Part 5 of my summary of Eric Ries´ book “The Lean StartUp“. For part 1 – 4 take a look at the end of the article. Today´s chapter is Measure
A startup´s job is to (1) rigorously measure where it is right now, confronting the hard truths that assessment reveals, and then (2) devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan.
Accounting is something that has become taken for granted but unfortunately standard accounting is not helpful in evaluating entrepreneurs. Startups are too unpredictable for forecasts and milestones to be accurate.
Also taking a look if a startup is making its products better by the time is really dangerous. Eric Ries gives some examples of startups telling him “We are making our product better. We changed some things, numbers went up and it seems like the people like them.” Most milestones are built the same way: hit a certain product milestone, maybe talk to a few customers, and see if the numbers go up. But how do we know that the changes we have made are related to the results we are seeing?
To answer these kinds of questions, startups have a strong need for a new kind of accounting geared specifically to disruptive innovation. -> Innovation Accounting.
How innovation accounting works – three learning milestones
It works in three steps:
- Use a minimum viable product to establish real data on where the company is right now (the baseline). Without a clear-eyed picture of your current status – no matter how far from the goal you may be – you cannot begin to track your progress.
- Startups must attempt to tune the engine from the baseline toward the ideal. This may take many attempts. After the startup has made all the micro changes and product optimizations it can to move its baseline toward the ideal, the company reaches a decision point.
- Pivot or persevere! (As discussed in a previous article)
Establish the baseline
A startup can create a complete prototype of a product and can use this single MVP to test most of the startup´s assumptions. Or separate MVPs that are aimed at getting feedback on one assumption at a time. Or performing a smoke test before even building a prototype – a test that measures only one thing: whether customers are interested in trying a product. These MVPs provide the first example of a learning milestone.
Tuning the engine
Once the baseline has been established, the startup can work toward the second learning milestone. Every product development, marketing, or other initiative that a startup undertakes should be targeted at improving one of the drivers of its growth model. For example, a company might spend time improving the design of its product to make it easier for new customers to use.
Pivot or persevere
Over time, a team that is learning its way toward a sustainable business will see the numbers in its model rise from the horrible baseline established by the MVP and converge to something like the ideal one established in the business plan. When this is done right, even the most powerful reality distortion field won´t be able to cover up this simple fact: if we are not moving the drivers of our business model, we are not making progress. That becomes a sure sign that it´s time to pivot!
In the end of the chapter Eric Ries gives an example about the “Hollywood picture of an Entrepreneur”. A movie were you see the protagonist having an idea, a short photo montage were you see the protagonist building a team, working, writing on whiteboards and closing sales, and after the photo montage the founders are successful. Unfortunately, the real work that determines the success of startups happens during the photo montage. Only 5 % of entrepreneurship is the big idea, the business model and the whiteboard strategizing. The other 95 % is the gritty work that is measured by innovation accounting: product prioritization decisions, deciding which customers to target or listen to, and having the courage to subject a grand vision to constant testing and feedback.
We all must face this fundamental test: deciding when to pivot and when to persevere!
Use cohort analysis to get the whole picture! Forget about traditional analysis!
Eric Ries gives groundbreaking examples why it´s essential to use cohort-analysis to see the reality about your customers instead of using confusing cumulative metrics. He gives an example about a product where customers can register, log in once, having conversations and pay. With a great cohort-analysis you can figure out which indicators change when you changed something in the system. Paying customers grow from 1% to 2%, registered customers without action went down from 42% to 39%. In relation we will get the whole picture instead of measuring “How many clicks did we have?”, “How many new customers registered?” – because when we will have 100 new registered customers without having a single one who pays we can rethink our change. Maybe our marketing was great to get new customers but our product has weaknesses so that no one of the new customers is ready to pay for it. For further information take a look in his book or google the topics. It´s really worth thinking about!
Principles of a lean startup: