The Lean Startup PDF

J 1j How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses  $26.00 (Canada: $30.00) Most startups fail. But many of those failures are preventable. TheLean Startup is a new appro...

J 1j How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses  $26.00 (Canada: $30.00) Most startups fail. But many of those failures are preventable. TheLean Startup is a new approach being adopted across the globe, changing the way companies are built and new products are launched. Eric Ries defines a startup as an organization dedicated to creating something new under condi tions of extreme uncertainty. This is just as true for one person in a garage as it is in a group of seasoned professionals in a Fortune 500 board room. What they all have in common is a mission to penetrate the fog of uncertainty to discover a successful path to a sustainable business. The Lean Startup approach fosters com panies that are more capital efficient and that leverage human creativity more effectively. Inspired by lessons from lean manufacturing, it relies on "validated learning," rapid scientific experimentation, as well as a number of coun terintuitive practices that shorten product development cycles, measure actual progress without resorting to vanity metrics, and help us learn what customers really want. It enables a company to shift directions with agility, alter ing plans inch by inch, minute by minute. Rather than wasting time creating elaborate business plans, TheLeanStartup offers entrepre neurs—in companies of all sizes—a way to test their vision continuously, to adapt and adjust before it's too late. Ries provides a scientific approach to creating and managing success ful startups in an age when companies need to innovate more than ever. Acclaim for THE LEAN STARTUP "The Lean Startup isn't just about how to create a more success ful entrepreneurial business; its about what we can learn from those businesses to improve virtually everything we do. I imag ine Lean Startup principles applied to government programs, to health care, and to solving the worlds great problems. Its ultimately an answer to the question How can we learn more quickly whatworks and discard what doesn't?" —Tim O'Reilly, CEO, O'Reilly Media "Eric Ries unravels the mysteries of entrepreneurship and re veals that magic and genius are not the necessary ingredients for success but instead proposes a scientific process that can be learned and replicated. Whether you are a startup entrepreneur or corporate entrepreneur, there are important lessons here for you on your quest toward the new and unknown." —Tim Brown, CEO, IDEO "The road map for innovation for the twenty-first century. The ideas in The Lean Startup will help create the next industrial revolution." —Steve Blank, lecturer, Stanford University, UC Berkeley Haas Business School "Every founding team should stop for forty-eight hours and read The Lean Startup. Seriously, stop and read this book now." —Scott Case, CEO, Startup America Partnership "The key lesson of this book is that startups happen in the present—that messy place between the past and the future where nothing happens according to PowerPoint. Ries's 'read and react' approach to this sport, his relentless focus on vali dated learning, the never-ending anxiety of hovering between persevere' and pivot,' all bear witness to his appreciation for the dynamics ofentrepreneurship." —Geoffrey Moore, author, Crossing the Chasm "Ifyou are an entrepreneur, read this book. Ifyou are thinking about becoming an entrepreneur, read this book. Ifyou are just curious about entrepreneurship, read this book. Starting Lean is today's best practice for innovators. Doyourselfa favor and read this book." —Randy Komisar, founding director ofTiVo and author of the bestselling The Monk and theRiddle "How do you apply the fifty-year-old ideas of Lean to the fast- paced, high-uncertainty world of startups? This book provides a brilliant, well-documented, and practical answer. It is sure to become a management classic." —Don Reinertsen, author, The Principles ofProduct Development Flow "What would happen if businesses were built from the ground up tolearn what their customers really wanted? The Lean Startup is the foundation for reimagining almost everything about how work works. Don't let theword startup in the title confuse you. This is a cookbook for entrepreneurs in organizations of all sizes." —Roy Bahat, president, IGN Entertainment uThe Lean Startup is a foundational must-read for founders, enabling them to reduce product failures by bringing structure and science to what is usually informal and an art. It provides actionable ways to avoid product-learning mistakes, rigorously evaluate early signals from the market through validated learn ing, and decide whether to persevere or to pivot, all challenges that heighten the chance ofentrepreneurial failure." —Noam Wasserman, professor, Harvard Business School "One of the best and most insightful new books on entrepre neurship and management I've ever read. Should be required reading not only for the entrepreneurs that I work with, but for my friends and colleagues in various industries who have inevitably grappled with many of the challenges that The Lean Startup addresses." —Eugene J. Huang, partner, True NorthVenture Partners "Every entrepreneur responsible for innovation within their organization should read this book. It entertainingly and me ticulously develops a rigorous science for the innovation process through the methodology of"lean thinking." This methodology provides novel andpowerful tools for companies to improve the speed and efficiency oftheir innovation processes through mini mum viable products, validated learning, innovation account ing, and actionable metrics. These tools will help organizations large and small to sustain innovation by effectively leveraging the time, passion, and skill of their talent pools." —Andrea Goldsmith, professor of electrical engineering at Stanford University and cofounder of several startups "In business, a 'lean' enterprise is sustainable efficiency in ac tion. Eric Ries's revolutionary Lean Startup method will help bring your new business idea to an end result that is successful and sustainable. You'll find innovative steps and strategies for creating and managing your own startup while learning from the real-life successes and collapses of others. This book is a must-read for entrepreneurs who are truly ready to start some thing great!" —Ken Blanchard, coauthor of The One Minute Manager® and The One Minute Entrepreneur "Business is too important to be left to luck. Eric reveals the rig orous process that trumps luck in theinvention of new products and new businesses. We've made this a centerpiece ofhow teams work in my company... it works! This book is the guided tour of the key innovative practices used inside Google, Toyota, and Facebook that workin anybusiness." —Scott Cook, founder and chairman of the Executive Committee, Intuit The LEAN STARTUP  The LEAN STARTUP How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses Eric Ries CROWN BUSINESS NEW YORK Copyright © 2011 by EricRies All rights reserved. Published in the United States byCrown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., NewYork. www.crownpublishing.com CROWN BUSINESS isatrademark and CROWN and the Rising Sun colophon are registered trademarks of Random House, Inc. Crown Business books are available atspecial discounts for bulkpurchases for sales promotions orcorporate use. Special editions, including personalized covers, excerpts of existing books, orbooks with corporate logos, can becreated in large quantities for special needs. For more information, contact Premium Sales at (212) 572-2232 ore-mail [email protected]. Library of Congress Cataloging-in-Publication Data Ries, Eric, 1978- The leanstartup/ Eric Ries. — 1sted. p. cm. 1. New business enterprises. 2. Consumers' preferences. 3. Organizational effectiveness. I. Tide. HD62.5.R545 2011 658.1'1—dc22 2011012100 ISBN 978-0-307-88789-4 elSBN 978-0-307-88791-7 Printed in the United States ofAmerica Book design byLauren Dong Illustrations byFredHaynes Jacket design byMarcus Gosling 10 9876543 For Tara Contents Introduction 1 Part One VISION 1. Start 15 2. Define 25 3. Learn 37 4. Experiment 56 Part Two STEER 5. Leap 79 6. Test 92 7. Measure 114 8. Pivot (or Persevere) 149 Part Three ACCELERATE 9. Batch 184 10. Grow 206 11. Adapt 224 12. Innovate 253 13. Epilogue: Waste Not 272 14. Join the Movement 285 Endnotes 291 Disclosures 301 Acknowledgments 303 Index 309 The LEAN STARTUP Introduction Stop me if you've heard this one before. Brilliant college kids sit ting in a dorm are inventing the future. Heedless of bound aries, possessed of new technology and youthful enthusiasm, they build a newcompany from scratch. Their early success al lows them to raise money andbring an amazing new product to market. They hire their friends, assemble a superstar team, and dare the world to stop them. Ten years and several startups ago, that was me, building my first company. I particularly remember a moment from back then: the moment I realized my company was going to fail. My cofounder and I were at our wits' end. The dot-com bubble had burst, and we had spent all our money. We tried desperately to raise more capital, and we could not. It was like a breakup scene from a Hollywood movie: it was raining, and we were arguing in the street. We couldn't even agree on where to walknext, and sowe parted in anger, heading in opposite directions. As a meta phor for ourcompany's failure, this image of the two of us, lost in the rain and drifting apart, is perfect. It remains a painful memory. The company limped along for months afterward, but our situation was hopeless. At the time, it had seemed we were doing everything right: we had a great product, a brilliant team, amazing technology, and the right idea at the right time. And we really were on to something. We 2 Introduction were building a way for college kids to create online profiles for the purpose of sharing... with employers. Oops. But despite a promising idea, we were nonetheless doomed from day one, because we did not know the process we would need to use to turn our product insights into a great company. If you've never experienced a failure like this, it is hard to de scribe the feeling. It's as ifthe world were falling outfrom under you. You realize you've been duped. The stories in the magazines are lies: hard work and perseverance don't lead to success. Even worse, the many, many, many promises you've made to employ ees, friends, and family are not going to come true. Everyone who thought you were foolish for stepping outonyour own will be proven right. It wasn't supposed to turn out that way. In magazines and newspapers, in blockbuster movies, and on coundess blogs, we hear the mantra of the successful entrepreneurs: through de termination, brilliance, great timing, and—above all—a great product, you too can achieve fame and fortune. There is a mythmaking industry hard at work to sell us that story, but I have come to believe thatthestory is false, theprod uct of selection bias and after-the-fact rationalization. In fact, having worked with hundreds of entrepreneurs, I have seen firsthand how often a promising start leads to failure. The grim reality isthat most startups fail. Most new products are not suc cessful. Most new ventures do not live up to their potential. Yet the story of perseverance, creative genius, and hard work persists. Why is it so popular? I think there is something deeply appealing about this modern-day rags-to-riches story. It makes success seem inevitable if you just have the right stuff. It means that the mundane details, the boring stuff, the small individual choices don't matter. If we build it, they will come. When we fail, as somany of us do, we have a ready-made excuse: we didn't  Introduction 3 have the right stuff. We weren't visionary enough or weren't in the right place at the right time. After morethan ten years asan entrepreneur, I came to reject thatline ofthinking. I have learned from bothmyown successes and failures and those of many others that it's the boring stuff that matters the most. Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught. Entrepreneurship is a kind of management. No, you didn't read that wrong. We have wildly divergent associations with these two words, entrepreneurship and management. Lately, it seems that one is cool, innovative, and exciting and the other is dull, serious, and bland. It is time to look past these preconceptions. Let metell you a second startup story. It's 2004, and a group of founders have just started a new company. Their previous company had failed very publicly. Their credibility is at an all-time low. They have a huge vision: to change theway people communicate by using a new technology called avatars (remem ber, this was before James Cameron's blockbuster movie). They are following avisionary named Will Harvey, who paints a com pelling picture: people connecting with their friends, hanging out online, using avatars to give them a combination ofintimate connection and safe anonymity. Even better, instead of having to build all the clothing, furniture, and accessories these ava tars would need to accessorize their digital lives, the customers would be enlisted to build those things and sell them to one another. The engineering challenge before them is immense: creat ingvirtual worlds, user-generated content, an online commerce engine, micropayments, and—last but not least—the three- dimensional avatar technology that can run on anyone's PC. 4 Introduction I'm in this second story, too. I'm a cofounder and chieftech nology officer of this company, which is called IMVU. At this point in our careers, my cofounders and I are determined to make new mistakes. We do everything wrong: instead ofspend ing years perfecting our technology, we build a minimum vi able product, an early product that is terrible, full of bugs and crash-your-computer-yes-really stability problems. Then we ship it to customers way before it's ready. And we charge money for it. After securing initial customers, we change the product constantly—much too fast by traditional standards—shipping new versions ofour product dozens oftimes every single day. We really did have customers in those early days—true vi sionary earlyadopters—and we often talked to them and asked for their feedback. But we emphatically did not do what they said. We viewed their input as only one source of information about our product and overall vision. In fact, we were much more likely to run experiments on our customers than we were to cater to their whims. Traditional business thinking says that this approach shouldn't work, butit does, and you don't have to take my word for it. As you'll see throughout this book, the approach we pi oneered at IMVU has become the basis for a new movement of entrepreneurs around the world. It builds on many previous management and product development ideas, including lean manufacturing, design thinking, customer development, and agile development. It represents a new approach tocreating con- tinupus innovation. It's called the Lean Startup. Despite thevolumes written on business strategy, thekey at tributes of business leaders, and ways to identify the next big thing, innovators still struggle to bring their ideas to life. This was the frustration that led us to try a radical new approach at IMVU, one characterized by an extremely fast cycle time, a  Introduction 5 focus on what customers want (without asking them), and a sci entific approach to making decisions. ORIGINS OF THE LEAN STARTUP I am one of those people who grew up programming comput ers, and so my journey to thinking about entrepreneurship and management has taken a circuitous path. I have always worked on the product development side of my industry; my partners andbosses were managers or marketers, andmy peers worked in engineering and operations. Throughout my career, I kept hav ing the experience ofworking incredibly hard on products that ultimately failed in the marketplace. At first, largely because ofmy background, I viewed these as technical problems that required technical solutions: better ar chitecture, a better engineering process, better discipline, focus, or product vision. These supposed fixes led to still more failure. So I read everything I could get my hands on and was blessed to have had some of the top minds in Silicon Valley as my men tors. By the time I became a cofounder of IMVU, I was hungry for new ideas about how to build a company. I was fortunate to have cofounders who were willing to ex periment with new approaches. They were fed up—as I was—by the failure of traditional thinking. Also, we were lucky to have Steve Blank as an investor and adviser. Back in 2004, Steve had just begun preaching a new idea: the business and marketing functions of a startup should be considered as important as en gineering and product development and therefore deserve an equally rigorous methodology to guide them. He called that methodology Customer Development, and it offered insight and guidance to my daily workas an entrepreneur. 6 Introduction Meanwhile, I was building IMVU's product development team, using some of the unorthodox methods I mentioned ear lier. Measured against the traditional theories of product devel opment I had been trained on in my career, these methods did notmake sense, yet I could see firsthand that they were working. I struggled to explain the practices to new employees, investors, and the founders of other companies. We lacked acommon lan guage for describing them and concrete principles for under standing them. I began to search outside entrepreneurship for ideas that could help me make sense of my experience. I began to study other industries, especially manufacturing, from which most modern theories of management derive. I studied lean manu facturing, a process that originated.in Japan with the Toyota Production System, a completely new way of thinking about the manufacturing of physical goods. I found that by apply ing ideas from lean manufacturing to my own entrepreneurial challenges—with a few tweaks and changes—I had the begin nings of a framework for making sense of them. This line of thought evolved into the Lean Startup: the ap plication of lean thinking to the process of innovation. IMVU became a tremendous success. IMVU customers have created more than 60 million avatars. It is a profitable company with annual revenues ofmore than $50 million in2011, employ ing more than a hundred people in our currentoffices in Moun tain View, California. IMVU's virtual goods catalog—which seemed so risky years ago—now has more than 6 million items in it; more than 7,000 are added every day, almost all created by customers. As a result of IMVU's success, I began to be asked for advice by other startups and venture capitalists. When I woulddescribe my experiences at IMVU, I was often met with blank stares or extreme skepticism. The most common reply was "That could  Introduction 1 never work!" My experience so flew in the face of conventional thinking that most people, even in the innovation hub of Sili conValley, could not wrap their minds around it. Then I started to write, first on a blog called Startup Les- sons^ Learned, and speak—at conferences and to companies, startups, and venture capitalists—to anyone who would listen. In the process of being called on to defend and explain my insights and with the collaboration of other writers, thinkers, and entrepreneurs, I had a chance to refine and develop the theory of the Lean Startup beyond its rudimentary beginnings. My hope all along was to find ways to eliminate the tremen dous waste I saw all around me: startups that built products nobody wanted, new products pulled from the shelves, count less dreams unrealized. Eventually, the Lean Startup idea blossomed into a global movement. Entrepreneurs began forming local in-person groups to discuss and apply Lean Startup ideas. There are now orga nized communities of practice in more than a hundred cities around the world.1 My travels have taken me across countries andcontinents. Everywhere I have seen the signs of anew entre preneurial renaissance. The Lean Startup movement is making entrepreneurship accessible to awhole new generation of found ers who are hungry for new ideas about how to build successful companies. Although my background is in high-tech software entrepre neurship, the movement has grown way beyond those roots. Thousands of entrepreneurs are putting Lean Startup principles to work in every conceivable industry. I've had the chance to work with entrepreneurs in companies of all sizes, in different industries, and even in government. This journey has taken me to places I never imagined I'd see, from the world's most elite venture capitalists, to Fortune 500 boardrooms, to the Penta gon. The most nervous I have ever been in a meeting was when 8 Introduction I was attempting to explain Lean Startup principles to the chief information officer ofthe U.S. Army, who is a three-star general (for the record, he was extremely open to new ideas, even from a civilian like me). Pretty soon I realized that it was time to focus on the Lean Startup movement full time. My mission: to improve the suc cess rate of new innovative products worldwide. The result isthe bookyou are reading. THE LEAN STARTUP METHOD This is a book for entrepreneurs and the people who hold them accountable. The five principles of the Lean Startup, which in form all three parts of this book, are as follows: 1. Entrepreneurs are everywhere. You don't have to work in a garage to be in a startup. The concept of entrepreneurship includes anyone who works within my definition ofa startup: a human institution designed to create new products andservices under conditions ofextreme uncertainty. That means entrepre neurs are everywhere and the Lean Startup approach can work in any size company, even a very large enterprise, in any sector or industry. 2. Entrepreneurship is management. A startup is an insti tution, not just a product, and so it requires a newkind of man agement specifically geared to itscontext ofextreme uncertainty. In fact, as I will argue later, I believe "entrepreneur" should be considered a job tide in all modern companies that depend on innovation for their future growth. 3. Validated learning. Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how  Introduction 9 to build a sustainable business. This learning can be validated scientifically by running frequent experiments that allow entre preneurs to test each element of their vision. 4. Build-Measure-Learn. The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All suc cessful startup processes should be geared to accelerate thatfeed back loop. 5. Innovation accounting. To improve entrepreneurial out comes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up mile stones, and how to prioritize work. This requires a new kind of accounting designed for startups—and the people who hold them accountable. Why Startups Fail Whyare startups failing so badly everywhere we look? The first problem is the allure of a good plan, a solid strat egy, and thorough market research. In earlier eras, these things were indicators of likely success. The overwhelming temptation is to apply them to startups too, but this doesn't work, because startups operate with too much uncertainty. Startups do not yet know who their customeris or what their product should be. As the world becomes more uncertain, it gets harder and harder to predict the future. The old management methods are not up to the task. Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static envi ronment. Startups have neither. The second problem is that after seeing traditional man agement fail to solve this problem, some entrepreneurs and 10 Introduction investors have thrown up their hands and adopted the "Just Do It" school ofstartups. This school believes that if management is the problem, chaos is the answer. Unfortunately, as I can attest firsthand, this doesn't work either. It may seem counterintuitive to think that something as dis ruptive, innovative, and chaotic as astartup can bemanaged or, to be accurate, must be managed. Most people think of process and management as boring and dull, whereas startups are dy namic and exciting. But what is actually exciting is to see start ups succeed and change the world. The passion, energy, and vision that people bring to these newventures are resources too precious to waste. We can—and must—do better. This book is about how. HOW THIS BOOK IS ORGANIZED This book is divided into three parts: "Vision," "Steer," and "Accelerate." "Vision" makes the case for a new discipline of entrepre neurial management. I identify who is an entrepreneur, de fine a startup, and articulate anew way for startups to gauge if they are making progress, called validated learning. To achieve that learning, we'll see that startups—in a garage or inside an enterprise—can use scientific experimentation to discover how to build a sustainable business. "Steer" dives into the Lean Startup method in detail, showing one major turn through the core Build-Measure-Learn feedback loop. Beginning with leap-of-faith assumptions that cry out for rigorous testing, you'll learn how to build a minimum viable product to test those assumptions, a new accounting system for evaluating whether you're making progress, and a method for  Introduction 11 deciding whether to pivot (changing course with one foot an chored to the ground) or persevere. In "Accelerate," we'll explore techniques that enable Lean Startups to speed through the Build-Measure-Learn feedback loop as quickly as possible, even as they scale. We'll explore lean manufacturing concepts that are applicable to startups, too, such as the power of small batches. We'll also discuss organi zational design, how products grow, and how to apply Lean Startup principles beyond the proverbial garage, even inside the world's largest companies. MANAGEMENT'S SECOND CENTURY Asasociety, wehave aproven set oftechniques for managing big companies and we know the best practices for building physical products. Butwhen it comes to startups and innovation, we are still shooting in the dark. We are relying on vision, chasing the "great men" who can make magic happen, or trying to analyze our new products to death. These are new problems, born of the success of management in the twentieth century. This book attempts to put entrepreneurship and innovation on a rigorous footing. We are atthe dawn of management's sec ond century. It is our challenge to do something great with the opportunity we have been given. The Lean Startup movement seeks to ensure that those of us who long to build the next big thing will have the tools we need to change theworld. Pari One VISION START ENTREPRENEURIAL MANAGEMENT Building a Startup is an exercise in institution building; thus, it necessarily involves management. This often comes as a sur prise to aspiring entrepreneurs, because their associations with these two words are so diametrically opposed. Entrepreneurs are rightly wary of implementing traditional management practices early on in a startup, afraid that they will invite bureaucracy or stifle creativity. Entrepreneurs have been trying to fit the square peg of their unique problems into the round hole of general management for decades. As a result, many entrepreneurs take a "just do it" attitude, avoiding all forms of management, process, and disci pline. Unfortunately, this approach leads to chaos more often than it does to success. I should know: my first startup failures were all of this kind. The tremendous success of general management over the last century has provided unprecedented material abundance, but those management principles are ill suited to handle the chaos and uncertainty that startups must face. 16 THE LEAN STARTUP I believe that entrepreneurship requires a managerial discipline to harness the entrepreneurial opportunity we have been given. There are more entrepreneurs operating today than at any previous time in history. This has been made possible by dra matic changes in the global economy. To cite but one example, one often hears commentators lament the loss ofmanufacturing jobs in the United States over the previous two decades, but one rarely hears about a corresponding loss ofmanufacturing capa bility. That's because total manufacturing output in the United States is increasing (by 15 percent inthe last decade) even as jobs continue to be lost (see the charts below). In effect, the huge productivity increases made possible by modern management and technology have created more productive capacity than firms know what to do with.1 We are living through an unprecedented worldwide entre preneurial renaissance, but this opportunity is laced with peril. Manufacturing Total 1970 1975 1980 1985 1990 1995 2000 2005 2010 Shaded areas indicate US recessions  Start II AllEmployees: Durable Goods Manufacturing (DMANEMP) Source: U.S. Department of Labor: Bureau of Labor Statistics 1930 1940 1950 1960 1970 1980 1990 2000 2010 Shaded areas indicate US recessions All Employees: Nondurable Goods Manufacturing (NDMANEMP) Source: U.S. Department of Labor: Bureau of Labor Statistics 7,600 7,200 6,800 ~ 6,400 | 6,000 e ^ 5,600 5,200 4,800 4,400 1930 1940 1950 1960 1970 1980 1990 2000 2010 Shaded areas indicate US recessions 18 THE LEAN STARTUP Because we lack a coherent management paradigm for new in novative ventures, were throwing our excess capacity around with wild abandon. Despite this lack of rigor, we are finding some ways to make money, but forevery success there are fartoo many failures: products pulled from shelves mere weeks after being launched, high-profile startups lauded in the press and forgotten a few months later, and new products that wind up being used by nobody. What makes these failures particularly painful is not just the economic damage done to individual em ployees, companies, and investors; they are also a colossal waste of our civilizations most precious resource: the time, passion, andskill ofits people. The Lean Startup movement is dedicated to preventing these failures. THE ROOTS OF THE LEAH STARTUP The Lean Startup takes its name from the lean manufacturing revolution that Taiichi Ohno and Shigeo Shingo are credited with developing atToyota. Lean thinking is radically altering the way supply chains and production systems are run. Among its tenets are drawing on theknowledge andcreativity ofindividual workers, the shrinking of batch sizes, just-in-time production and inventory control, and an acceleration of cycle times. It taught theworld thedifference between value-creating activities and waste andshowed how to build quality into products from the inside out. The Lean Startup adapts these ideas to the context of entre preneurship, proposing that entrepreneurs judge their progress differently from theway other kinds ofventures do. Progress in manufacturing is measured by the production of high-quality physical goods. As we'll see in Chapter 3, the Lean Startup uses a different unit of progress, called validated learning. With  Start 19 scientific learning as our yardstick, we can discover and elimi nate the sources of waste that are plaguing entrepreneurship. A comprehensive theory of entrepreneurship should address all the functions of an early-stage venture: vision and concept, product development, marketing and sales, scaling up, partner ships and distribution, and structure and organizational de sign. It has to provide a method for measuring progress in the context of extreme uncertainty. It can give entrepreneurs clear guidance on how to make the many trade-off decisions they face: whether and when to invest in process; formulating, plan ning, and creating infrastructure; when to go it alone and when to partner; when to respond to feedback and when to stick with vision; and how and when to invest in scaling the busi ness. Most of all, it must allow entrepreneurs to make testable predictions. For example, consider the recommendation that you build cross-functional teams and hold them accountable to what we call learning milestones instead of organizing your company into strict functional departments (marketing, sales, information technology, human resources, etc.) that hold people accountable for performing well in their specialized areas (see Chapter 7). Perhaps you agree with this recommendation, or perhaps you are skeptical. Either way, if you decide to implement it, I predict that you pretty quickly will get feedback from your teams that the new process is reducing their productivity. They will ask to go back to the old way of working, in which they had the op portunity to "stay efficient" by working in larger batches and passing work between departments. It's safe to predict this result, and not just because I haveseen it many times in the companies I work with. It is a straightfor ward prediction of the Lean Startup theory itself. When people are used to evaluating their productivity locally, they feel that a good day is one in which they did their job well all day. When I 20 THE LEAN STARTUP worked as aprogrammer, that meant eight straight hours ofpro gramming without interruption. That was a good day. In con trast, if I was interrupted with questions, process, or—heaven forbid—meetings, I felt bad. What did I really accomplish that day? Code andproduct features were tangible to me; I could see them, understand them, and show them off. Learning, by con trast, is frustratingly intangible. The Lean Startup asks people to start measuring their pro ductivity differendy. Because startups often accidentally build something nobody wants, it doesn't matter much if they do it on time and on budget. The goal of a startup is to figure out theright thing to build—the thing customers want andwill pay for—as quickly as possible. In other words, theLean Startup isa new way oflooking at thedevelopment ofinnovative new prod ucts that emphasizes fast iteration and customer insight, a huge vision, and great ambition, all at the same time. Henry Ford is one ofthe most successful andcelebrated entrepre neurs of all time. Since theidea ofmanagement has been bound upwiththe history oftheautomobile since itsfirst days, I believe it is fitting to use the automobile as a metaphor for a startup. An internal combustion automobile is powered by two im portant andvery different feedback loops. Thefirst feedback loop isdeep inside the engine. Before Henry Fordwas a famous CEO, hewas an engineer. Hespent his days andnights tinkering in his garage with the precise mechanics of getting the engine cylinders to move. Each tiny explosion within the cylinder provides the motive force to turn thewheels butalso drives theignition ofthe next explosion. Unless the timing of this feedback loop is man aged precisely, the engine will sputterand break down. Startups have a similar engine that I call the engine ofgrowth. The markets and customers for startups are diverse: a toy  Start 21 company, a consulting firm, and a manufacturing plantmay not seem like they have much in common, but, as we'll see, they operate with the same engine of growth. Every newversion of a product, every newfeature, and every new marketing program is an attempt to improve this engine of growth. Like Henry Ford's tinkering in his garage, not all of these changes turn out to be improvements. New product development happens in fits and starts. Much of the time in a startup's life is spent tuning the engine by making improve ments in product, marketing, or operations. The second important feedback loop in an automobile is be tween the driver and the steering wheel. This feedback is so im mediate and automatic that we often don't think about it, but it is steering that differentiates driving from most other forms of transportation. If you have a daily commute, you probably know the route so well that your hands seem to steer you there on their own accord. We can practically drive the route in our sleep. Yet if I asked you to close youreyes and writedown exactly how to get to your office—not the street directions but every ac tion you need to take, every push of hand on wheel and foot on pedals—you'd find it impossible. The choreography of driving is incredibly complex when one slows down to think about it. Bycontrast,a rocketship requires just this kind of in-advance calibration. It must be launched with the most precise instruc tions on what to do: every thrust, every firing of a booster, and every change in direction. The tiniest error at the point of launch could yield catastrophic results thousands of miles later. Unfortunately, too many startup business plans look more like they are planning to launch a rocket ship than drive a car. They prescribe the steps to take and the results to expect in ex cruciating detail, and as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes. 22 THE LEAN STARTUP One company I workedwith had the misfortune of forecast ing significant customer adoption—in the millions—for one of its new products. Powered by a splashy launch, the company successfully executed its plan. Unfortunately, customers did not flock to the product ingreat numbers. Even worse, the company had invested in massive infrastructure, hiring, and support to handle the influx of customers it expected. When the customers failed to materialize, thecompany hadcommitted itselfsocom pletely that they could not adapt in time. They had "achieved failure"—successfully, faithfully, and rigorously executing a plan that turnedout to have been utterly flawed. The Lean Startup method, in contrast, is designed to teach you how to drive astartup. Instead ofmaking complex plans that are based on a lot of assumptions, you can make constant ad justments with a steering wheel called the Build-Measure-Learn feedback loop. Through this process of steering, we can learn when and if its time to make a sharp turn called a pivot or whether we should persevere along our current path. Once we have anengine that's revved up, the Lean Startup offers methods to scale and grow the business with maximum acceleration. Throughout the process of driving, you always have a clear idea of where you're going. If you're commuting to work, you don't give up because there's a detour in the road or you made a wrong turn. You remain thoroughly focused on getting to your destination. Startups also have a true north, a destination in mind: creat inga thriving andworld-changing business. I call that a startup's vision. To achieve that vision, startups employ a strategy, which includes a business model, a product road map, a point of view about partners and competitors, and ideas about who the cus tomer will be. The product is the end result of this strategy (see the chart on page23).  Start 23 Products change constantly through the process of optimiza tion, what I call tuning the engine. Less frequently, the strategy may have to change (called a pivot). However, the overarching vision rarely changes. Entrepreneurs are committed to seeing the startup through to that destination. Every setback is an op portunityfor learning howto getwhere theywant to go (see the chart below). CHANGE Optimization Pivot 24 THE LEAN STARTUP In real life, a startup is a portfolio of activities. A lot is hap pening simultaneously: the engine is running, acquiring new customers and serving existing ones; we are tuning, trying to improve our product, marketing, and operations; and we are steering, deciding if and when to pivot. The challenge of en trepreneurship is to balance all these activities. Even the small est startup faces the challenge of supporting existing customers while trying to innovate. Even the most established company faces the imperative to invest in innovation lestit become obso lete. As companies grow, what changes isthe mix of these activi ties in the company's portfolio of work. Entrepreneurship is management. And yet, imagine a modern manager who is tasked with building a newproduct in the con text of an established company. Imagine that she goes back to hercompany's chieffinancial officer (CFO) a year later andsays, "We have failed to meet thegrowth targets we predicted. In fact, we have almost no new customers and no new revenue. How ever, we have learned an incredible amountand are on the cusp of a breakthrough new line of business. All we need is another year." Most of the time, this would be the last report this intra- preneur would give her employer. The reason is that in general management, a failure to deliver results is due to either a fail ure to plan adequately or a failure to execute properly. Both are significant lapses, yet new product development in our modern economy routinely requires exactly this kind of failure on the wayto greatness. In the Lean Startup movement, we have come to realize that these internal innovators are actually entrepre neurs, too, and that entrepreneurial management can help them succeed; this is the subject of the next chapter. DEFINE WHO, EXACTLY, IS AN ENTREPRENEUR? AS Itravel the World talking about the Lean Startup, I'm consis tentlysurprised that I meetpeople in the audience who seem out of place. In addition to the more traditional startup en trepreneurs I meet, these people are general managers, mostly working in very large companies, who are tasked with creating new ventures or product innovations. They are adept at organi zational politics: they know how to form autonomous divisions with separate profit and loss statements (P&Ls) and can shield controversial teams from corporate meddling. The biggest sur prise is that they arevisionaries. Like the startup founders I have worked with for years, they can see the future of their industries and are prepared to take bold risks to seek out new and innova tivesolutions to the problems their companies face. Mark, for example, is a manager for an extremely large com pany who came to one of my lectures. He is the leader of a division that recently had been chartered to bring his company into the twenty-first century by building a new suite of products designed to take advantage of the Internet. When he came to talk to me afterward, I started to give him the standard advice about how to createinnovation teamsinside big companies, and 26 THE LEAN STARTUP he stopped me in midstream: "Yeah, I've read The Innovators Dilemma.1 I've got that all taken care of." He was a long-term employee of the company and a successful manager to boot, so managing internal politics was the least of his problems. I should have known; his success was a testament to his ability to navigate the company's corporate policies, personnel, and pro cesses to get things done. Next, I tried to give him some advice about the future, about cool new highly leveraged product development technologies. He interrupted me again: "Right. I know all about the Internet, and I have a vision for how our company needs to adapt to it or die." Mark has all the entrepreneurial prerequisites hailed—proper team structure, good personnel, a strong vision for the future, and an appetite for risk taking—and soit finally occurred to me to ask whyhe was coming to meforadvice. He said, "It's as ifwe have all of the raw materials: kindling, wood, paper, flint, even some sparks. Butwhere's the fire?" The theories of management that Mark hadstudied treat innovation like a "black box" byfo cusing on the structures companies need to put in place to form internal startup teams. But Mark found himself working inside the black box—and in need of guidance. What Mark was. missing was a process for converting the raw materials of innovation into real-world breakthrough successes. Once a team is set up, what should it do? What process should it use? How should it be heldaccountable to performance mile stones? These are questions the Lean Startup methodology isde signed to answer. My point? Mark is an entrepreneur just like a Silicon Valley high-tech founder witha garage startup. He needs the principles of the Lean Startup justas much as thefolks I thought of as clas sic entrepreneurs do. Entrepreneurs whooperate inside an established organization  Define 21 sometimes are called "intrapreneurs" because of the special cir cumstances that attend building a startup within a larger com pany. As I have applied Lean Startup ideas in an ever-widening variety of companies and industries, I have come to believe that intrapreneurs have much more in common with the rest of the community of entrepreneurs than most people believe. Thus, when I use the term entrepreneury I am referring to the whole startup ecosystem regardless of company size, sector, or stage of development. This book is for entrepreneurs of all stripes: from young visionaries with little backing but great ideas to seasoned vision aries within larger companies such as Mark—and the people who hold them accountable. IF I'M AN ENTREPRENEUR, WHAT'S ASTARTUP? The Lean Startup is a set of practices for helping entrepreneurs increase their odds of building a successful startup. To set the record straight, it's important to define what a startup is: A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty. I've come to realize that the most important part of this defi nition is what it omits. It says nothing about size of the com pany, the industry, or the sector of the economy. Anyonewho is creating a new product or business under conditions of extreme uncertainty is an entrepreneurwhether he or she knows it or not and whether working in a government agency, a venture-backed company, a nonprofit, or a decidedly for-profit company with financial investors. 28 THE LEAN STARTUP Let's take a look at each of the pieces. The word institution connotes bureaucracy, process, even lethargy. How can that be part of a startup? Yet successful startups are full of activities as sociated with building an institution: hiring creative employees, coordinating their activities, and creating a company culture that delivers results. We often lose sight of the fact that a startup is not justabout a product, a technological breakthrough, or even a brilliant idea. A startup is greater than the sum of its parts; it is an acutely human enterprise. The fact that a startup's productor service isa newinnovation is also an essential part of the definition and a tricky part too. I prefer to use the broadest definition ofproduct, one that encom passes any source of value for the people who become custom ers. Anything those customers experience from their interaction with a company should be considered part of that company's product. This is true of a grocery store, an e-commerce website, a consulting service, and a nonprofit social service agency. In every case, the organization is dedicated to uncovering a new source of value for customers and cares about the impact of its product on those customers. It's also important that the word innovation be understood broadly. Startups use many kinds of innovation: novel scientific discoveries, repurposing an existing technology for a new use, devising a new business model that unlocks value that was hid den, or simply bringing a product or service to a new location or a previously underserved set of customers. In all these cases, innovation is at the heart of the company's success. There is one moreimportantpart of this definition: the con text in which the innovation happens. Most businesses—large and small alike—are excluded from this context. Startups are designed to confrontsituations of extreme uncertainty. To open up a newbusiness that isan exact clone of an existing business all  Define 29 the way down to the business model, pricing, target customer, andproduct may bean attractive economic investment, but it is not a startup because its success depends onlyon execution—so much so that this success can be modeled with high accuracy. (This iswhy so many small businesses can befinanced with sim ple bank loans; the level of risk and uncertainty is understood well enough that a loanofficer can assess its prospects.) Most tools from general management are not designed to flourish in the harsh soil of extreme uncertainty in which start ups thrive. The future is unpredictable, customers face a growing array of alternatives, and the pace of change is ever increasing. Yet most startups—in garages and enterprises alike—still are managed by using standard forecasts, product milestones, and detailed business plans. THE SNAPTAX STORY In 2009, a startup decided to try something really audacious. They wanted to liberate taxpayers from expensive tax stores by automating the process ofcollecting information typically found on W-2 forms (the end-of-year statement that most employ ees receive from their employer that summarizes their taxable wages for the year). The startup quickly ran into difficulties. Even though manyconsumers had access to a printer/scanner in their home or office, few knew how to use those devices. After numerous conversations with potential customers, the team lit upon the idea of having customers take photographs of the forms directly from their cell phone. In the process of testingthis concept, customers asked something unexpected: would it be possible to finish the whole tax return right on the phone itself? That was not an easy task. Traditional tax preparation re quires consumers to wade through hundreds of questions, many 30 THE LEAN STARTUP forms, and a lot of paperwork. This startup tried something novel by deciding to ship an early version of its product that could do much less than a complete tax package. The initial version worked only for consumers with a very simple return to file, and it worked onlyin California. Instead of having consumers fill out a complex form, they al lowed the customers to use the phone's camera to take a picture oftheir W-2 forms. From thatsingle picture, thecompany devel oped the technology to compile andfile most of the 1040 EZ tax return. Compared with thedrudgery oftraditional tax filing, the new product—called SnapTax—provides a magical experience. From its modest beginning, SnapTax grew into a significant startup success story. Its nationwide launch in 2011 showed that customers loved it, to the tune of more than 350,000 downloads in the first three weeks. This is the kind of amazing innovation youd expect from a new startup. However, the name of this company may surprise you. SnapTax was developed by Intuit, Americas largest producer of finance, tax, and accounting tools for individuals and small businesses. With more than 7,700 employees and annual rev enues in the billions, Intuit isnot a typical startup.2 The team that built SnapTax doesn't look much like the ar chetypal image of entrepreneurs either. They dont work in a garage or eat ramen noodles. Their company doesn't lackfor re sources. They are paid a full salary and benefits. They comeinto a regular office every day. Yet theyare entrepreneurs. Stories like this one are not nearly as common inside large corporations as they should be. Afterall, SnapTax competes di rectly with one of Intuits flagship products: the fully featured TurboTax desktop software. Usually, companies like Intuit fall into the trap described in Clayton Christensten's The In novator's Dilemma: they are very good at creating incremental  Define 31 improvements to existing products andserving existing custom ers, which Christensen called sustaining innovation, but struggle to create breakthrough new products—disruptive innovation— that can create new sustainable sources of growth. One remarkable part of the SnapTax story is what the team leaders said when I asked them to account for their unlikely success. Did they hire superstar entrepreneurs from outside the company? No, they assembled a team from within Intuit. Did they face constant meddling from senior management, which is the bane of innovation teams in many companies? No, their executive sponsors created an "island of freedom" where they could experiment as necessary. Did they have a huge team, a large budget, and lots of marketing dollars? Nope, they started with a team of five. What allowed the SnapTax team to innovate was not their genes, destiny, orastrological signs butaprocess deliberately facili tated by Intuit s senior management. Innovation is a bottoms-up, decentralized, and unpredictable thing, but that doesn't mean it cannot be managed. It can, but to do so requires a new man agement discipline, one that needs to be mastered not just by practicing entrepreneurs seeking to build the next big thing but also by the people who support them, nurture them, and hold them accountable. In other words, cultivating entrepreneurship is the responsibility of senior management.Today, a cutting-edge company such as Intuit can point to success stories like SnapTax because it has recognized the need for a new management para digm. This is a realization that was years in the making.3 A SEVEN-THOUSAND-PERSON LEAN STARTUP In 1983, Intuits founder, the legendary entrepreneur Scott Cook, had the radical notion (with cofounder Tom Proulx) 32 THE LEAN STARTUP that personal accounting should happen by computer. Their success was far from inevitable; they faced numerous competi tors, an uncertain future, and an initially tiny market. A de cade later, the company went public and subsequently fended off well-publicized attacks from larger incumbents, includ ing the software behemoth Microsoft. Partly with the help of famed venture capitalist John Doerr, Intuit became a fully di versified enterprise, a member of the Fortune 1000 that now provides dozens of market-leading products across its major divisions. This is the kind of entrepreneurial success were used to hear ing about: a ragtag team of underdogs who eventually achieve fame, acclaim, and significant riches. Flash-forward to 2002. Cook was frustrated. He had just tabulated ten years of data on all of Intuits new product intro ductions and had concluded that the company was getting a measly return on its massive investments. Simply put, too many of its new products were failing. By traditional standards, Intuit is an extremely well-managed company, but as Scott dug into the root causes of those failures, he came to a difficult conclu sion: the prevailing management paradigm he and his company had been practicing was inadequate to the problem of continu ous innovation in the modern economy. By fall 2009, Cook had been working to change Intuits management culture for several years. He came across my early work on the Lean Startup and asked me to give a talk at In tuit. In Silicon Valley this is not the kind of invitation you turn down. I admit I was curious. I was still at the beginning of my LeanStartup journeyand didnt have much appreciation for the challenges faced by a Fortune 1000 company like his. My conversations with Cook and Intuit chief executive of ficer (CEO) Brad Smith were my initiation into the thinking of modern general managers, who struggle with entrepreneurship  Define 33 every bit as much as do venture capitalists and founders in a garage. To combat these challenges, Scott and Brad are going back to Intuits roots. They are working to build entrepreneur- ship and risktaking into all their divisions. For example, consider one of Intuits flagship products. Be cause TurboTax does most of its sales around tax season in the United States, it used to have an extremely conservative culture. Over the course of the year, the marketing and product teams would conceive one major initiative that would be rolled out justin time for tax season. Now they test over five hundred dif ferent changes in a two-and-a-half-month tax season. They're running up to seventy different tests per week. The team can make a change live on its website on Thursday, run it over the weekend, read the results on Monday, and come to conclusions starting Tuesday; then they rebuild new tests on Thursday and launch the next set on Thursday night. As Scott put it, "Boy, the amount of learning they get is just immense now. And what it does is develop entrepreneurs, because when you have only one test, you don't have entrepre neurs, you have politicians, because you have to sell. Out of a hundred good ideas, you've got to sell your idea. So you build up a society of politicians and salespeople. When you have five hundred tests you're running, then everybody's ideas can run. And then you create entrepreneurs who run and learn and can retest and relearn as opposed to a society of politicians. So we're trying to drive that throughout our organization, using exam ples which have nothing to do with high tech, like the website example. Every business today has a website. You don't have to be high tech to use fast-cycle testing." This kind of change is hard. After all, the company has a sig nificantnumber of existing customers who continue to demand exceptional service and investors who expect steady, growing returns. 34 THE LEAN STARTUP Scott says, It goes against the grain ofwhat people have been taught in business and what leaders have been taught. Theprob lem isn't with the teams or the entrepreneurs. They love the chance to quickly get their baby out into the market. They love the chance to have the customer vote instead of the suits voting. The real issue is with the leaders and the middle managers. There are many business leaders who have been successful because of analysis. They think they're analysts, and their job is to do great planning and analyzing and have a plan. The amount of time a company can count on holding on to market leadership to exploit its earlier innovations is shrink ing, and this creates an imperative for even the most entrenched companies to invest in innovation. In fact, I believe a compa ny's only sustainable path to long-term economic growth is to build an "innovation factory" that uses Lean Startup techniques to create disruptive innovations on a continuous basis. In other words, established companies need to figure out how to accom plish what Scott Cook did in 1983, but on an industrial scale and with an established cohort of managers steeped in tradi tional management culture. Ever themaverick, Cookasked meto put these ideas to thetest, and so I gave a talk that was simulcast to all seven thousand-plus Intuit employees during which I explained the theory of the Lean Startup, repeating my definition: an organization designed to create new products and services under conditions of extreme uncertainty. What happened next is etched in my memory. CEO Brad Smith had been sitting next to me as I spoke. When I was done, he got up and said before all of Intuits employees, "Folks, listen  Define 35 up. You heard Eric's definition of a startup. It has three parts, and wehere at Intuit match allthreeparts of that definition." Scott and Brad are leaders who realize that something new is needed in management thinking. Intuit is proof that this kind of thinking can work in established companies. Brad explained to me how they hold themselves accountable for their new in novation efforts by measuring two things: the number of cus tomers using products that didn't exist three years ago and the percentage of revenue coming from offerings that did not exist three years ago. Under the old model, it took an average of 5.5 years for a successful new product to start generating $50 million in rev enue. Brad explained to me, "We've generated $50 million in offerings that did not exist twelve months ago in the last year. Now it's not one particular offering. It's a combination of a whole bunch of innovation happening, but that's the kind of stuff that's creating some energy for us, that we think we can truly short-circuit the ramp by killing things that don't make sense fast and doubling down on the ones that do." For a com pany as large as Intuit, these are modest results and early days. They have decades of legacy systems and legacy thinking to overcome. However, their leadership in adopting entrepreneur ial management is starting to payoff. Leadership requires creating conditions that enable employ ees to do the kinds of experimentation that entrepreneurship re quires. Forexample, changes inTurboTax enabled the Intuit team to develop five hundred experiments per tax season. Before that, marketers with great ideas couldn't have done those tests even if they'd wanted to, because they didn't have a system in place through which to change the website rapidly. Intuit invested in systems that increased the speed at which tests could be built, de ployed, and analyzed. As Cook says, "Developing these experimentation systems is 36 THE LEAN STARTUP the responsibility ofsenior management; they have to be put in by the leadership. It's moving leaders from playing Caesar with their thumbs up and down on every idea to—instead—putting in the culture and the systems so that teams can move and in novate at thespeed ofthe experimentation system." LEARN As an entrepreneur, nothing plagued me more than the question of whether my company was making progress toward creating a successful business. As an engineer and later as a manager, I was accustomed to measuring progress by making sure ourwork proceeded according to plan, was high quality, and cost about what we had projected. After many years as an entrepreneur, I started to worry about measuring progress in this way. What if we found ourselves building something that nobody wanted? In that case what did it matterifwedid it on timeand on budget? When I went home at the end of a day's work, the only things I knew for sure were that I had kept people busy andspent money that day. I hoped that myteam's efforts tookus closer to our goal. If we woundup taking a wrong turn, I'dhave to take comfort in the fact that at least we'd learned something important. Unfortunately, "learning" is the oldest excuse in the book for a failure of execution. It's what managers fall backon when they fail to achieve the results we promised. Entrepreneurs, under pressure to succeed, are wildly creative when it comes to demon strating what we have learned. We can all tell a good story when our job, career, or reputation depends on it. However, learning is cold comfort to employees who are fol lowing an entrepreneur into the unknown. It is cold comfort to 38 THE LEAN STARTUP the investors who allocate precious money, time, and energy to en trepreneurial teams. Itis cold comfort to the organizations—large andsmall—that depend onentrepreneurial innovation to survive. You can't take learning to the bank; you can't spend it or invest it. You cannot give it to customers and cannot return it to limited partners. Is it anywonder that learning has a bad name in entre preneurial and managerial circles? Yet if the fundamental goal ofentrepreneurship is to engage in organization building under conditions of extreme uncer tainty, its most vital function is learning. We must learn the truth about which elements of our strategy are working to re alize our vision and which are just crazy. We must learn what customers really want, not what they say they want or what we think they should want. We must discover whether we are on a path that will lead to growing a sustainable business. In the Lean Startup model, we are rehabilitating learning with a concept I call validated learning. Validated learning is not after-the-fact rationalization or a good story designed to hide failure. It is a rigorous method for demonstrating progress when one is embedded in the soil of extreme uncertainty in which startups grow. Validated learning is the process ofdemonstrating empirically that a team has discovered valuable truths about a startup's present and future business prospects. It is more con crete, more accurate, and faster than market forecasting or clas sical business planning. It is the principal antidote to the lethal problem of achieving failure: successfully executing a plan that leads nowhere. VALIDATED LEARNING AT IMVU Let me illustrate this with an example from my career. Many audiences have heard me recount the story ofIMVU's founding  Learn 39 and themany mistakes wemade in developing our first product. I'll now elaborate on one of those mistakes to illustrate validated learning clearly. Those of us involved in the founding of IMVU aspired to be serious strategic thinkers. Each of us had participated in previous ventures that had failed, and we were loath to repeat that experience. Our main concerns in the early days dealt with the following questions: What should we build and for whom? What market could we enter and dominate? How could we build durable value that would not be subject to erosion by competition?1 Brilliant Strategy We decided to enter the instant messaging (IM) market. In 2004, that market had hundreds of millions of consumers ac tively participating worldwide. However, the majority of the customers who were using IM products were not paying for the privilege. Instead, large media and portal companies such as AOL, Microsoft, and Yahoo! operated their IM networks as a loss leader for other services while making modest amounts of money through advertising. IM is an example of a market that involves strong network effects. Like most communication networks, IM is thought to follow Metcalfe's law: the value of a network as a whole is pro portional to the square of the number of participants. In other words, the more people in the network, the more valuable the network. This makes intuitive sense: the value to each partici pant isdriven primarily by howmanyother people he or she can communicate with. Imagine aworld in whichyou own the only telephone; it would have no value. Only when other people also have a telephone does it become valuable. In 2004, the IM market was locked up by a handful of 40 THE LEAN STARTUP incumbents. The top three networks controlled more than 80 percent of the overall usage and were in the process of consoli dating their gains in market share at the expense of anumber of smaller players.2 The common wisdom was that it was more or less impossible to bring a new IM network to market without spending an extraordinary amount of money on marketing. The reason for that wisdom is simple. Because of the power of network effects, IM products have high switching costs. To switch from one network to another, customers would have to convince their friends and colleagues to switch with them. This extra work for customers creates a barrier to entry in the IM market: with all consumers locked into an incumbent sproduct, there are no customers left with whom to establish a beachhead. At IMVU we settled on a strategy of building a product that would combine the large mass appeal of traditional IM with the high revenue per customer of three-dimensional (3D) video games and virtual worlds. Because of the near impossibility of bringing a new IM networkto market, we decided to build an IM add-on product that would interoperate with the existing networks. Thus, customers would be able to adopt the IMVU virtual goods and avatar communication technology with out having to switch IM providers, learn a new user interface, and—most important—bring their friends with them. In fact, we thought this last point was essential. For the add-on product to be useful, customers would have to use it with their existing friends. Every communication would come embedded with an invitation to join IMVU. Our product would be inherently viral, spreading throughout the existing IM networks like an epidemic. To achieve that viral growth, it was important that our add-on product support as many of the existing IM networks as possible and work on all kinds of computers.  Learn 41 Six Months to Launch With this strategy in place, my cofounders and I began a pe riod of intense work. As the chief technology officer, it was my responsibility, among other things, to write the software that would support IM interoperability across networks. My co- founders and I worked for months, puttingin crazy hours strug gling to get our first product released. We gave ourselves ahard deadline of six months—180 days—to launch the product and attract our first paying customers. It was a grueling schedule, but we were determined to launch on time. The add-on product was so large and complex and had so many moving parts that we had to cut a lot of corners to get it done on time. I wont mince words: the first version was terrible. We spent endless hours arguing about which bugs to fix and which we could live with, which features to cut and which to try to cram in. It was awonderful and terrifying time: we were full of hope about the possibilities for success and full of fear about the consequences of shipping abad product. Personally, I was worried that the low quality of the product would tarnish my reputation as an engineer. People would think I didn't know how to build a quality product. All of us feared tarnishing the IMVU brand; after all, we were charging people money for a product that didn't work very well. We all envi sioned the damning newspaper headlines: "Inept Entrepreneurs Build Dreadful Product." As launch day approached, our fears escalated. In our situa tion, many entrepreneurial teams give in to fear and postpone the launch date. Although I understand this impulse, I am glad we persevered, since delay prevents many startups from getting the feedback they need. Our previous failures made us more afraid of another, even worse, outcome than shipping a bad 42 'THE LEAN STARTUP product: building something that nobody wants. And so, teeth clenched and apologies at the ready, we released our product to the public. Launch And then—nothing happened! It turned out that our fears were unfounded, because nobody even tried our product. At first I was relieved because at least nobody was finding out how bad the product was, but soon that gave way to serious frustration. After all the hours we had spent arguing about which features to include and which bugs to fix, our value proposition was so far offthat customers weren't getting far enough into the experi ence to find out how bad our design choices were. Customers wouldn't even download our product. Over the ensuing weeks and months, we labored to make the product better. We brought in a steady flow of custom ers through our online registration and download process. We treated each day's customers as a brand-new report card to letus know how we were doing. We eventually learned how tochange the product's positioning so that customers at least would download it. We were making improvements to the underlying product continuously, shipping bug fixes and new changes daily. However, despite ourbest efforts, we were able to persuade only a pathetically small number ofpeople to buy the product. In retrospect, one good decision we made was to set clear revenue targets for those early days. In the first month we in tended to make $300 in total revenue, and we did—barely. Many friends and family members were asked (okay, begged). Each month our small revenue targets increased, first to $350 andthen to $400. As they rose, ourstruggles increased. We soon ran out of friends and family; our frustration escalated. We were  Learn 43 making the product better every day, yet our customers' behav ior remained unchanged: theystill wouldn't use it. Our failure to move the numbers proddedus to accelerate our efforts to bring customers intoouroffice for in-person interviews and usability tests. The quantitative targets created the motiva tion to engage in qualitative inquiry and guided us in the ques tions we asked; thisis a pattern we'll see throughout this book. I wish I could say that I was the one to realize our mistake and suggest the solution, but in truth, I was the last to admit the problem. In short, our entire strategic analysis of the mar ketwas utterly wrong. We figured this out empirically, through experimentation, rather than through focus groups or market research. Customers could not tell us what they wanted; most, after all, had never heard of 3D avatars. Instead, they revealed the truth through their action or inaction as we struggled to make the product better. Talking to Customers Out of desperation, we decided to talk to some potential cus tomers. We brought them into our office, and said, "Try this new product; it's IMVU." If the person was a teenager, a heavy user of IM, or a techearly adopter, he or shewould engage with us. In constrast, if it was a mainstream person, the response was, "Right. So exactly what would you like meto do?" We'd get nowhere with the mainstream group; they thought IMVU was too weird. Imagine a seventeen-year-old girl sitting down with us to look at this product. She chooses her avatar and says, "Oh, this is really fun." She's customizing the avatar, deciding how she's going to look. Then we say, "All right, it's time to download the instant messaging add-on," and she responds, "What's that?" 44 THE LEAN STARTUP "Well, it's this thing that interoperates with the instant mes saging client." She's looking at us and thinking, "I've never heard ofthat, my friends have never heard ofthat, why doyou want me to do that?" It required alot ofexplanation; an instant messaging add-on was not a product category thatexisted in hermind. But since she was in the room with us, we were able to talk her into doing it. She downloads the product, and then we say, "Okay, invite one of your friends to chat." And she says, "No way!" We say, "Why not?" And she says, "Well, I don't know if this thing is cool yet. You want me to risk inviting one of my friends? What are they going to think ofme? If it sucks, they're going to think I suck, right?" And we say, "No, no, it's going to beso much fun once you get the person in there; it's a social product." She looks at us, her face filled with doubt; you can see that this is a deal breaker. Of course, the first time I had that experience, I said, "It's all right, it's justthis oneperson, send her away and get me a new one."Then the second customercomes in and says the same thing. Then the third customer comes in, and it's the same thing. You start to see patterns, and no matter how stubborn you are, there's obviously something wrong. Customers kept saying, "I want to use it by myself. I want to try it out first to see if it's really cool before I invite a friend." Our team was from the video game industry, so we understood what thatmeant: single-player mode. So we built a single-player version. We'd bring new customers into our office. They'd cus tomize the avatar and download the product like before. Then they would go into single-player mode, and we'd say, "Play with your avatar and dress it up; check out the cool moves it can make." Followed by, "Okay, you did that by yourself; now it's time to invite one of your friends." You can see what's com ing. They'd say, "No way! This isn't cool." And we'd say, "Well, we told you it wasn't going to be cool! What is the point of a single-player experience for a social product?" See, we thought  Learn 45 we should geta gold star just for listening to our customers. Ex cept our customers still didn't like the product. They would look at us and say, "Listen, old man, you don't understand. What is the deal with this crazy business of inviting friends before I know if it's cool?" It was a total deal breaker. Out of further desperation, we introduced a feature called ChatNow that allows you to push a button and be randomly matched with somebody else anywhere in the world. The only thing you have in common is that you both pushed the button at the same time. All of a sudden, in our customer service tests, people were saying, "Oh, this is fun!" So we'd bring them in, they'd use ChatNow, and maybe they would meet somebody they thoughtwas cool. They'd say, "Hey, that guywas neat; I want to add him to my buddylist. Where's my buddy list?" And we'd say, "Oh, no, you don't want a new buddy list; you want to use your regular AOL buddy list." Re member, this was how we planned to harness the interoperabil ity that would lead to network effects andviral growth. Picture the customer looking at us, asking, "What do you want me to do exacdy?" And we'd say, "Well, just give the stranger your AIM screen name so you can put him on your buddy list." You could see their eyes go wide, and they'd say, "Are you kidding me? A stranger on my AIM buddylist?" To whichwe'd respond, "Yes; otherwise you'd have to download a whole new IM client with a new buddy list." And they'd say, "Do you have any idea how many IM clients I already run?" "No. One or two, maybe?" That's how many clients each of us in the office used. To which the teenager would say, "Duh! I run eight." We had no idea how many instant messaging clients there were in the world. We had the incorrect preconception that it's a challenge to learn new software and it's tricky to move your friends over to a new buddy list. Our customers revealed that this was nonsense. 46 THE LEAN STARTUP We wanted to draw diagrams on the whiteboard that showed why our strategy was brilliant, but our customers didn't under stand concepts like network effects and switching costs. If we tried to explain why they should behave the way we predicted, they'd just shake their heads at us, bewildered. We had a mental model for how people used software that was years out of date, and so eventually, painfully, after doz ens of meetings like that, it started to dawn on us that the IM add-on concept was fundamentally flawed.3 Our customers did not want an IM add-on; they wanted a stand-alone IM network. They did not consider having to learn how to use a new IM program a barrier; on the contrary, our early adopters used many different IM programs simultane ously. Ourcustomers were notintimidated by the idea ofhaving to take their friends with them to a new IM network; it turned out that they enjoyed that challenge. Even more surprising, our assumption that customers would want to use avatar-based IM primarily with their existing friends was also wrong. They wanted to make new friends, an activity that 3D avatars are par ticularly well suited to facilitating. Bit by bit, customers tore apart our seemingly brilliant initial strategy. Throwing My Work Away Perhaps you can sympathize with our situation and forgive my obstinacy. After all, it was mywork over the prior months that needed to be thrown away. I had slaved over the software that was required to make our IM program intemperate with other networks, which was at the heart of our original strategy. When it came time to pivot and abandon that original strategy, almost all of my work—thousands of lines of code—was thrown out. I felt betrayed. I was a devotee of the latest in software develop mentmethods (known collectively as agile development), which  Learn 4? promised to help drive waste out of product development. However, despite that, I had committed the biggest waste of all: building a product that our customers refused to use. That was really depressing. I wondered: in light of the fact that my work turned out to be a waste of time and energy, would the company have been just as well offif I had spent the last six months on a beach sip ping umbrella drinks? Had I really been needed? Would it have been better if I had not done any work at all? There is, as I mentioned at the beginning of this chap ter, always one last refuge for people aching to justify their own failure. I consoled myself that if we hadn't built this first product—mistakes and all—we never would have learned these important insights about customers. We never would have learned that our strategy was flawed. Thereistruth in thisexcuse: what we learned during those critical early months set IMVU on a path that would lead to our eventual breakout success. For a time, this "learning" consolation made me feel better, but my relief was short-lived. Here's the question that bothered me most of all: if the goal of those months was to learn these important insights about customers, why did it take so long? How much of our effort contributed to the essential lessons we needed to learn? Could we have learned those lessons earlier if I hadn't beenso focused on making the product "better" by add ing features and fixing bugs? VALUE VS. WASTE In other words, whichof our efforts arevalue-creating and which are wasteful? This question is at the heart of the lean manufac turing revolution; it is the first question any lean manufactur ing adherent is trained to ask. Learning to see waste and then 48 THE LEAN STARTUP systematically eliminate it has allowed lean companies such as Toyota to dominate entire industries. In the world of software, the agile development methodologies I had practiced until that time had their origins in lean thinking. They were designed to eliminate waste too. Yet those methods had led me down a road in which the ma jority of my team's efforts were wasted. Why? The answer came tomeslowly over the subsequent years. Lean thinking defines value as providing benefit to the customer; any thing else is waste. In amanufacturing business, customers don't care how the product is assembled, only that it works correcdy. But in a startup, who the customer is and what the customer might find valuable are unknown, part of the very uncertainty that is an essential part of the definition of a startup. I realized that as a startup, we needed a new definition of value. The real progress we had made at IMVU was what we had learned over those first months about what creates value for customers. Anything we had done during those months that did not contribute to our learning was a form of waste. Would it have been possible to learn the same things with less effort? Clearly, the answer is yes. For onething, think of all the debate and prioritization of ef fort that went into features that customers would never discover. If we had shipped sooner, we could have avoided that waste. Also consider all the waste caused by our incorrect strategic assump tions. I hadbuilt interoperability for more than a dozen different IM clients and networks. Was this really necessary to test our as sumptions? Could we have gotten the same feedback from our customers with half as many networks? With only three? With onlyone? Since thecustomers of all IM networks found ourprod uct equally unattractive, thelevel of learning would have been the same, but oureffort would have been dramatically less. Here's the thought that kept me up nights: did we have to  Learn 49 support any networks at all? Is it possible that we could have discovered how flawed our assumptions were without building anything? For example, what if we simply had offered custom ers the opportunity to download the product from us solely on the basis of its proposed features before building anything? Re member, almost no customers were willing to use our original product, so wewouldn't have had to do much apologizing when we failed to deliver. (Note that this is different from asking cus tomers what they want. Most of the time customers don't know what they want in advance.) We could have conducted an ex periment, offering customers the chance to try something and then measuring their behavior. Such thought experiments were extremely disturbing to me because they undermined my job description. As the head of product development, I thought my job was to ensure the timely delivery of high-quality products and features. But if many of those features were a waste of time, what should I be doing instead? How couldwe avoid this waste? I've come to believe that learning is the essential unit of progress for startups. The effort that is not absolutely necessary for learning what customers want can be eliminated. I call this validated learning because it is always demonstrated by positive improvements in the startup's core metrics. As we've seen, it's easy to kid yourselfabout what you think customers want. It's also easy to learn things that are completely irrelevant. Thus, validated learning is backed up by empirical data collected from real customers. WHERE DO YOU FIND VALIDATION? As I can attest, anybody who fails in a startup can claim that he or she has learned a lot from the experience. They can tell 50 THE LEAN STARTUP a compelling story. In fact, in the story of IMVU so far, you might have noticed something missing. Despite my claims that we learned a lot in those early months, lessons that led to our eventual success, I haven't offered any evidence to back that up. In hindsight, it's easy to make such claims and sound credible (and you'll see some evidence later in the book), but imagine us in IMVU's early months trying to convince investors, employ ees, family members, and most of all ourselves that we had not squanderedour time and resources. What evidence did we have? Certainly ourstories offailure were entertaining, andwe had fascinating theories about what we had done wrong and what we needed to do to create a more successful product. However, the proof did not come until we put those theories into practice and built subsequent versions ofthe product thatshowed supe rior results with actual customers. The next few months are where the true story of IMVU begins, not with our brilliant assumptions and strategies and whiteboard gamesmanship but with the hard work of discover ingwhat customers really wanted andadjusting ourproduct and strategy to meet those desires. We adopted theview that our job was to find a synthesis between our vision and what customers would accept; it wasn't to capitulate to what customers thought they wanted or to tell customers what they ought to want. As we came to understand our customers better, we were able to improve our products. As we did that, the fundamen tal metrics of our business changed. In the early days, despite our efforts to improve the product, our metrics were stubbornly flat. We treated each day's customers as a new report card. We'd payattention to the percentage of newcustomers who exhibited product behaviors such as downloading and buying our prod uct. Each day, roughly the same number of customers would buy the product, and that number was pretty close to zero de spite the many improvements.  Learn 51 However, once we pivoted away from the original strat egy, things started to change. Aligned with a superior strat egy, our product development efforts became magically more productive—not because we were working harder but because we were working smarter, aligned with our customers' real needs. Positive changes in metrics became the quantitative vali dation that our learning was real. This was critically important becausewe could show our stakeholders—employees, investors, and ourselves—that we were making genuine progress, not de luding ourselves. It is also the right way to think about pro ductivity in a startup: not in terms of how much stuff we are building but in terms of howmuchvalidated learning we're get ting for ourefforts.4 For example, in one early experiment, we changed our en tirewebsite, homepage, and product registration flow to replace "avatar chat" with "3D instant messaging." New customerswere split automatically between these two versions of the site; half saw one, and half saw the other. We were able to measure the difference in behavior between the two groups. Not only were the people in the experimental group more likely to sign up for the product, theywere more likely to become long-term paying customers. We had plenty of failed experiments too. During one period in which we believed that customers weren't using the product because theydidn'tunderstand its many benefits, wewent so far as to pay customer service agents to act as virtual tour guides for new customers. Unfortunately, customers who got that VIP treatment were no more likely to become active or paying customers. Even after ditching the IM add-on strategy, it still took months to understand why it hadn'tworked. After our pivotand many failed experiments, we finally figured out this insight: cus tomers wanted to use IMVU to make new friends online. Our 52 THE LEAN STARTUP customers intuitively grasped something that we were slow to realize. All the existing social products online were centered on customers' real-life identity. IMVU savatar technology, however, was uniquely well suited to help people get to know each other online without compromising safety or opening themselves up to identity theft. Once we formed this hypothesis, our experi ments became much more likely to produce positive results. Whenever we would change the product to make it easier for people to find and keep new friends, we discovered that custom ers were more likely to engage. This is truestartup productivity: systematically figuring out the right things to build. These were just a few experiments among hundreds that we ran week in and week out as we started to learn which custom ers would use the product and why. Each bit of knowledge we gathered suggested new experiments to run, which moved our metrics closer and closer to our goal. THE AUDACITY OF ZERO Despite IMVU's early success, our gross numbers were still pretty small. Unfortunately, because of the traditional way businesses are evaluated, this is a dangerous situation. The irony is that it is often easier to raise money or acquire other resources when you have zero revenue, zero customers, and zero traction than when you have a small amount. Zero in vites imagination, but small numbers invite questions about whether large numbers will ever materialize. Everyone knows (or thinks he or she knows) stories of products that achieved breakthrough success overnight. As long as nothing has been released and no data have been collected, it is still possible to imagine overnight success in the future. Small numbers pour cold water on that hope.  Learn 53 This phenomenon creates a brutal incentive: postpone get tingany data until you are certain ofsuccess. Of course, as we'll see, such delays have the unfortunate effect of increasing the amount of wasted work, decreasing essential feedback, and dra matically increasing the risk that a startup will buildsomething nobody wants. However, releasing a product and hoping for the best is not a good plan either, because this incentive is real. When we launched IMVU, we were ignorant of this problem. Our earli est investors and advisers thought it was quaint that we had a $300-per-month revenue plan at first. But after several months with our revenue hovering around $500 per month, some began to lose faith, as did some of our advisers, employees, and even spouses. In fact, at one point, some investors were seri ously recommending that we pull the product out of the mar ket and return to stealth mode. Fortunately, as we pivoted and experimented, incorporating what we learned into our product development and marketing efforts, our numbers started to improve. But not by much! On the one hand, we were lucky to see a growth pattern that started to look like the famous hockey stick graph. On the other hand, the graph went up only to a few thousand dollars per month. These early graphs, although promising, were not by themselves sufficient to combat the loss of faith caused by our early failure, and we lacked the lan guage of validated learning to provide an alternative concept to rally around. We were quite fortunate that some of our early investors understood its importance and were willing to look beyond our small gross numbers to see the real progress we were making. (You'll see the exact same graphs they did in Chapter 7.) Thus, we can mitigate the waste that happens because of the audacity of zero with validated learning. What we needed 54 THE LEAN STARTUP to demonstrate was that our product development efforts were leading us toward massive success without giving in to the temptation to fall back on vanity metrics and "success theater"—the work we do to make ourselves look successful. We could have tried marketing gimmicks, bought a Super Bowl ad, or tried flamboyant public relations (PR) as a way of juicing our gross numbers. That would have given investors the illusion of traction, but only for a short time. Eventually, the fundamentals of the business would win out and the PR bump would pass. Because we would have squandered pre cious resources on theatrics instead of progress, wewould have been in real trouble. Sixty million avatars later, IMVU is still going strong. Itsleg acy is not justa great product, an amazing team, and promising financial results but a whole new way of measuring the progress of startups. LESSONS BEYOND IMVU I have had many opportunities to teach the IMVU story as a business case ever since Stanford's Graduate School of Business wrote an official study about IMVU's early years.5 The case is now part of the entrepreneurship curriculum at several business schools, including Harvard Business School, where I serve as an entrepreneurin residence. I'vealso told thesestories at countless workshops, lectures, and conferences. Every time I teach the IMVU story, students have an over whelming temptation to focus on the tactics it illustrates: launching a low-quality early prototype, charging customers from day one, and using low-volume revenue targets as a way to drive accountability. These are useful techniques, but theyare not the moral of the story. There are too many exceptions. Not  Learn 55 every kind of customer will accept a low-quality prototype, for example. If the students are more skeptical, they may argue that the techniques do not apply to their industry or situation, but work only because IMVU is a software company, a consumer Internet business, or a non-mission-critical application. None of these takeaways is especially useful. The Lean Startup is not a collection of individual tactics. It is a principled approach to new product development. The only way to make sense of its recommendations is to understand the underlying principles that make them work. As we'll see in later chapters, the Lean Startup model has been applied to a wide variety of businesses and industries: manufacturing, clean tech, restau rants, and even laundry. The tactics from the IMVU story may or may not make sense in your particular business. Instead, the way forward is to learn to see every startup in any industry as a grand experiment. The question is not "Can this product be built?" In the modern economy, almost any product that can be imagined can be built. The more pertinent questions are "Should this product bebuilt?" and "Canwebuild a sustainable business around this set of products and services?" To answer those questions, we need a method for systematically breaking down a business plan into its component parts and testing each part empirically. In other words, we need the scientific method. In the Lean Startup model, every product, every feature, every marketing campaign—everything a startup does—is understood to be an experiment designed to achieve validated learning. This experi mental approach works across industries and sectors, as we'll see in Chapter 4. EXPERIMENT ICOITie acrOSS many Startups that are struggling to answer the follow- I ing questions: Which customer opinions should we listen to, if any? How should we prioritize across the many features we could build? Which features are essential to the product's success and which are ancillary? What can be changed safely, andw