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Every so often a business book comes along that changes how we think about innovation and entrepreneurship. Clay Christensen’s theories on disruptive innovation and Geoffrey Moore’s potent metaphors of “crossing the chasm” from small to mass markets, and going “inside the tornado” of starting a business, have loomed large over entrepreneurial theory for years. Eric Ries’s The Lean Startup has the chops to join this exalted company.
Ries is an unusual mix of business practitioner and theorist who writes more convincingly than most academics and less simplistically than most business people. His book evolved out of his experiences as a technology entrepreneur, which led to a well-read blog and invitations to advise all kinds of companies, from start-ups to Fortune 100 enterprises, all struggling with the same problems of starting and building something new.
The thrust of it is that start-ups tend to be much higher-risk endeavours than they need to be. Entrepreneurs in every setting make the same mistakes. They build elaborate products before daring to test them with consumers. They make decisions based on the wrong information, and they stick with bad ideas long after they should. Their behaviour is supported by the entrepreneurial myths of innovators who persisted through endless rejection eventually to be validated by success. These rare cases, Ries writes, lead many to unnecessary failure.
Ries is a programmer by trade and his greatest business success has been a company called IMVU, an instant messaging service that allows people to communicate using avatars. He uses his experiences as the basis for the main lessons in The Lean Startup, as well as a rich array of fresh entrepreneurial stories, mostly drawn from the technology industry.
He defines a start-up as a “human institution designed to create a new product or service under conditions of extreme uncertainty”. The words “human” and “uncertainty” are essential to what follows. A successful start-up does not just rely on a brilliant idea, but also requires managing people through all the challenges of innovation and growth, and through times when the idea will fail and when people will fight over what to do next.
Ries argues for round after round of small experiments. Entrepreneurs should create a “minimal viable product” as soon as they can and start testing it with consumers. It will be worth a thousand hours of strategising and internal analysis. Then they should keep testing every aspect of their business models. He is a great fan of repeated “split testing” – a technique taken from direct advertising, whereby you test slightly different versions of the same product with different groups of customers to see which works best.
When it comes to the critical issue of when and how to change strategic direction, Ries writes realistically about the issues that will come up. Some in the organisation will want to persevere, while others will want to change direction entirely. Useful data will be vital to making the decision based on reason rather than emotion. He emphasises the importance of “innovation accounting”, a way of digging much deeper than headline numbers such as revenue growth to track changes in customer adoption, retention and usage patterns.
With these established, the decision to “pivot” should require less blind courage than otherwise. His book is full of useful ways to rethink hoary start-up terms. For example, when start-ups talk of “runway”, they tend to take their available money and divide it by their monthly burn rate. If they have $1m and they are spending $100,000 a month, they have a 10-month runway. He suggests they think of “runway” as the number of pivots they can still achieve.
Unlike so many authors in this field, Ries writes clinically and intelligently, without hoopla. He wishes businesses could innovate with less waste. It is a noble wish and one his book should help fulfil.
The Lean Startup is published by Crown Business ($26)