strategy+business Winter 2013 : Page 96

The Five Principles of the Lean Startup Entrepreneurs are everywhere. You don’t have to work in a garage to be in a startup. Entrepreneurship is manage-ment. A startup is an institution, not just a product, so it requires management, a new kind of man-agement specifically geared to its context. Validated learning. Startups ex-ist not to make stuff, make money, or serve customers. They exist to learn how to build a sustainable business. This learning can be validated scientifically, by running experiments that allow us to test each element of our vision. Innovation accounting. To improve entrepreneurial outcomes, and to hold entrepreneurs account-able, we need to focus on the bor-ing stuff: how to measure progress, how to set up milestones, how to prioritize work. This requires a new kind of accounting, specific to startups. 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 successful startup processes should be geared to ac-celerate that feedback loop. minded methodology for launching new businesses, whether they are stand-alone new ventures or ven-tures within existing enterprises. We are reprinting Ries’s own pub-lished primer on the five principles that characterize the lean startup. A s the name implies, the lean startup is an efficiency-96 going to be great.” The political capital that you and your team have is never so high as the day after the money and the plan are authorized. It decreases steadily from that day forward. One year later, I guarantee the money has been spent on schedule. Everybody has been very busy. You probably did a good job hitting your mile-stones. But what are the odds that you beat the forecast results? The incentive in creating the forecast was making it as big as possible to in-crease your odds of getting the fund-ing. Now that huge forecast is a ma-jor liability. Quite often, you’re back in front of the VC, spouse, or CFO saying, “Remember when we pro-jected millions of customers? Just kidding. We have hundreds. And remember when I said we’d have bil-lions in revenue? Just kidding. We have thousands. But we have learned so much! And boy, if you just give us another year and $25 million more and a bigger team, I promise you it will work this time.” I tell this joke all the time in corporate settings, and people laugh hysterically because they know in a mature company that guy’s about to get fired. Learning is a four-letter word in most companies; learning means you failed to do what you said you were going to do, which, in turn, means you’re a bad manager. At the same time, we love to make fun of the CFOs, accountants, and managers who cancel promising projects right before they’re about to pay off. But you have to look at things from their point of view. If you come back from your great ex-pensive adventure with almost no customers and almost no revenue, it could mean one of two things. You learned something great and you’re on the brink of success, or you’re Bozo the Clown and you’ve accom-plished absolutely nothing. If you can’t tell the difference between an A-plus and an F-minus, that is a total paradigm breakdown. And clearly, we can’t take it for granted that finance can sort out this mess. Traditional accounting metrics—profitability, ROI, net re-turn on assets, IR—all show zero in the early stages, even if you are the next Twitter. That’s not the accoun-tant’s fault or the CFO’s fault. That’s the paradigm’s fault. There’s no way for the finance people and corporate management to make a good decision, because the metrics they’re trained to look at are the wrong ones. They may end up killing projects on the cusp of great-ness, letting others go on with no chance of succeeding, and—almost as bad—pushing the ones that show promise forward too quickly. For some products, the process of testing and iteration takes a long time. How can you have the pa-tience to make investments over years or decades, when your ROI during that period is guaranteed to be negative? If we measure progress differently, it is possible to sustain that kind of commitment. Lean startup is short-term action in the service of long-term vision. It’s our way of quantifying validated learn-ing, to learn objectively who’s mak-ing progress and who’s not. strategy+business issue 73 thought leader

The Five Principles Of The Lean Startup

As the name implies, the lean startup is an efficiencyminded methodology for launching new businesses, whether they are stand-alone new ventures or ventures within existing enterprises. We are reprinting Ries’s own published primer on the five principles that characterize the lean startup.

Entrepreneurs are everywhere. You don’t have to work in a garage to be in a startup.

Entrepreneurship is management. A startup is an institution, not just a product, so it requires management, a new kind of management specifically geared to its context.

Validated learning. Startups exist not to make stuff, make money, or serve customers. They exist to learn how to build a sustainable business. This learning can be validated scientifically, by running experiments that allow us to test each element of our vision.

Innovation accounting. To improve entrepreneurial outcomes, and to hold entrepreneurs accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, how to prioritize work. This requires a new kind of accounting, specific to startups.

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 successful startup processes should be geared to accelerate that feedback loop.

Read the full article at http://digitaledition.strategy-business.com/article/The+Five+Principles+Of+The+Lean+Startup/1558985/183015/article.html.

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