Welcome back to my notes/summary of The Lean Startup. The purpose if this newsletter is to make you smarter and hopefully save you time in doing so. If you find it useful, please consider upgrading your subscription.
Chapter 3
In the entrepreneurial world, the question of measuring progress is critical and can be quite challenging. Traditionally, progress is measured by adherence to plans, ensuring high-quality work, and staying within the budget. However, this approach may not be sufficient for startups, as it doesn't address the fundamental issue of whether the product being developed is what customers actually want.
Entrepreneurs often face the risk of building something that nobody wants, leading to a waste of time, resources, and money. This realization calls for a shift in the way progress is measured. It is not enough to show that the team has been busy and money has been spent. The real measure of progress is whether the work is taking the company closer to its ultimate goal of creating a successful business.
Learning becomes a critical aspect of progress measurement in the context of entrepreneurship. However, relying solely on learning as an excuse for a failure of execution can be detrimental. Entrepreneurs should avoid using learning as a way to justify not achieving the desired results.
Overall, while learning is an essential aspect of the entrepreneurial journey, it must be complemented with tangible results and progress towards achieving the startup's goals. This balanced approach will enable entrepreneurs to build successful businesses and instill confidence in their stakeholders.
In the Lean Startup model, the concept of validated learning takes center stage as a way to overcome the challenges posed by extreme uncertainty in startup environments. Validated learning is not about creating after-the-fact rationalizations or constructing stories to conceal failure; rather, it is a rigorous and empirical method for demonstrating progress.
Validated learning involves the process of systematically proving that a startup team has gained valuable insights and knowledge about the business's current state and its future prospects. It is a way to validate the assumptions and hypotheses underlying the startup's business model and product offerings.
The focus on validated learning is crucial because it offers several advantages over traditional market forecasting or classical business planning. It provides a more concrete and accurate way to assess progress, allowing entrepreneurs to identify what works and what doesn't in a more timely manner.
Where do you find validation?
In the early days of IMVU, they faced the challenge of convincing stakeholders, including investors and employees, that they were making progress despite the initial failures. Their theories about what went wrong and what needed to be done differently were mere speculations without concrete evidence to back them up. It wasn't until they put our theories into practice, building subsequent versions of the product and seeing improved results with actual customers, that we could validate our learning.
To measure the impact of various changes and experiments, Ries and his team used split testing to compare different versions of their website, registration flow, and product offerings. For example, by replacing "avatar chat" with "3D instant messaging" on their website, they observed that new customers in the experimental group were more likely to sign up for the product and become long-term paying customers.
The key to startup productivity lies in systematically figuring out the right things to build based on validated learning. Every bit of knowledge gathered through experiments suggested new directions to explore, continuously moving us closer to meeting our customers' needs and achieving our business objectives.
The Audacity of Zero
In the early stages of IMVU, despite the initial success, the gross numbers were still relatively small. This presented a challenge because traditional business evaluation tends to question whether large numbers will ever materialize when the initial revenue and customer traction are not significant. Zero revenue and customers may invite imagination and hope for overnight success in the future, but small numbers raise doubts about the potential for substantial growth.
This phenomenon creates a dangerous incentive for startups to delay getting any data until they are certain of success. Entrepreneurs might be tempted to postpone releasing their product until they believe it will achieve a significant impact. However, such delays can lead to wasted efforts, lack of essential feedback, and increased risk of building something that customers don't want.
When they launched IMVU, they didn't fully grasp this problem. Initially, they had a modest revenue plan, but as the numbers hovered around $500 per month, some stakeholders started losing faith. There were suggestions to pull the product out of the market and return to stealth mode. However, as we pivoted, experimented, and learned from our failures, our numbers began to improve.
But even as their numbers showed promise, they were still relatively small. At that stage, they lacked the language of validated learning to communicate the real progress they were making. Fortunately, some of their early investors understood the importance of validated learning and looked beyond the small gross numbers to see the potential for significant growth.
Validated learning allowed them to demonstrate that their product development efforts were leading them toward success, without resorting to vanity metrics or marketing gimmicks. Vanity metrics might provide a temporary illusion of traction, but they do not reflect the true progress or potential of a startup. By focusing on validated learning, they avoided the trap of "success theater" and wasteful efforts that might have undermined our long-term prospects.
As IMVU grew, it not only became a successful product with a thriving team but also left a lasting impact on how startups measure progress. The Lean Startup approach and the concept of validated learning have since become essential tools for entrepreneurs to build successful businesses based on real customer needs and continuous improvement.
The IMVU story has been widely used as a business case in various educational settings. However, students often focus on the specific tactics employed by IMVU, such as launching a low-quality prototype and charging customers from day one. While these tactics were useful for IMVU, they may not apply to every situation or industry.
Key Takeaways
The key takeaway from the Lean Startup approach is not just about using specific tactics but understanding the underlying principles that guide its recommendations. It's about seeing every startup as a grand experiment and adopting a principled approach to new product development. Instead of asking, "Can this product be built?" the focus should be on "Should this product be built?" and "Can we build a sustainable business around it?"
The Lean Startup model encourages a scientific method-like approach, where every aspect of the business is seen as an experiment designed to achieve validated learning. It's about systematically breaking down a business plan into its component parts and testing each part empirically. This approach can be applied across industries and sectors, allowing startups to adapt and innovate based on real customer feedback and data.
In the Lean Startup model, the goal is not just to build a product but to build a successful and sustainable business by continuously learning and iterating based on customer insights and market feedback. It's an adaptive and customer-centric approach to entrepreneurship, fostering innovation and growth in a dynamic and uncertain business environment.
Thanks for reading. See you next time.
(By reading this summary, you just saved yourself over 10-15 minutes of extra reading per chapter, which cumulative will save you literal hours of your day. Consider upgrading your subscription and/or sharing.)