Eric Ries' presentation on lean startups. From Steve Blank's Customer Development course at Berkeley. Learn more and hear the audio at http://bit.ly/3qsvJ.

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

5. Top Gun dogfight scene

6. Warfare Changes Forever

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