
- Start with your number one problem from the interview process.
“A danger with iterating through mockups during the solution interview is it is quite easy to get carried away and end up with more than you need for your MVP.”
Getting Started Deploying Continuously
- It is the process of releasing code regularly throughout the day.
- Consider using a short cycle agile development process too.
Define Your Activation Flow
- This defines all the steps your customers take from signing up for the service to enjoying the first experience.
- Reduce the number of steps or the amount of friction caused through this process.
- Be prepared for when things go wrong, have a phone number or contact details.
Build a Marketing Website
This site has a sole purpose of selling your product. It includes all the steps from customers being made aware of your product to becoming an interested prospect.
- Focus on the landing page – It has to convince your customers to stay within 8 seconds.
- Clear call to action – make sure each page has a clear call to action.
- UVP – This is where your Unique Value Proposition goes.
Chapter 10: Get Ready to Measure
The Need for Actionable Metrics
- This phase is not about optimizing the funnel but rather learning about hotspots and problems.
- Be aware of vanity metrics vs actionable metrics.
Metrics Are People First
- Metrics are people first, there are people behind all the numbers but be a metric driven company.
- Metrics can help you figure out where things are going wrong but only people can tell you why.
- Be proactive, reach out to your users. Don’t wait for them to reach out to you!
Simple Funnel Reports Aren’t Enough
- Know the difference between MICRO FUNNELS and MACRO FUNNELS. It’s all about the time period that you are tracking.
Chapter 11: The MVP Interview
Sell your MVP face to face before you try to sell it over the internet through your sales channel.
What you’re looking for from the MVP interview:
- Product risk: What is compelling about the product? UVP?
- Customer risk: Do you have enough customer?
- Market risk: Is the price right?
Conduct MVP Interviews
- Set the Stage
- Show the landing page (Test the UVP)
- Show Pricing Page (Test the Price!!)
- Signup and Activation (Test Solution)
Chapter 12: Validate Customer Lifecycle
- Make feedback easy! Be accessible! Use a 1-800 number to make the process easy.
- Tech Support – Think Customer Success!
- Activation & Acquisition – Do you have enough traffic to support learning? Reach out to your users, be proactive and drill into the sub-funnels.
- Retention – Make sure users are using the product. Send email reminders and follow up!
- Revenue – Get paid. Communicate with both paying customers and lost users.
- Referral – Get testimonials from paying customers!
Chapter 13: Don’t Be A Feature Pusher
Features Must Be Pulled, Not Pushed
- Agile or Continuous Development can put you in a spot to release features without doing all the validation work.
- More features dilute your UVP / MVP. Adding features can be a bit of an addiction.
The Feature Lifecycle
- Traditional Agile/Kanban doesn’t include a customer component. Make sure you include a customer focus.
- Set Goals for every stage and know that a feature can be killed at any point.
Chapter 14: Measure Product/Market Fit
The Sean Ellis Test
Sean Ellis ran a consulting company and before he took on a new customer, would ask users and customers of the product, “how would they feel if the product no longer existed?”
- If responses were 40% very disappointed or better, you likely have a company that can scale, if not, maybe not.
- This is a test to see if you have early traction, although it doesn’t help you capture it.
Have You Built Something People Want?
- Pass the Sean Ellis Test, have 40% of people bought in to your product.
- Pick your Growth Engine: Sticky/Referral, Paid or Viral.