ENG491 Technology Entrepreneurship

1. ENG491 Technology Entrepreneurship Fall 2011 – Fall 2012 Emre Oto Building a Lean, Scalable Startup www.eng491bu.org Follow on Twitter: @eng491

2. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Week 9Executive Summary of ENG491 • Technology entrepreneurship is a hard, human science that follows the scientific method

3. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartup all about? • Thescientific method to building startups • Based on validated learning • Validated learning is not after-the-fact rationalization • Validated learning is not a good story designed to hide failure

4. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartup all about?Validated Learning • Process of demonstrating progress under the extreme uncertainty in which startups grow • Process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects • Demonstrated by positive improvements in the startup’s core metrics

5. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Validated Learning • Validated learning is backed by empirical data collected from real customers • Learning is the essential unit of progress for startups • Any effort not absolutely necessary for learning what customers want can be eliminated • We don’t want to kid ourselves on what customers want • We don’t want to learn things that are completely irrelevant

6. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Validated Learning • Work smarter not harder • Build to understand what the customer needs, and build only what the customer wants • Positive changes in metrics become the quantitative validation that our learning was real. • Productivity is not how much stuff we are building, but how much validated learning we are getting for our efforts.

7. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Validated Learning • The question is not «Can this product be built?» • In the modern economy we can pretty much build any product imaginable • The right question is «Should this product be built?» • «Can we build a sustainable business around this set of products and services?» • Conclusion: Everything a startup does is an experiment to achieve validated learning

8. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Experimentation • Many questions in a startup: • Which customer opinions should we listen to? • How should we prioritize across features? • Which features are essential to the product’s success? • What should we work on next? • Etc. • The answer is «Experimentation»

9. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Experimentation • Begin with a clear hypothesis • Test predictions empirically • Just as scientific experimentation is informed by theory, startup experimentation is guided by the startups’s vision • The goal of every startup experiment is to discover how to build a sustainable business around this vision • Key idea: The experiment is a product • Special kind of product called the Minimum Viable Product

10. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Experimentation • Customers interact with products and generate feedback and data • Outcome of the experiment is learning about how to build a sustainable business (and repeat)

11. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Build-Measure-Learn • Minimize total time • through the loop • Focus on validated • learning • Learn where and • when to invest energy

12. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartup all about?Leap-of-faith assumptions • Which hypotheses to test first? • Riskiest elements of a startup’s plan • Parts on which everything depends • The value hypothesis and the growth hypothesis (more on this later) • State leap-of-faith assumptions, then build Minimum Viable Product

13. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartup all about?The Minimum Viable Product • Version of the product that enables a full turn of the loop.. • with a minimum amount of effort • ..and the least amount of development time • Not internal! We put it in front of the client/customer! • We may even try to sell it..

14. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?The Minimum Viable Product • Begins the process of learning • The goal is to test fundamental business hypothesis • Initially targets early adopters (80% solution) • Can start with a smoke test (a simple ad) or an early prototype • When in doubt, simplify • Remove any feature, process, or effort that does not contribute directly to the learning you seek. • Ok if low quality, but that doesn’t mean we should be sloppy or undisciplined.

15. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» The Minimum ViableProductType #1: The Video MVP • Useful when it is impossible to demonstrate working software in a prototype form • Example: Dropbox • Read page: 97-99 of the Lean Startup for the whole story

16. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» The Minimum ViableProductType #2: TheConcierge MVP • Offering personalized service to a selected few to understand demand and the inner workings of a scalable product / service • Learning activity designed to test the leap-of-faith assumptions in the company’s growth model • Can help invalidate the company’s proposed growth model, making it clear a different approach is needed.

17. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» The Minimum Viable ProductType #2: TheConcierge MVP • Even if the initial MVP is profitable, growth model may be insufficient • Pivot to transform a small profit business model to a scalable business • Example: Food on the Table • Read page 99-102 of the Lean Startup for the whole story

18. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» The Minimum Viable ProductQualityof an MVP • Modern production processes rely on high quality to boost efficiency: Six Sigma, lean manufacturing etc. • W.Edward Deming: “Customer is the most important part of the production process” • To assess quality, you must know know who the customer is: Risky assumption in a startup

19. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» The Minimum Viable ProductQualityof an MVP • If we do not know who the customer is, we do not know what quality is • Even a “low-quality” MVP can help build a great high-quality product • If an MVP is indeed low quality, use it as a learning opportunity to understand what attributes customers care about • vs. handwavy strategizing on a whiteboard • at least you have an empirical foundation

20. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» The Minimum Viable ProductQuality of an MVP • Only build high-quality products to win over customers • Start validated learning as soon as possible • This does not mean you should be sloppy or undisciplined • That slows down the Build-Measure-Learn loop • Defects make it difficult to evolve the product

21. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» The Minimum Viable ProductFear of Competition • You should be lucky to be noticed • Managers, large companies, etc are overwhelmed with good ideas. • Their challenge lies in prioritization and execution, and it is those challenges that give a startup hope of surviving. • “Speed is the only strategy in a startup”

22. The Minimum Viable ProductFear of Competition • You are building a new team because you believe you can accelerate through the Build-Measure-Learn feedback loop faster than anyone else. • If that’s true, it makes no difference what the competition knows • Sooner or later you will face competition, being stealth mode rarely helps • Fear of (bad) reputation: • If you have branding concerns, initially launch unbranded or under a different brand name

23. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Measurement • A startup’sjob is to • Rigorouslymeasurewhere it is rightnow, confrontingthe hard truthsthatassessmentreveals • Deviseexperimentstolearn how tomovetherealnumbersclosertothe ideal • Keyquestion: How do youknowyouaremakingyourproductbetter? • Cause-effectrelationship?

24. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Measurement • Innovationaccounting: • Webeginbyturningleap-of-faithassumptionsinto a quantitativefinancial model • Establishbaseline: Weuse an MVP toestablishreal data on wherethecompany is rightnow • Tuningthe engine: Wemakechangestomoveitsbaselinetowardthe ideal • Pivot orpersevere? Reestablishnewbaseline, tunethe engine fromthere

25. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Measurement • Establishingbaseline: • Set clearbaselinemetrics, hypothesestoimprocesthosemetrics, and a set of experimentsdesignedto test thosehypotheses • Plan to test themostcriticalassumptionsfirst • Tuningthe engine: • Everyproductdevelopment, marketing, orotherinitiativethat a startupundertakesshould be targeted at improving on eofthedrivers of itsgrowth model. • A gooddesignchangescustomerbehaviorforthebetter

26. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupall about?Measurement • Establishingbaseline: • Set clearbaselinemetrics, hypothesestoimprovethosemetrics, and a set of experimentsdesignedto test thosehypotheses • Plan to test themostcriticalassumptionsfirst • Tuningthe engine: • Everyproductdevelopment, marketing, orotherinitiativethat a startupundertakesshould be targeted at improving on eofthedrivers of itsgrowth model. • A gooddesignchangescustomerbehaviorforthebetter

27. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementVirtues of Objective Measurement • Poor quantitative results force us to declare failure and create the motivation, context and space for more qualitative research • Gross metrics such as total number of users etc. are not actionable and are misleading • Use cohort-based metrics rather than gross metrics

28. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementCohort Analysis

29. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementSplit-Testing • An experiment in which different versions of the product are offered to customers at the same time • By observing changes in behavior between the two groups, one can make inferences about the impact of the different variations. • Helps refine understanding of what customers want and don’t want

30. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementThe Value of the Three A’s The three A’s of Innovation Accounting metrics • Actionable • Accessible • Auditable

31. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementActionability • A report must demonstrate clear cause and effect • E.g. Number of hits is not actionable • Where do the hits come from? • Non-actionable metrics result in finger-pointing • When cause and effect is clearly understood, people are better able to learn from their actions

32. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementAccessibility • You should not have to figure out how to use the data • “Out of clutter, find simplicity” (Albert Einstein) • Make reports / data simple so that everybody understands them • “Metrics are people too”: Use tangible, concrete units (Hits vs. number of unique users)

33. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementAccessibility • Use cohort analysis: • Translate complex actions into people-based reports • Among the people who used our product, here’s how many of them exhibited each of the behaviors we care about • Provide widespread access to the report • All team members should see and understand

34. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» MeasurementAuditability • Data should be credible,and justifiable • Validate data by talking to real customers • Make sure the mechanisms that generate reports/data are not too complex • Data that does not have credibility dismotivates the team

35. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartup all about?Pivot or Persevere • Pivot: Structured course correction designed to test a new fundamental hypothesis about the product, strategy, and the engine of growth • Upon completing the loop, we either pivot the original strategy orpersevere • There is a human element to it: intuition, judgementetc. • Unconditional perseverance is stupid • Companieswho do not pivot arestuck in theland of thelivingdead • ..andcash is not theonlythingyouburn (hint: yourpassion?)

36. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» What is theLeanStartupallabout?Pivot orPersevere • Ifwediscoverone of ourhypotheses is false, it is time tomake a majorchangeto a newstrategichypothesis • Failure is a prerequisitetolearning • TheLeanStartupmethodallowsstartupstorecognizeit’s time to pivot sooner • Themoremoney, time, andcreativeenergythat has beensunkintothe idea, theharder it is to pivot

37. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereCash and Pivots • A startup’s runway is the number of pivots it can still make • Your cash gives you opportunities to make a fundamental change to your business strategy • Pivot is more important than time: • Get to each pivot point faster • The startup has to find ways to achieve the same amount of validated learning at lower cost or in a shorter time

38. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or Perseverevs. penitence • Many entrepreneurs wish, in hindsight, they had pivoted sooner. Reasons why: • Vanity metrics allow entrepreneurs to form false conclusions • Without an unclear hypothesis, you can’t experience complete failure: No impetus to change • Many entrepreneurs are afraid = Reality distortion

39. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereSome pivots are inevitable • = Customer segment pivot • Once you have found success with early adopters, you need to sell to mainstream customers • More on this later

40. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Zoom-in Pivot • A feature may become the product • Zoom-out Pivot • Whole product becomes feature in larger product

41. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Customer segment pivot: • Company realizes product solves a real problem for real customers but they are not the type of customers it originally planned to serve • Product hypotheses are partially confirmed, the right problem is being solved, but for a different customer than the original

42. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Customer need pivot: • By getting to know customers extremely well, we figure the problem we are trying to solve is not very important • Target customer has a problem worth solving, but not the one we originally anticipated • May require little more than repositioning the product or a completely new product

43. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Platform pivot: • Starting with an application, then switching into a platform and vice versa • Start selling a single application i.e. a killer-app, then transform into a platform • Platform later emerges as a vehicle for third parties

44. ENG491 Technology Entrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Business Architecture Pivot: • B2B architecture to B2C and vice versa • High-margin, low-volume to low-margin, high-volume • Complex systems model vs. volume operations model

45. ENG491 TechnologyEntrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Value capture Pivot: • Changes in the value we capture the value the company creates • = Monetization = Revenue capture • May have dramatic impact on the rest of the business

46. ENG491 TechnologyEntrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Engine of growth pivot: • Three primary engines of growth: Viral, sticky, paid • More on this next week • Company changes growth strategy to seek faster or more profitable growth • May inevitably require a change in the way value is captured

47. ENG491 TechnologyEntrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Channel pivot: • Same basic solution could be delivered through a different channel with greater effectiveness • E.g. Forgoing a complex sales process to “sell direct” to end users • Technology pivot: • = Sustaining innovation • Incremental improvement designed to appeal to and retain an existing customer base

48. ENG491 TechnologyEntrepreneurship Week #9«TheLeanStartupRedux» Pivot or PersevereTypes of Pivots • Permanent fact of life for any growing business • Even after a company achieves success it must continue to pivot • E.g Disruptive innovation • A pivot is not an ordinary change. It is a structured change designed to test a new fundamental hypothesis about the product • If we take a wrong turn, we have the tools we need to realize it and the agility to find another path