Assignments

Prompt 1: Discuss the idea of "small batches" as outlined by Eric Ries in The Lean Startup. Why does he advocate for this type of production and how does the idea of "pull" factor in? What (if any) problems do you see with small batches? How might you use this for your own company you are building now?

Eric Ries starts discussing “small batches” in The Lean Startup via addressing the elephant in the room, that of their perceived inefficiency. He rebuts this belief set by stating that, “…even though it seems inefficient…[the]…‘single-piece flow’ in lean manufacturing…works because of the surprising power of…[said]…small batches” (p. 184). Their power is that when there is an issue it is found “…out immediately and…[has]…no rework required” because a large quantity of the batch has not been made yet (p. 185).

An example of this in the real world is car manufacturers, which normally have large batch sizes. The industry standard claim is:

By keeping…[their]…machines running at peak speed, they could drive down the unit cost of each part and produce cars that were incredibly inexpensive so long as they were completely uniform…[compared to the small batch approach of]…Toyota…[which]…used smaller general-purpose machines that could produce a wide variety of parts in small batches. (186)

This quality over quantity eventually led Toyota to achieve quantity as well, for like the theoretical concept, “The biggest advantage of working in small batches is that quality problems can be identified much sooner…[which is a concept called]…Toyota’s famous andon cord…the benefits of finding and fixing problems faster outweigh…” the perceived inefficiency of the disruption of the andon assembly line (p. 187)

Ries also mentions that it is important to make sure that, “Instead of working in separate departments, engineers and designers…[should]…work together side by side one feature at a time” (p. 189). As an example of this working well he states at IMVU they make, “…about fifty changes to its product (on average) every single day” (p. 189).

To make sure that those aforementioned changes are not negative they also implemented a process where defective changes are automatically removed, everyone is notified of the defect, and the team that is responsible for the defect is blocked from doing anything else until the problem is solved or fixed.

Ries also advocates for the small batch method because hardware is commonly becoming software when prototyping or iterating, allowing for faster production changes and, “Since machines are designed for rapid changeovers, as soon as the new design is ready, new versions can be produced quickly” (p. 192). This trend is also most predominantly seen with physical objects shifting away from injection molding to 3D printing or other rapid prototyping tools, SGW changing field x-ray systems to detect explosives in just “three and a half weeks after the initiation of the development project,” and the School of One approach to education (p. 194).

Ries additionally states that small batches are not just better, but large batches are actively harmful to a company. From his personal experience he writes, “When I work with product managers and designers in companies that use large batches, I often discover that they have to redo their work five or six times for every release” (p. 197).

Ries then mentions the idea of “pull” and “push” systems. He argues that small batches enable a “pull” system, where the production process is driven by customer demand, rather than the large batches’ “push” system, where the production process is driven by forecasts and assumptions made by higher ups, data analysts, and obfuscated by teams that want funding. He states that a startup’s, or even an established company’s, “ideal goal is to achieve small batches all the way down to single-piece flow along the entire supply chain. Each step in the line pulls the parts it needs from the previous step…It’s as if the whole supply chain suddenly went on a diet” (p. 200)

Some problems I see in the pull system is that it is not suitable for some types of products/services and some circumstances. Instances could include but are not limited to, developing a large-scale infrastructure project, creating a complex software system, a startup that is too focused on sort-term improvements that they neglect the long-term vision, a company that has too much inventory with not enough capital, as by then it is probably already too late, or a company that has not enough inventory because people are buying it off the shelves, meaning they have met product market fit.

With the startup I am building right now, Let’s Eat, I have already implemented this approach during the weekend. I iterated as much as possible with the rulebook/cards on the computer and only printed out product on the things I was working on to get feedback from my consumers. After each conversation I made it my goal to implement at least some of their feedback to improve the product and as it now stands, I believe I have a better and more customer-centric product.

Prompt 2: How does Eric Ries in The Lean Startup characterize growth for companies? What drives growth in most cases? Which of the engines of growth do you think will affect your company the most? Why that one?

In The Lean Startup, by Eric Ries, growth is characterized as one of three engines: the sticky engine, the viral engine, and the paid engine (p. 182). He mentions that once he had two companies who were very different come to him with the same dilemma, “Each one had early customers and promising early revenue…[but]…The problem was that neither company was growing…[and]…Both…[of them were]…using the same engine of growth…” that was not suited to their business (pp. 206-207).

Ries immediately knew this because he claims that “Sustainable growth is characterized by one simple rule: New customers come from the actions of past customers,” which was not happening at either company (p. 207). This is why “…the advertising…[for a product or service]…must be paid for out of revenue, not one-time sources such as investment capital” because if it is not then it shows that the new customers are not arriving from the actions of the previous ones (p. 208). To decide how to do that one must decide which of the three engines their company should use.

The sticky engine of growth focuses on customer retention and, by proxy, reducing the churn rate, which is “defined as the fraction of customers in any period who failed to remain engaged with the company’s product” (p. 210). In an ideal scenario with the sticky engine:

…collectors who start using it will check constantly and repeatedly to see if new items are for sale as well as listening their own items for sale or trade…For such a product to grow, it has to offer such a compelling new capability that customers are willing to risk being tied to a proprietary vendor for a potentially long time…[this means that said companies rely]…on having a high customer retention rate. (p. 210)

How a business with a sticky engine grows is determined by “the rate of compounding, which is simply the natural growth rate minus the churn rate” (p. 211). As a result of the rate of compounding being the primary method of success, the sticky engine is suitable for businesses that have a network effect, meaning the value of the product or service increases with the number of users. In other words, it works best with social media companies like Instagram, Rumble, YouTube, X, or TikTok, with commerce platforms like Amazon, Ebay, or Craig’s List, and with streaming services like Netflix, Hulu, or Disney+.

The viral engine, on the other hand, focuses more on spreading the product/service through referrals or word-of-mouth from existing customers to new customers. Ries, however, does mention that it “…is distinct from the simple word-of-mouth growth…[as just that will not be enough to make the viral engine grow and]…Instead, products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use” rather than one off recommendations for the product (p. 212).

A startup/company with a viral engine grows by following a concept called the viral loop which requires a high viral coefficient. Ries explains this by writing that, “…the viral loop, and its speed is determined by a single mathematical term called the viral coefficient…[which is the measurement of]…how many new customers will use a product as a consequence of each new customer who signs up” (p. 213). So, if a business has “…a viral coefficient of 0.1…[then]…one in every ten customers will recruit one of his or her friends…[which]…is not a sustainable loop…[and]…By contrast…[if a business has]…a viral loop with a coefficient that is greater than 1.0 will grow exponentially” (pp. 213-214).

Businesses that work best with the viral engine are messaging apps like WeChat, Snapchat, or iMessage, online games like MMO RPGs, Crusader Kings 3, or Stellaris, and board games like Carcassonne, Settlers of Catan, or Uno.

Lastly, the paid engine relies on acquiring customers through paid advertising or other marketing channels and ensuring that the revenue from each customer exceeds the cost of acquiring them. Ries asserts that if a business “…wants to increase its rate of growth…[using this engine]…it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer” (p. 216). As simple as this seems he mentions that “The problem with…[this]…is that some kinds of products are not compatible with viral growth,” even more so than other engines (p. 216).

To determine whether the revenue from each customer is lower than the price of acquisitioning them a business must perform a “…cost per acquisition (CPA)” analysis (p. 217). To do this they have to have the “…variable costs…deducted…[giving the business]…the customer lifetime value (LTV)” (p. 216). To initially solve this dilemma it may seem best to go for wealthy consumers, as they are more likely to have a better lifetime value, but, “Wealthy consumers cost more to reach because they tend to become more profitable customers…[and so]…the ability to grow in the long term by using the paid engine requires a differentiated ability to monetize a certain set of customers” especially well in comparison to the other engines (p. 218)

As a result this engine is suitable for businesses that dabble in software, education, or government contracts as those are the most lucrative, least expensive to acquire, and best able to cater to their specific needs.

Ries claims that it may be tempting to try multiple engines simultaneously like trying multiple tests in conjunction with one another as he described before, but he cautions against it. He states that while:

Technically, more than one engine of growth can operate in a business at a time…[but]…successful startups usually focus on just one engine of growth…[as]…Companies that attempt to build a dashboard that includes all three engines tend to cause a lot of confusion because the operations expertise required to model all these effects simultaneously is quite complicated…[which means that]…Only after pursuing one engine thoroughly should a startup consider a pivot to one of the others. (p. 219)

For the startup I am working on right now, Let’s Eat, I believe that the viral engine would be best suited to it. My reasoning for forgoing the paid engine is I do not have a lot of liquidity and I believe that the cost per acquisition will be too high given the circumstances of my distance from the target audience and their unwillingness to pay for things that they are not referred to by others of their cohort. The sticky engine is suboptimal because I am not producing a service or having a subscription platform, meaning that the churn rate for the consumers of my product will be close to 100% if I do not come up with expansions for the product.

This leaves the viral engine and making it akin to a ripple that goes through a community is the best way of doing so. The way this will be done is by the people using the product at social gatherings like book clubs or play dates. By introducing the product to new customers my old customers become my delegates and they get to share something that will make the interactions with their peers more enjoyable. To that end I already went to a book club this weekend and procured two sales, so I know this method can, at the very least, generate some revenue.

It is important to remember though that, “The growth…[should be] coming from an engine of growth that is working—running efficiently to bring in new customers—not from improvements driven by product development” (pp. 222-223).

Prompt 3: The Lean Startup’s 12th chapter discusses innovation at length and how difficult it is for companies to continue to innovate as they grow. Recount the reason(s) Eric Ries states that this ability to innovate is challenged as a company grows. Discuss ways in which Eric Ries believes that innovation can be preserved as companies grow. Share an example of one of these methods employed by a company in the real world. 

Ries believes that “Today’s companies must learn to master a management portfolio of sustainable and disruptive innovation” rather than just the former to remain in the positions that they are in (p. 183). Unfortunately for today’s companies the “Conventional wisdom holds that when a companies become larger, they inevitably lose the capacity for innovation, creativity, and growth…[but Ries asserts]…this is wrong…[because]…even large, established companies, can make…[a]…shift to…[a process called]…portfolio thinking” (p. 253). What he means by this is that “Successful innovation teams must be structured correctly in order to succeed…[and the correct structure is to have]…startup teams…[which]…require three structural attributes: scarce but secure resources, independent authority to develop their business, and a personal stake in the outcome” (p. 253)

Scarce but secure resources means that the startup team has enough resources to pursue their innovation project, but not an abundance which would lead them to become wasteful/complacent. Additionally, the resources must be secure, meaning that they are not subject to arbitrary/frequent changes/cuts by managements’ or investors’ whims. The reason this is important is because it allows the team to focus on learning and experimenting, rather than worrying about survival, and subsequently on pleasing higherups.

This may sound like a playground of fun, but as Ries points out “…startups are both easier and more demanding to run than traditional divisions: they require much less capital overall, but that capital must be absolutely secure from tampering” even by those inside the team, meaning there is a heightened responsibility involved in being a part of the startup team (p. 254).

Furthermore, to work most productively, “…startup teams…[must]…be completely cross-functional, that is, have full-time representation from every functional department in the company that will be involved in the creation or launch of their early products” which can cause discrepancies in the team as different skill sets and temperaments may clash (p. 255). This is done, despite the problems it may cause, so the startup team is more or less independent and has authority to act with expertise in any direction without requiring input from those who are not in the fold.

This then mandates that a personal stake be involved in the startup team to counterbalance the aforementioned diversity of thought. As Ries makes certain to point out though, “…a personal stake…[does not have]…to be financial…[it could be just making]… sure the innovator[s] receives credit for having brought the new product to life—if it is successful” (p. 255)

The personal stake also must come with the incentivized desire to share to create a platform for experimentation, where individuals are protected somewhat while holding entrepreneurial mishaps accountable. If this works poorly, “Each department simply…[takes]…whatever interpretation of the data support[s] its position best and start[s] advocating on its own behalf…[and]…if another team manage[s] to bring clarity to the situation, it might undermine…[the other team]…and so the rational response…[is]…to obfuscate as much as possible” (p. 258).

This then gives way for rational fears and, by proxy, hiding innovation from upper management. The rationale “…fear of endangering the current business…[leads to]…each proposed experiment[’s]…delay…sabotage…and…obfuscation…[and the]…Hiding from the parent organization…[other experiments which]….can have long-term negative consequences” for the business as a whole (p. 260).

This then means creating an innovative sandbox, something similar to a playground, but with more tangible results and boundaries. Ries emphasizes that “The challenge here is to create a mechanism for empowering innovation teams out in the open” which requires split-tests, one team, on time completion of experiments, experiments that do not affect a totality of the customers, similar or exactly the same metrics to measure progress with, and monitoring those said metrics (p. 261)

Even if all of this is done to at T, the process of a startup team cannot remain the same over time, as a singular team that works together will eventually become the status quo. As Ries puts it, “Every successful product or feature began life in research and development (R&D), eventually became a part of the company’s strategy, was subject to optimization, and in time became old news” (p. 266). This happens because a:

…larger team eventually will be needed to grow…[the product/service]…commercialize it, and scale it…[meaning that]…Ideally the sandbox will grow over time…[which necessitates]…that senior management consider whether the teams working in the sandbox can fend for themselves politically in the parent organization…[without taking it over entirely or fizzling out due to lack of new employee acquisitions]… (p. 267)

As a result, “New innovation teams will need a new sandbox within which to play,” sort of like how a new caterpillar is needed once an insect emerges from a cocoon (p. 268).

An example of a company using a startup team within it is Amazon. Via their sticky engine, which they call Seller Central for business-to-business transactions or pain old retention rates for business-to-consumer transactions, they make it so there is space for people to sandbox with startup teams and test their results on a small portion of their customers (Amazon 2000; Amazon 2015).

Amazon also claims to have a culture of innovation and experimentation for its own employees. This means that they encourage their employees to form small, autonomous teams which work on new products/services that can create value for customers, just like their third-party businesses on their cite do (Olmez & Kraynak, 2020). These teams are called “two-pizza teams”, because they should be small enough to be fed by two pizzas (Dell et al., 2001). Some of the successful products or services that emerged from these startup teams within Amazon are Kindle, Amazon Prime, Alexa, and the myriad of other things they sell based upon the other businesses on their site.

Prompt 1: Thoughts on value-creation versus growth hypotheses.

First it is important to delineate what value-creation and growth hypotheses are before comparing the two. Value-creation is linked to the value hypothesis which is related to how one measures the potential benefit the customer gets in the interaction with the product/service. It is commonly associated with metrics like retention, user feedback, and overall customer behavior. Eric Ries states that when pertaining to value-creation, “A critical question to consider is whether customers will in fact signup for the free trial…[or any other product/service the business is offering]…given a certain number of promised features (the value hypothesis)” (p. 96).

The growth hypotheses pertain to when and how customers will first interact with and share the product or service. Ideally this should be exponential growth, where an individual contacts the people they know and shares the product or service through word of mouth, referrals, or any other method. In other words, the growth hypotheses are a theory on how customers are acquired. Ries warns that if the growth is not viral but just substantial enough and there is no way of adjusting it with an irritative process like the growth hypotheses then, “…many companies get caught in the trap of being satisfied with a small profitable business when a pivot (change in course or strategy) might lead to more significant growth. The only way to know is to have tested the growth model systematically with real customers,” with the metrics the growth hypotheses provide (p. 102).

Both are stated by Ries to be essential for validating a startup’s viability with enough veracity to make the proper pivots/perseverance, when necessary, in as little time as possible because he claims that “The only way to win is to learn faster than anyone else” (p. 111). Value-creation should come first for, as he puts it, “If we do not know who the customer is, we do not know what quality is,” which means knowing how to grow/improve is by proxy impossible (p. 107).

An example he used was Wealthfront which originally had a videogame like system, which they chose to pivot from. In their first idea:

A significant percentage of the game players would demonstrate enough talent as virtual fund managers to prove themselves suitable to become managers of real assets (the value hypothesis) …The game would grow using the viral engine of growth and generate value using a freemium business model. The game was free to play, but the team hoped that a percentage of the players would realize that they were lousy traders and therefore would want to convert to paying customers once Wealthfront started offering real asset management services (the growth hypothesis) (Ries, 2011, p. 166).

Prompt 2: 1-page customer archetype statement for the target customer of Let’s Eat.

Our target market is children and adolescents from the ages of 5-25 who are in school, have a phone/laptop, and who have guardians subsidizing or are solely responsible for their income/spending. They are also likely to use social media, in particular YouTube, and if they go to the stores with their parents there is a 35% chance that they will incentivize their parents into spending more and more specifically our product the Let’s Eat: Dinner Deck. (Auxier et al., 2021; Gard, 2023).

Our target audience, the person who is most likely to buy the product, are the parents of these children. They are educated, white-collar workers who make $40,000 or more, are between the ages of 39-66, and are interested in eating healthy (Anderer, 2023; DPL, 2023; Chang, 2022). It is more likely for them to be female because women are projected to take 75% of discretionary spending by 2028, but it is not required of them to be (Betterton, 2023).

A fictitious example of a member of the target audience would be Rebecca Daniell, a 38-year-old mother of three who has a bachelor’s degree in psychology from the University of Denver and still lives in the metro area. She spends most of her time at work, where she makes $62,400 a year. She enjoys spoiling her kids, practices yoga, likes to cook but wants her family to help her, appreciates things that make life more convenient, likes to believe she is contributing to the greater good, and prefers to not have to think about repurchasing products.

In an ideal scenario when our product is in full swing, she would be shopping for groceries and other necessities with her children. As a result of liking to spoil her children, when they ask her to buy the Let’s Eat: Dinner Deck she decides to purchase it because it is only $19, and she thinks it could be helpful in getting her kids interested in cooking.

The child that was interested in the game was Charlie Daniell, an 8-year-old who spends a lot of time in school and playing games online. Charlie saw Let’s Eat: Dinner Deck in the store and scanned the QR code on the deck’s cover. Charlie, seeing that there was a website with videos about how to play the game and with recipes that are within the game, is interested in it. That interest in turn leads to the aforementioned request for it to be purchased via Rebecca’s income, which is accepted.

It should also be noted that early adopters are likely to be college students or other people that do not meet the target market/audience, which is something that we will have to consider as, according to Ries, “…early adopters…[are]…diametrically opposed to the actions…[one has]…to master to be successful with mainstream customers” (p. 170).

Prompt 3: Thoughts on innovation accounting versus traditional accounting.

Like in prompt one, I believe it is pertinent to get the semantics of these terms down prior to going into depth on their juxtaposition. Ries describes innovation accounting as, “…a quantitative approach that allows us to see whether our engine-tuning efforts are bearing fruit,” which means that it is a system of empirical metrics which assists founders of startups to determine the veracity of their leaps-of-faith (p. 77).

Traditional accounting is, of course, more confined to the conventional definition and the common nomenclature. This is exemplified in the three things that this traditional form does well, looking backward to tabulate the impact of decisions that have already been made, focusing on financial indicators such as revenue, profit, and cash flow, and relying on historical data as well as company averages to determine future decisions the business should make. In Ries’s words, “…Traditional accounting judges new ventures by the same standards it uses for established companies, but these indications are not reliable predictors of a startup’s future prospects,” which is the beginning of the distinctions between the two terms (p. 85).

Innovation accounting in contrast to traditional accounting looks forward to predicting values of things that have not yet happened or may never happen, focuses more on learning indicators such as customer behavior, feedback, and retention than it does on profit, revenue and cashflow, and prefers to use real-time data rather than things that have already been. The risks involved in this form of accounting need to be offset by the same empiricism that traditional accounting has however because there is a risk that it will be harder to differentiate, “…false startups from true innovators” (Ries, 2011, p. 85). How this is done is by following the three step, “…systematic approach to figuring out if…[the startup is]…making progress and discovering if…[the startup is]…actually achieving validated learning” (p. 113). The first step is to, “…use a minimum viable product to establish real data on where the company is…” going currently (p. 117). The next is to, “…attempt to tune the engine from the baseline…[and the]…third step…[is whether to]…pivot or persevere” based upon the other two metrics level of success (p. 118).

While Ries claims that “Accounting is the key to their success” he does warn that, “…vanity metrics…[can make a false impression of how well the business is doing and one must]…avoid the temptation to use them”  (pp. 115, 128). This is especially true in startups where the company has a “limited runway” to take off from, meaning, “The true measure of runway is how many pivots a startup has left: the number of opportunities it has to make a fundamental change to its business strategy” (Ries, 2011, p. 160). The wrong type of accounting can severely dampen the number of pivots as a business will persevere longer than they should on something that is not working due to the focus of said accounting.

Prompt 4: What is the difference between pivot and persevere? Why does a company choose one of these choices, is there a moment that defines the decision? Research and discuss a company that pivoted. What was their initial focus, why did the company pivot? Discuss your impressions of whether or not this pivot was successful.  What objective measurements can you find to suggest the pivot's success?

The difference between pivoting and persevering is simple, whether to keep doing what you have been doing despite uncertainty or unforeseen complications or to shift the business strategy to something else, often at the expense of a substantial amount of work and resources. Ries states that, “Successful entrepreneurs do not give up at the first sign of trouble, nor do they persevere the plane right into the ground. Instead, they possess a unique combination of perseverance and flexibility,” which leaves the quandary of what is the right combination of both qualities (p. 113).

The consequences of perseverance are evident, as most people, “…want to keep believing in…[their]…ideas even when the writing is on the wall…[which]…is why the myth of perseverance is so dangerous” (Ries, 2011, p. 114). As a result, a sure sign of when to pivot, even if the co-founders do not want to, is, “…if…[the startup is]…not moving the drivers of…[their]…business model…[and by proxy are]…not making progress” (p. 120).

PayPal, SpaceX, and Tesla have Elon Musk as a common thread, and his businesses have chosen to pivot in some cases and persevere in others. SpaceX and PayPal have infamously pivoted many times while Tesla and SpaceX have famously persevered despite the financial hardships of doing so (Mancini, 2023; Rosenbaum, 2017). For example:

A couple of years ago…[PayPal’s]…focus was on ubiquity. It was on customer acquisition. It was on the top line growth…[but now]…PayPal has pivoted toward being what we believe to be more of a mature model, focusing not on customer acquisition, but on increasing penetration of existing customers, cutting costs to drive the bottom line (Smith, 2022).

This shift is necessary and common in startups as eventually profit becomes a priority because without it a company cannot last. Whether or not this pivot is successful is debatable however, as according to Ries, “…the sign of a successful pivot…[is that]…the new experiments you run are overall more productive than the experiments you were running before” and according to reports the stock of PayPal went from “…60 times earnings…[to]…trading at below market multiples, somewhere around 16 times earnings or a little bit below that,” which is certainly not a more productive measure of success in the eyes of the public (Ries, 2011, p. 125; Smith, 2022).

SpaceX in contrast has an interesting story with its pivot. They were having difficulty with one of their rockets and a, “…question the YouTuber had asked actually led to changes being made on one of the newest rockets…[and is claimed to be]…‘one of the biggest improvements we (SpaceX) made…’” (Sukheja, 2022). The reason that this is a pivot and not just a shift in production is because, according to Ries, “A pivot requires that…[the startup]…keep[s] one foot rooted in what…[they have]…learned so far, while making a fundamental change in strategy in order to seek even greater validated learning” which is most definitely the result of SpaceX’s change, despite them continuing to make rockets instead of shifting towards something like a social media platform, because, after all, that probably would not work…but who knows, I am not Elon Musk (Ries, 2011, p. 154).

Prompt 1: Ries spends a lot of time in Chapter 3 discussing learning, specifically Validated Learning. How does validated learning empirically help startup businesses discover truths?

Validated Learning empirically helps startup businesses discover truths via demonstrating, “…positive improvements in the startup’s core metrics” (Ries, 2011). This is done by lean thinking, which means that the entrepreneur must define, “…value as providing benefit to the customer…[while]…anything else is waste” (Ries, 2011). In the example Ries provides, his company, that focused on IM network addons, spent a large amount of their time making the product and testing the interoperability of it, which made the product suboptimal. Unfortunately, or fortunately depending on how you look at it, there was also no demand for the product and as a result the customers did not even download their software. This then allowed them to do what they should have been doing from the start, asking the customer why they do not want their product and what they do want.

The questioning led to the revelation that their, “IM add-on concept was fundamentally flawed,” forcing them to pivot (Ries, 2011). As a result, they had to scrap a lot of what they had made and tell the investors that they were learning from their mistakes. The issue with this was that there were not that many results in the interim between shifting strategies which made them develop the aforementioned idea as validated learning, rather than the dreaded backtracking the industry claims as “learning.” In other words, “Positive changes in metrics became the quantitative validation that…[their]…learning was real…[and the level of success started to be measured]…not in terms of how much stuff…[they were]…building but in terms of how much validated learning…[they were]…getting for…[their]…efforts” (Ries, 2011). 

The results were that they shifted into a system that allowed their users to meet other users who were strangers, rather than bringing over their other friends who may or may not enjoy the service and its recommendation. That was the problem that they ended up solving, not the interoperability, something which they would have more easily been able to ascertain if they had not invested so much time into a product that no one wanted. 

Prompt 2: How can revenue generated, SOMETIMES be worse than no revenue generated? Think critically about this point....do you agree? Why or why not?

Revenue generated can sometimes be worse than no revenue generated depending upon how that revenue is gained. For example, if a company uses, “…marketing gimmicks…[like buying]…a Super Bowl ad, or…[buying a]…flamboyant public relations (PR) as a way of juicing…[their]…gross numbers,” then they would not only just have the ephemeral “illusion of traction,” but they also could be missing out on the fact that the problem they are solving is not one people want to be solved (Ries, 2011). In this instance, they are not answering the underlying question of “Should this product be built?” and are instead skipping straight to building/marketing the product. When startups do not fine tune their work before launch there is a significant risk that they will not have a successful product in the long term, but not only that, if the product does fail to launch and the team as to pivot, there could be a lot of wasted product and work as a consequence of that outcome.

This scenario is exemplified by Ries’s company who he admits could have been better served if they just pitched their idea to potential customers rather than building an MVP. Ries states that, “…almost no customers were willing to use our original product, so we wouldn’t have had to do much apologizing when we failed to deliver” (Ries, 2011).

As for whether or not I agree with this, well, I believe it is circumstantial. Circumstances where it may be optimal for making a product and attempting to accrue revenue with it despite not testing enough could be time constraints, like a class/competition, good fortune, where the person somehow just hit the nail on the head without this safety net, or desperation, like imminent bankruptcy/competitors launching. It could also be the case that the startup has already done enough and is hesitating to generate revenue because they are afraid of the outcome, sort of like how someone might be scared to take off a band aid due to the potential of it hurting. Much like the band aid though, the testing phase of generating no income has to end eventually if the startup wants to be successful. 

Prompt 3: Discuss how Ries thinks about experimenting in a startup and how it aligns or differs from how YOU think of experimentation?  

Ries thinks about experimenting in a startup by following the scientific method, meaning that the experiment must have, “…clear hypothes[es] that make…predictions about what is supposed to happen…then tests those predictions empirically” (Ries, 2011). 

The first way to do this is having the startup think big but start small, meaning the startup should test the waters with things that either do not scale or are not really the product they are intending to build to see if there is a demand for their product. An example Ries uses is Zappos, which started small to answer the question, “…is there already sufficient demand for a superior online shopping experience for shoes?” along with, “…many other assumptions…[because]…To sell shoes, Zappos had to interact with customers: taking payment, handling returns, and dealing with customer support” (Ries, 2011).  This experience from the experiment allowed them to simultaneously develop their expertise in the field and their ability to meet the demands of their customers. In contrast, if they had only thought big, like Caroline Barlerin’s volunteering idea, or kept doing market research/surveys, which some startups are apt to do, they would have had a more difficult time aggregating both skillsets. 

The next way to do this is to break things down with a value hypothesis and a growth hypothesis. According to Ries, “The value hypothesis tests whether a product or service really delivers value to customers once they are using it,” while, “…the growth hypothesis…tests how new customers will discover a product or service” (Ries, 2011). For instance, a value hypothesis for fishing would be if the hook stays in the fish once it is caught, while the growth hypothesis would be if the lure is enticing enough for the fish to bite on it.

Last, there is the admission that, “In the Lean Startup model, an experiment is more than just a theoretical inquiry; it is also a first product,” meaning that every experiment has interaction with actual customers, rather than with data out in the ether (Ries, 2011). 

This type of experimentation differs from my own because of two reasons. One is that I am much more inclined to theoretical inquiry than empirical metrics on account of me being in academia for so long. In school we are taught to think abstractly and when we are told to do otherwise, we are still acting in an abstract way due to time constraints that make it almost impossible to do the real thing in the depth that is required for them to flourish. Second, is that I do not have a large social circle and am uncomfortable exiting the circle I have, so interacting with customers is a challenge for me. I am pretty sure I will have to do the type of experimentation Ries talks about though, especially since it is apart of the assigned reading.

Prompt 1: Discuss your understanding of the 5 Principles of the Lean Startup Method upon which this book is built.  

The 5 Principles of the Lean Startup Method are, entrepreneurs are everywhere, being an entrepreneur is about management, startups need validated learning, entrepreneurs should follow a build-measure-learn approach, and one should use innovation accounting.

The entrepreneurs are everywhere is rooted in the book’s definition of a startup which is, “…a human institution designed to create new products and services under conditions of extreme uncertainty” (Ries, 2011). On account of this definition being broad, the concept of entrepreneurship tied to a startup is ubiquitous and is not dependent on company size, type of industry, or expertise of the individuals within the startup.

The second principle, entrepreneur is management, Ries argues that the extreme uncertainty of future uncertainty is the key component of what makes someone an entrepreneur, which means that management in, “companies that depend on innovation for their future growth,” should be considered as entrepreneurs (Ries, 2011).

Next, validated learning posits that, “startups exist to learn how to build a sustainable business,” meaning that applying the principles of the scientific method can help expedite the process of discovery and the veracity of the findings they acquire (Ries, 2011).

Fourth is following a build-measure-learn approach to the business which means that one has to, “…turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere,” in the given context that they are in while accelerating the feedback loop as effectively as possible (Ries, 2011).

Lastly is innovation accounting, which means that startups have to regulate, “how to measure progress, how to set up milestones, and how to prioritize work,” within their business which requires some level of accounting for what is happening, what has happened, and what will happen (Ries, 2011)..

Prompt 2: Why does the author think that startup businesses fail? Explain whether you agree or disagree with him.

The author, Eric Ries, thinks that startup businesses fail because one, people believe that, “…the allure of a good plan, a solid strategy, and thorough market research” is powerful, even though it does not work in this context because there is too much uncertainty, and two, because, “…entrepreneurs and investors have thrown up their hands and adopted the ‘Just Do It’ school of startups…” which neglects management and results in chaos that eventually leads to failure (Ries, 2011).

I believe that this is correct, but only so far as in both are diametrically opposed extreme ways of dealing with the same problem which lack the nuance and balance required to maintain stability/consistency. In other words, medicine given in the wrong dosage is poison. Someone cannot meticulously plan and strategize through every obstacle, nor can they fly by the seat of their pants either, what is required is prudent judgement and adaptation to the circumstances allotted to the individual’s circumstance. What may work for one person in one time period may not work for another and vice versa, so what is required of a successful entrepreneur is the right things at the right time.

The right thing at the right time means that an entrepreneur must be like a person at a train station trying to catch a train. While they cannot necessarily predict when the train will stop, they have to have their bags packed and ready to go for when the train does arrive, lest they lose their opportunity.

Prompt 3: What are some of the major departures the author highlights between traditional management and the Lean Startup Method?

Some of the major departures Eric Ries highlights between traditional management and the Lean Startup Method are that the traditional method has been successful over the last century, but it is not well suited for the uncertainty that start ups face, something that the Lean Startup Method seeks to address.

The origins of the Lean Startup Method are from “…the lean manufacturing revolution that Taiichi Ohno and Shigeo Shingo,” did with their company Toyota, which has the tenants of “…drawing on the knowledge and creativity of individual workers, the shrinking of batch sizes, just-in-time production and inventory control, and an acceleration of cycle times,” in comparison to the traditional method (Ries, 2011).

This is adapted into the Lean Startup Method via the idea that entrepreneurs should have different metrics for success. Those metrics should be able to measure the metrics of, “vision and concept, product development, marketing and sales, scaling up, partnerships and distribution, and structure and organizational design,” in extreme uncertainty (Ries, 2011). This should allow the entrepreneurs the ability to determine when to invest, go alone, partner, respond to feedback, stick with a vision, or scale.

Some things that differ, and are point of contention, are that there should be cross-functional teams that have learning milestones, rather than formal departments and that learning should be the metric of success rather than profit. This method lowers productivity but increases the learning of individuals and therefore the ideating of the company as a whole because individuals know how the entire system works, rather than their small part. This is explained via an engine of growth, where the creation is more about tuning to the optimal frequency, meaning one pivots when there is a problem, rather than producing bulk product that the customers do not want.

Additionally, there is the idea that overplanning is, again, not a good idea, because no plan survives contact with the enemy. Therefore, maneuverability is key, something that rigid team structures lack.

Prompt 4: How does Ries characterize:  a) an entrepreneur?   and b) a Startup?   How does this differ or align with how YOU think of entrepreneurs and startups?

Eric Ries characterizes an entrepreneur as individuals who are adept at organizational politics and are visionaries. Being adept at organizational politics means that they, “…know how to form autonomous divisions with separate profit and loss statements (P&Ls) and can shield controversial teams from corporate meddling” (Ries 2011). Additionally, he mentions that an entrepreneur also must have the prerequisites of a, “…proper team structure, good personnel, a strong vision for the future, and an appetite for risk taking,” to make use of their visionary and organizational politics effectively (Ries 2011).

He characterizes a startup as “…a human institution designed to create a new product or service under conditions of extreme uncertainty” (Ries 2011). This, as aforementioned in prompt one, means that people can be an entrepreneur so long as they are, “…creating a new product or business under conditions of extreme uncertainty” (Ries 2011).

I believe my idea on what an entrepreneur is, is somewhat aligned to what Ries believes as, in my view, an entrepreneur is an individual that creates or manages a business and more specifically someone who does so in a new or innovative way.

This means that if a CEO is appointed by a board and then simply maintains the status quo they cannot be classified as an entrepreneur, but if they are appointed and then take the company in a new or innovative direction, that may or may not be successful, then they can be categorized as such. This limitation means that most entrepreneurs share commonalities like an obsessive work ethic, an ambitious vision, and, at least to start with, an unsatisfactory lifestyle to the individual’s preferences.

As for my idea of what a startup is, well I have a broader definition. I believe that it should be classified as a group of people that are beginning a new venture, regardless of the certainty or uncertainty of what they are doing. The reason I think this is because the term itself is broad and simple, consisting of the words start and up, which do not themselves specify that it has to be an uncertain startup. I do agree, however that if an individual wants to be an entrepreneur making a startup that there must be some level of uncertainty, but I disagree with the notion that every startup needs to be from entrepreneurs.