What Lean Startups Teach Us About How to Start a Business Part 2

Establish a Baseline, Move the Needle, and Pivot

Part 1

In the first part of this tutorial we learned that lean startups first bring a minimum viable product (or MVP) to market, then assiduously capture feedback on how people do and do not utilize it. This approach is all about speed and saving money. It allows the startup to learn faster what does and does not work. And it avoids the risk of spending inordinate amounts of time and capital developing a mature product, only to find a lukewarm reception from the market. Eric Ries, the widest-recognized advocate for lean startups, often argues that the greatest challenge in product development today is not building things inefficiently. The greatest danger is building something very efficiently which nobody wants. To avoid this catastrophe, the philosphy of lean startups is, "Learn quickly what the market likes, dislikes, or wants in the product. Then move rapidly to a new iteration of the product which accommodates these preferences." The life rhythm of a lean startup can be defined as "Build, Measure, Learn, Retool, Measure Again, Learn More, Retool … and so forth."

Establishing a Baseline, Then Moving the Needle

With each new iteration, the goal is to gain greater market penetration and greater market share. This is the sole measure of whether modifications and enhancements are working or not. Thus, lean startups have almost a fanatical preoccupation with gathering customer data and analyzing it. There are three learning milestones in this process.

• The first is to get the minimum viable product to market and establish a baseline for its acceptance.
• Next, based on feedback, you proceed to the second milestone, which is what Ries calls "tuning the engine" and what I described above as "retooling."
• Once the retooled product is on the market, you monitor the metrics to see how much the product revision improves sales and market acceptance when compared to the baseline.

In the spirit of continuous improvement, you keep "tuning the engine," always looking to market and end-user feedback for guidance. The purpose of each retooling is to move the growth needle even higher above the baseline. And you are not only looking for growth. You are also watching the rate of growth to see if it is continuing apace or (hopefully) accelerating from one iteration to the next.

Making a Pivot

This then brings the startup to the third learning milestone, which is described as "persevere or pivot." If growth continues to trend upward at a steady or accelerating pace, the market is telling you to persevere in the direction you are going. But if the growth curve is slowing down and flattening out, the time has come to pivot. Ries borrows this word from basketball, where a player plants a foot, then pivots to quickly change direction while maintaining momentum. The concept of a pivot in lean startups is quite similar. Once the direction of development starts bringing diminishing returns, it's foolish to keep evolving along that same bearing. Instead, a different direction is called for. In essence, a pivot is large-scale change in strategy without abandoning the orchestrating vision. The basketball player driving for the goal does not change the vision of what he wants to achieve by making a pivot. He is merely reaching his goal along a different path. In his "stump speech" Ries describes a pivot as changing direction while staying grounded in what has been learned. He goes on to say that the startup which can reduce the time between pivots increases its odds of success before running out of money. In other words, the entire objective is to learn faster so that you can discover what doesn't work as quickly as possible.

Types of Pivots

How you make a pivot and change direction is the art of lean startup innovation. Ries arranges pivots under a variety of category headings. Without repeating all of them, here are some illustrative examples.

• A zoom-in pivot occurs when you discover that what you initially conceived of as a single feature in your product is in fact so enthusiastically received that it can become your entire product. An example would be a consulting firm which starts off with a variety of offerings, but then discovers overwhelming market demand for one particular segment of their services. There is so much demand, indeed, that they abandon their other consulting specialties to exploit the opportunities in this one arena.
• A zoom-out pivot transpires when a startup discovers that there is not enough demand for their product per se, but that there is heightened demand for a larger offering that includes the product. For instance, take the case of a retired executive who launches a new career as a professional speaker, only to find that the demand for keynote speakers has slowed significantly. This encore entrepreneur therefore adds consulting and coaching services which he leverages off of his keynote speeches, and with this pivot builds a sustainable business model.
• Sometimes you launch a product intended for one customer base, only to discover that it finds acceptance among customers whom you had not anticipated. This then sets the stage for a customer segment pivot, in which you rework your marketing and product features to better serve this unexpected pool of customers. Just north of my home a new restaurant opened, targeting young professionals in neighborhood condos and apartments. While it reached many of them, it drew more heavily from nearby condos catering to retired couples. The owners quickly learned that a customer segment pivot was in order.
• Very commonly a startup solves a felt need in its target community. But the community does not feel the need intensely enough to make the product viable. This calls for repositioning the product in a customer need pivot, which redeploys the product as a solution for a more urgently felt need.. A woman was struggling to make her dog kennel profitable. Then she noticed how many of her clients complained about their dog's unruly behavior. She retooled her business to offer obedience training for dogs and was an instant success.
• A technology pivot transpires when a company either discovers a better technology for delivering its product or service or is forced to change to a new technology because of its broad acceptance. A case in point would be the response which Barnes & Noble made once the iPad phenomenon took root.Barnes & Noble seized that opportunity to create its Nook reader and begin delivering books electronically rather than selling them exclusively in hard copy.

In summary, the lean startup movement has created a methodology which embodies the spirit of a prediction that Arie de Geuss made over 20 years ago. "The ability to learn faster than your competitors may be your only sustainable advantage," he said. Fast learning is the only way to make competent choices in settings of high uncertainty. And that's the very sphere in which lean startups operate. In fact, Ries' definition of a startup is "a human institution designed to deliver a new product or service under conditions of extreme uncertainty." If you would like to know more about the methodology in a lean startup, you might view this YouTube video in which Eric Ries uses a one-hour presentation to explain it. If you are not a "techie" by nature some of his lingo or examples may seem a bit foreign to you. But you can still grasp the essence of his major points.

Part 1