Opinion: Applying the Toyota model to the world of startups

Get early exposure to customer feedback, particularly early adopters

A few years ago in this column, I reviewed Getting to Plan B by John Mullins and Randy Komisar. That book offered entrepreneurs a structured approach to stress-testing the assumptions underlying their business plan. I suggested it was a book that should be added to the reading list of every entrepreneur and venture capitalist.

Eric Ries, The Lean Startup: How Today’s Entrepreneurs Use Continuous Business Innovation to Create Radically Successful Businesses, Crown Business, 2011.

I would now add The Lean Startup to that list. Indeed, the two books have much in common in proposing that entrepreneurs test their key product and business assumptions early and often.

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As anyone who follows startups knows, most fail. We have all seen cases of startups developing elaborate business plans based on untested assumptions and then trying to execute them without looking for early feedback to test their validity. In the end, many have wasted substantial time, money and resources building products that fail to attract customers. The disastrous experience of Webvan remains one of the most egregious and instructive examples of this.

In The Lean Startup, Eric Ries challenges the traditional approach of detailed, well-researched business plans. Rather, drawing inspiration from Toyota’s lean production methodology, he offers a set of practices to help entrepreneurs increase the odds of building a successful startup by creating rapid prototypes designed to reality-test market assumptions and use customer feedback to build things that people want and will pay for as rapidly as possible.

Mr. Ries is co-founder of several startups, including the social media company IMVU, from which several lessons in the book are drawn. More recently, he was an entrepreneur-in-residence at the Harvard Business School.

Other key lessons in the book are drawn from the experiences and mistakes of both well-known and relatively unknown startups, including Facebook, Groupon, SnapTax, Grockit and Zappos.

The book provides a coherent process that should be valuable to entrepreneurs, particularly those in the software and social media spaces. At the core of the lean startup methodology is a way of achieving quick and continuous feedback, called the “build, measure, learn” cycle.

The Ries approach is built on the idea of validated learning in which entrepreneurs run frequent experiments to test each element of their vision. In particular, two key hypotheses need to be tested, using empirical data from real customers: the value hypothesis and the growth hypothesis.

The value hypothesis tests whether a product or service really delivers value to customers, while the growth hypothesis tests the best way to reach and grow the customer base. The riskiest assumptions in the business model should be tested first.

The key to testing these hypotheses is what the author calls the “minimum viable product,” or MPV. The MPV is that version of the product that enables a full turn of the build, measure, learn cycle with a minimum amount of effort and the least amount of development time. The idea is to get early exposure to customer feedback, particularly early adopters to both test their reaction and to generate ideas related to the further development of the product. From the author’s perspective, this approach has far more value for startups than traditional market research methods.

To ensure that this feedback generated is really useful, Mr. Ries argues that startups need to look beyond standard accounting methods and focus on developing and using metrics that are geared to their need for continuous innovation and can help them assess their progress accurately and objectively. He refers to this as “innovation accounting.”

Moreover, he suggests that too often entrepreneurs resort to using vanity metrics (customer traffic, total revenue, number of customers, etc.) to try to make their companies look successful when they should really be focused on metrics that provide real data on customer adoption, retention and usage patterns-metrics to promote validated learning. There is also a very good discussion of the value of cohort analysis and the use of split-test experiments in this area.

Using data generated through this methodology, the company can decide whether to stay the course, fine-tune the model or pivot to a new direction. Most importantly, it will help companies avoid wasting time and resources pursuing the wrong direction.

Highly readable, The Lean Startup is full of useful advice and is a valuable addition to your business bookshelf.

Micheal Kelly is the former dean of the Telfer School of Management and incoming dean of Wilfred Laurier University’s School of Business and Economics.

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