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The Lean Startup


Low Burn by Design not Crisis




     Steve Blank and Eric Ries
Founding IMVU
    Customer Discovery and Validation
!

    – Founded company in April 2004
    – Sat in Steve Blank’s B-school class Fall of
      2004
    quot; Shipped in 6 months

    quot; Charged from Day 1

    quot; No press releases
The Economy

Before
• Cash was readily available
• Follow on financing was readily available


After
• Debt markets are tight
• IPO & M&A window closed
• VC!s deep pessimism


Venture fund returns have been on decline for a decade - no end in
                              sight
State of Startups

• High burn rate
• Swing for the fences
• Full management teams
• Assume customer is known
• Assume features are known
• Assumes growth is by execution




    Traditional startups are fighting yesterday’s war
Top Gun dogfight scene
Warfare Changes Forever
Boyd: Winning is about Agility



                 The OODA Loop

                 • Observe

                 • Orient

                 • Decide

                 • Act
Boyd Redefines the Rules to Win



               • Agility requires a continuous
                 cycle of interactions with the
                 environment
               • But you can’t do it from a desk
Winners are Those Who Can Move
 Faster Than Their Competitors


              • Winning requires constant
                assessment of change and
                ways to mitigate risk

              • Iterating faster than
                competitors yields
                substantial advantage
Facing Reality at Today’s Startup
        There is no 2nd Place


               • Uncertain environment
               • Rapid, unanticipated changes
                 that lead to disorientation
               • Constant threats to any initiative
               • Burn rate (time, fuel, bullets,
                 dollars) limits window of
                 opportunity
Using OODA to Create “Lean Startups”
     And Changing the Startup Rules


                            Customer
                           Development




                              Agile
                             Product
                           Development
Lean Startups
Building a New Wave of Companies in Silicon Valley


                          • Continuous customer
         Customer
                            interaction
        Development
                          • Revenue goals from day one
                          • No scaling until revenue
                          • Assumes customer and
                            features are unknowns
           Agile
                          • Low Burn by Design - Not
          Product
                            Crisis
        Development
IMVU
Founding IMVU

• History:
 - Company founded in April 2004
 - Founders audit Steve Blank's B-school class Fall of 2004
• Tactics:
 - Shipped in 6 months
 - Charged from Day 1
 - No press releases
 - Ship 20 times a day
• Results:
 - Continuous iteration with customers
 - 2007 revenues of $10MM


    • Here's what it looked like to their first venture investors
Customer Discovery & Validation
           Q4 2004

    Product:
•                                         9,000                                                                                             $8,000

     – 3D IM add-on for hanging out       8,000                                                                                             $7,000
       online with friends                7,000
                                                                                                                                            $6,000
         • Piggy back on existing buddy
                                          6,000
           lists and IM programs                                                                                                            $5,000

    Our customers told us:
•                                         5,000
                                                                                                                                            $4,000
     – Avatar customization is the key    4,000
                                                                                                                                            $3,000
       appeal.                            3,000

     – “Add-on” concept is confusing.                                                                                                       $2,000
                                          2,000
       They actually want a separate                                                                                                        $1,000
                                          1,000
       buddy list.
                                             0                                                                                              $0
    So we:
•


                                                                             Feb-05
                                                           Dec-04




                                                                                      Mar-05
                                                                    Jan-05
                                                  Nov-04




                                                                                                        May-05




                                                                                                                                   Aug-05
                                                                                               Apr-05




                                                                                                                          Jul-05
                                                                                                                 Jun-05
     – Ditched the IM add-on idea
Customer Discovery & Validation
           Q1 and Q2 2005

    Product:
•                                                     9,000                                                                                             $8,000

         3D IM service for hanging out with
     –                                                8,000                                                                                             $7,000
         friends and meeting people
                                                      7,000
               Introduced Chat Now feature (instant
           •                                                                                                                                            $6,000
               matching)!
                                                      6,000
    Our customers told us:
•                                                                                                                                                       $5,000
                                                      5,000
         Meeting new friends is as important
     –                                                                                                                                                  $4,000
         as talking with existing friends             4,000
         (50/50)!                                                                                                                                       $3,000
                                                      3,000
         Not enough people on IMVU
     –
                                                                                                                                                        $2,000
         Retention is a problem
     –                                                2,000

    So we:
•                                                                                                                                                       $1,000
                                                      1,000
         Scaled up our advertising budget (to
     –
                                                         0                                                                                              $0
         $40/day)!




                                                                                         Feb-05
                                                                       Dec-04




                                                                                                  Mar-05
                                                                                Jan-05
                                                              Nov-04




                                                                                                                    May-05




                                                                                                                                               Aug-05
                                                                                                           Apr-05




                                                                                                                                      Jul-05
                                                                                                                             Jun-05
         Learned about retention from market
     –
         leaders (Cyworld, Myspace)!
Customer Discovery & Validation
                    Q3 2005
    Product:
•
                                                          9,000                                                                                             $8,000
         3D IM service plus avatar home pages
     –
               Introduced avatar home pages, plus
           •                                              8,000                                                                                             $7,000
               messages, gifts, picture galleries blogs
                                                          7,000
    Our customers are telling us:
•                                                                                                                                                           $6,000

                                                          6,000
         Avatar home pages are highly addictive
     –                                                                                                                                                      $5,000

         2D and 3D complement each other
     –                                                    5,000
                                                                                                                                                            $4,000
         Messages in home pages and realtime
     –                                                    4,000
         interaction complement each other                                                                                                                  $3,000
                                                          3,000
         Want more than two avatars per
     –                                                                                                                                                      $2,000
         window: parties and chat rooms                   2,000

         Fix the bugs; polish
     –                                                                                                                                                      $1,000
                                                          1,000

                                                             0                                                                                              $0




                                                                                             Feb-05
                                                                           Dec-04




                                                                                                      Mar-05
                                                                                    Jan-05
                                                                  Nov-04




                                                                                                                        May-05




                                                                                                                                                   Aug-05
                                                                                                               Apr-05




                                                                                                                                          Jul-05
                                                                                                                                 Jun-05
Lean Startup Principles
Extraordinary Value at Low cost in Little Time


                        • Leverages:
     Customer            - Technology commoditization
    Development          - Agile management practices
                         - Customer Development
                        • Designed to test hypothesis
                          and answer the unknowns

        Agile
       Product
     Development
The Lean Startup
   Agile Product Development



                  • Continuous cycle of
                    Product Development
                   - Product release cycle in
                     hours not years
                   - Tightly coupled with customer
                     development
                   - Minimum feature sets,
   Agile             maximum customer coverage
  Product
Development
What has changed? Technology
Lean Startups Leverage Commoditized Technology


  Licensed Software/              Open Source/
 Proprietary Hardware          Commodity Technology
Product Development a la Microsoft
          Unit of progress: Advance to Next Stage

                        Waterfall




Problem: known                            Solution: known
Product Development at Typical Venture Startup
    Assumes Customers and Markets are Understood


                        Agile (XP)!

   “Product Owner” or
   in-house customer




                                  Solution: unknown
    Problem: known
Product Development at Lean Startup
             Assumes Customers and Markets are Unknown


                       Customer Development Engineering

Customer                                   Scale
                Customer     Customer
Discovery                                Company
                Validation   Creation

                                                   Data, feedback, insights


                  Problem: unknown                 Solution: unknown


            Hypotheses, experiments, insights
The Lean Startup
     Customer Development

                • Continuous cycle of
                  customer interaction
 Customer
                 - Rapid hypothesis testing about
Development
                   market, pricing, customers, …
                 - Extreme low cost, low burn,
                   tight focus
                 - Measurable gates for investors
The Lean Startup
Customer Development Parallels Agile Development

                           Agile Development


       Concept /                     Continuous
                          Agile                    Continuous
      Business Plan                    Test
                       Development                    Ship




                       Customer Development

      Customer                                           Company
                        Customer        Customer
      Discovery                                          Building
                        Validation      Creation
Customer Development
  Turns Market Risk/Product Fit Hypothesis into Facts


        Customer                               Company
                    Customer        Customer
        Discovery                              Building
                    Validation      Creation




• Discovery
 - Test hypotheses I.e. problem and product concept
• Validation
 - Build a repeatable and scalable sales process
• Creation
 - Create end-user demand and fill the sales pipeline
• Building
 - Scale via relentless execution
Lean Startup Advantages
                                          Customer
                                         Development


• Builds low-burn companies by design
 - Low cost market risk testing
                                            Agile
• Organized around learning and            Product
                                         Development
  discovery
• Right model for current conditions



  The next wave of capital efficient startups

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The Lean Startup

  • 1. The Lean Startup Low Burn by Design not Crisis Steve Blank and Eric Ries
  • 2. Founding IMVU Customer Discovery and Validation ! – Founded company in April 2004 – Sat in Steve Blank’s B-school class Fall of 2004 quot; Shipped in 6 months quot; Charged from Day 1 quot; No press releases
  • 3. The Economy Before • Cash was readily available • Follow on financing was readily available After • Debt markets are tight • IPO & M&A window closed • VC!s deep pessimism Venture fund returns have been on decline for a decade - no end in sight
  • 4. State of Startups • High burn rate • Swing for the fences • Full management teams • Assume customer is known • Assume features are known • Assumes growth is by execution Traditional startups are fighting yesterday’s war
  • 7. Boyd: Winning is about Agility The OODA Loop • Observe • Orient • Decide • Act
  • 8. Boyd Redefines the Rules to Win • Agility requires a continuous cycle of interactions with the environment • But you can’t do it from a desk
  • 9. Winners are Those Who Can Move Faster Than Their Competitors • Winning requires constant assessment of change and ways to mitigate risk • Iterating faster than competitors yields substantial advantage
  • 10. Facing Reality at Today’s Startup There is no 2nd Place • Uncertain environment • Rapid, unanticipated changes that lead to disorientation • Constant threats to any initiative • Burn rate (time, fuel, bullets, dollars) limits window of opportunity
  • 11. Using OODA to Create “Lean Startups” And Changing the Startup Rules Customer Development Agile Product Development
  • 12. Lean Startups Building a New Wave of Companies in Silicon Valley • Continuous customer Customer interaction Development • Revenue goals from day one • No scaling until revenue • Assumes customer and features are unknowns Agile • Low Burn by Design - Not Product Crisis Development
  • 13. IMVU
  • 14. Founding IMVU • History: - Company founded in April 2004 - Founders audit Steve Blank's B-school class Fall of 2004 • Tactics: - Shipped in 6 months - Charged from Day 1 - No press releases - Ship 20 times a day • Results: - Continuous iteration with customers - 2007 revenues of $10MM • Here's what it looked like to their first venture investors
  • 15. Customer Discovery & Validation Q4 2004 Product: • 9,000 $8,000 – 3D IM add-on for hanging out 8,000 $7,000 online with friends 7,000 $6,000 • Piggy back on existing buddy 6,000 lists and IM programs $5,000 Our customers told us: • 5,000 $4,000 – Avatar customization is the key 4,000 $3,000 appeal. 3,000 – “Add-on” concept is confusing. $2,000 2,000 They actually want a separate $1,000 1,000 buddy list. 0 $0 So we: • Feb-05 Dec-04 Mar-05 Jan-05 Nov-04 May-05 Aug-05 Apr-05 Jul-05 Jun-05 – Ditched the IM add-on idea
  • 16. Customer Discovery & Validation Q1 and Q2 2005 Product: • 9,000 $8,000 3D IM service for hanging out with – 8,000 $7,000 friends and meeting people 7,000 Introduced Chat Now feature (instant • $6,000 matching)! 6,000 Our customers told us: • $5,000 5,000 Meeting new friends is as important – $4,000 as talking with existing friends 4,000 (50/50)! $3,000 3,000 Not enough people on IMVU – $2,000 Retention is a problem – 2,000 So we: • $1,000 1,000 Scaled up our advertising budget (to – 0 $0 $40/day)! Feb-05 Dec-04 Mar-05 Jan-05 Nov-04 May-05 Aug-05 Apr-05 Jul-05 Jun-05 Learned about retention from market – leaders (Cyworld, Myspace)!
  • 17. Customer Discovery & Validation Q3 2005 Product: • 9,000 $8,000 3D IM service plus avatar home pages – Introduced avatar home pages, plus • 8,000 $7,000 messages, gifts, picture galleries blogs 7,000 Our customers are telling us: • $6,000 6,000 Avatar home pages are highly addictive – $5,000 2D and 3D complement each other – 5,000 $4,000 Messages in home pages and realtime – 4,000 interaction complement each other $3,000 3,000 Want more than two avatars per – $2,000 window: parties and chat rooms 2,000 Fix the bugs; polish – $1,000 1,000 0 $0 Feb-05 Dec-04 Mar-05 Jan-05 Nov-04 May-05 Aug-05 Apr-05 Jul-05 Jun-05
  • 18. Lean Startup Principles Extraordinary Value at Low cost in Little Time • Leverages: Customer - Technology commoditization Development - Agile management practices - Customer Development • Designed to test hypothesis and answer the unknowns Agile Product Development
  • 19. The Lean Startup Agile Product Development • Continuous cycle of Product Development - Product release cycle in hours not years - Tightly coupled with customer development - Minimum feature sets, Agile maximum customer coverage Product Development
  • 20. What has changed? Technology Lean Startups Leverage Commoditized Technology Licensed Software/ Open Source/ Proprietary Hardware Commodity Technology
  • 21. Product Development a la Microsoft Unit of progress: Advance to Next Stage Waterfall Problem: known Solution: known
  • 22. Product Development at Typical Venture Startup Assumes Customers and Markets are Understood Agile (XP)! “Product Owner” or in-house customer Solution: unknown Problem: known
  • 23. Product Development at Lean Startup Assumes Customers and Markets are Unknown Customer Development Engineering Customer Scale Customer Customer Discovery Company Validation Creation Data, feedback, insights Problem: unknown Solution: unknown Hypotheses, experiments, insights
  • 24. The Lean Startup Customer Development • Continuous cycle of customer interaction Customer - Rapid hypothesis testing about Development market, pricing, customers, … - Extreme low cost, low burn, tight focus - Measurable gates for investors
  • 25. The Lean Startup Customer Development Parallels Agile Development Agile Development Concept / Continuous Agile Continuous Business Plan Test Development Ship Customer Development Customer Company Customer Customer Discovery Building Validation Creation
  • 26. Customer Development Turns Market Risk/Product Fit Hypothesis into Facts Customer Company Customer Customer Discovery Building Validation Creation • Discovery - Test hypotheses I.e. problem and product concept • Validation - Build a repeatable and scalable sales process • Creation - Create end-user demand and fill the sales pipeline • Building - Scale via relentless execution
  • 27. Lean Startup Advantages Customer Development • Builds low-burn companies by design - Low cost market risk testing Agile • Organized around learning and Product Development discovery • Right model for current conditions The next wave of capital efficient startups