Based on two Popular books
- The Lean Startup by Eric Ries
2. Disciplined Entrepreneurship by MIT Press
Transcript:
Recently we have been looking at production methods and thought processes used by successful startups. This is the 3rd part in a series about Entrepreneurship. These are techniques that help us to answer difficult questions like…
What would you need to start an organization? What does it take to make a new business successful? Does it take a lot of money to make money? Not according to Eric Ries, the author of the popular book on entrepreneurship titled, “The Lean Startup.”
My name is Shaun McMillan, and this is the Best Class Ever.
According to the Lean Startup, which has profoundly shaped the modern thinking around entrepreneurship, a strong talented team doesn’t even necessarily need a good idea. Survival for a new business is not about profits, but about learning. In the beginning you will lose a lot of time, energy, and money, that’s a given. But to ultimately be successful you need to invest that time, energy, and effort into learning about what your customers really want and need. Then based on what you learn, you must adapt your offerings to meet their needs. Will you continue to offer the same product, or will you abandon your first idea in favor of a better one? You must decide either to pivot or persevere. So even if you start with a bad idea, pursuing it will hopefully lead to a good idea. And once you have a good idea with the right timing, then you have what could turn out to be tremendously successful.
The Entrepreneurship Series
This is the second framework we are going to look at in our series on entrepreneurship and startup methodologies. In the last lesson we talked about Design Thinking and how rapid prototyping, centered on understanding the user’s problems, can help teams to innovate quickly.
The Lean Startup introduces a lot of ideas and terminology that is likely very new to many of us, so we won’t be able to cover everything in one lesson. It will especially be new to those who usually think of themselves as creatives but tend to avoid thinking about management or business. Even for me, I have always thought of myself as a commercial artist, and a minister through my work for the church. So managing money has always been a secondary concern. Just as programmers love to program, and engineers love to build things, and phD students love to research, management always feels like a process that impedes on our progress. That intrusive thing that gets in the way of doing what we love.
But managing your time, money, and efforts are what make your work possible. Instead of working hard, we should work smart. It is entirely possible to work yourself into a grave, or to work yourself out of a job. But building the right thing, the right way, at the right time will open up amazing opportunities for you and keep you doing the work you love. But how do we evaluate whether this is the right thing to do right now, and how do we know if we are doing it right? We have to measure, manage, and evaluate. That is the only way.
Measure What Matters
It’s also important to measure what matters. How many likes you get on a social network is nothing more than a vanity metric. It doesn’t tell you whether you will be able to sustain your work over the course of time. To know that, you need to know how much you regularly spend in time, creative energy, and resources to continue offering your service. These are your costs. Then you need to know how much your audience or advertisers will pay you in revenue or donations. Revenue minus costs equals your profits.
Calculating the math of a sustainable business model is extremely simple. If your costs outweigh your revenue, your business is operating at a loss and dying. This will inevitably be the case in the beginning when your audience is small. You have to invest a lot in the beginning but your hope is that eventually your revenue will grow enough to cover your costs. Then and only then will you be able to gain any profits from this venture.
While you could drag this out into a slow death you cannot operate at a loss forever. No organization can continually perpetually operate at a loss. It will eventually die. Even volunteers will eventually burn out and find something more meaningful to do if the work doesn’t offer them some type of validation.
So speaking strictly from a business point of view, it seems like the path to success is to focus on profitability. But Eric Ries, the author of the Lean Startup, like many successful business men I’ve met, argues that no, profits are not the goal. Profits come from sales, sales come from a large enough audience, and a large audience comes from extremely happy customers advocating for your service. So the goal is not profitability but serving a small group of customers extremely well, to the point that they advocate for you and grow your audience.
Product-Market-Fit
So the goal is to find a product that fits the market. A product or service that is so good that customers demand it from you when they find out it exists. This is known as product to market fit.
And it doesn’t even have to be a big market. Find a small niche market, but serve them a product or service that truly fits their unique needs right now. Achieving that is your topmost priority, and everything else is secondary.
So how does any organization get product-to-market-fit as quickly as possible? You need to test your product with actual customers. And the sooner you test the sooner you’ll know if you have a good idea. And the less resources you’ll waste on a business that might never work. To run these tests you need an M.V.P. also known as a minimum viable product. A prototype of a product, just finished enough that you can test whether it provides value to the customer or not.
Examples of an M.V.P. can be as simple as a google ad. You run a google ad for a business idea and see whether people click on it or not. If no one clicks on it, then you know you need to make changes. The product might not even exist yet. It doesn’t need to. Until you know whether customers want it or not, why bother building it at all? We can learn about the user without having to program, build, or design anything. This is the leanest, cheapest, fastest way to product to market fit. This is the lean startup.
Innovation Accounting
So long before we find profit, we need to build, measure, and learn. Build a possible product, measure its success, and learn from its failures. Then repeat. And the faster we can speed up that feedback loop the quicker we can get to success. This part is basically the same as Design Thinking which we learned in the previous lesson.
Now we need to discuss business ideas, which is going to sound a lot less like finance, and a lot more like science. Every business idea is basically an assumption. Just like a hypothesis in science. If you say for example, that I want to build a YouTube channel for people interested in game design then I am assuming two things. Both that I will be able to capture enough of an audience to sell ads, collect donations, or sell enough t-shirts to make producing videos on a regular basis financially sustainable, and that game designers will love my videos enough to share them and/or trigger the algorithm to market my videos.
If my business idea is to promote a new educational game on kickstarter, then I am assuming that the game will be popular enough among educators to earn the bare minimum donations required to reach my crowdfunding goal. Before we even find out if it is fun enough to make students want to learn, or educational enough to make teachers want to implement it into their lesson plans, we would first need to find out if it even looks appealing enough to get those who see it’s image on the internet to click on it. All of this is easy to measure and easy to test. And scary, because once you start measuring, you will know right away if you are failing. But like we said in the last lesson, failing on a small scale is good. You are learning what doesn’t work, and hopefully that will be progress towards learning what does work.
Value Proposition Hypothesis
So the first thing we need is a measurable business proposal. In the business world we call this a value proposition. The best value proposition is one in which you offer a good or service that provides your customer 10 times more value than what it costs them to change over to your product. For example, if I offer a teacher an educational game for $30. That game should provide the teacher with $300 worth of value, or another way of measuring it is saying that learning by playing the $30 game is 10 times better than the traditional way of teaching without the game. We provide ten times the value of sticking with the status quo, and ask a small nominal fee in return.
To make that small nominal price work, I need to reach a certain scale, or a certain audience size. I often hear Seth Godin, popular for his ideas on marketing, refer to this as the Minimum Viable Audience, which traditionally is understood to be at least 1,000 people who absolutely love your work and will buy up any book, video, or service you have to offer.
Maybe you have been working full time and saved up a lot of money. You have maybe $10,000 put aside, and you estimate that if you quit your job and work full time on your side hustle, you’ll need to spend $2,000 per month on living expenses. That means you will burn through your $10,000 spending $2,000 per month in a matter of 5 months. That gives you 5 months of runway to produce YouTube videos, launch a KickStarter project, or commit full time to running your own business. Five months to see if enough people will like what your
offering enough to make it sustainable for you.
It is very possible that your initial idea will fail, but along the way maybe you’ll stumble into a much better idea. Now you must decide, should you start over again from scratch with the new idea or push forward with the old. Should you pivot or persevere?
Many startups start with a failing idea but stumble into a successful one. In fact, many pivot to a totally new idea more than once. If you are getting through the build, measure, and learn design cycle quickly enough then you can measure your runway by how many times you can pivot before you run out of resources or burn out. Once you find an idea that really actually changes customer behavior, then it will be easier to grow and convince others to jump on board.
In the next lesson we will look at more ideas from the Lean Startup, but we will focus more on the problem of distribution. Because even if you build a great product, will it succeed if no one knows about it? As they say, 1st time founders focus on product, but 2nd time founders focus on distribution.
To see visualizations of the concepts we covered in this lesson, or to see the other lessons from this series on startup methodologies be sure to visit www.BestClassEver.org.
