Jim Van Fleet, CTO of OtherScreen, describes the economic model underlying the Lean Startup, and offers examples of applications in a variety of business scenarios, including his own.
Startup which debuted as a New York Times #2 bestseller. While best-selling business books can come and go, I believe very deeply in the message of the Lean Startup, and that’s what I will share with you today. To begin, Eric is not like most best selling authors. He is not a radio or TV personality, televangelist or Harvard MBA. Eric is an entrepreneur, most famously as CTO of IMVU, a product similar to Second Life. I am a startup CTO, so we’re off to a good start.
does a thirty-something entrepreneur with a single great success behind him have when talking about business? The book claims to bridge the gap between managerialism and entrepreneurialism, not exactly the first time that’s been tried. When you need credibility, it’s hard to beat a dead, white economist. Frank Knight wrote a book called Risk, Uncertainty and Profit that sought to differentiate between economic risk and uncertainty. This serves as part of the underpinnings of the Lean Startup, and I’m going to try to explain it in layman’s terms.
distributions. If your business is to produce widgets, and you need four parts to do it, with known failure rates, expected lifetimes, defined maintenance schedules, yielding X% of total output as useful widgets and so forth, you can generate a mathematical model for expected profits from running your business. This is meant to represent managing via facts, or managerialism. Managers tell the consultants, “Fetch me the facts and I will make my decision!” In situations where the business manages economic risk, this manager is wise and can expect reasonable outcomes.
“bring you the facts” about your startup is pretty crazy. The best decision you can hope to make is of unknown quality. In Knight’s terms, these businesses have outcomes that are likewise random, but are governed by a probability function that’s unknown. In short, nobody really knows anything. That’s being a startup. You and your team are operating an environment of maximum uncertainty, discovering constantly what your business really is. If this sounds scary, you are right, it is, but I’ve found that I love it.
in? Software startups are usually fad-driven, so you can find hundreds of thousands of words on what the Lean Startup is really about, but to me, every compelling concept in the Lean Startup universe returns to service the point Knight makes about unknown probabilities. One concept is very easy to explain in terms of this context: the minimum viable product, often called the MVP. The minimum viable product is the smallest amount of work that you can do to test a theory that you have about the operation of your business.
lead to confusion. The other day, I overheard a description of a man who was struggling with health problems within his family. His work was then described as the “minimum viable product” during the period of his illness. The minimum viable product is not about not getting fired. That’s not an accurate characterization of what MVP means. It doesn’t mean short-changing your execution and releasing anyway, either, a common misconception.
are important, the emphasis belongs with viable. The idea behind the MVP is to generate meaningful data for use in forming your business. Data that wasn’t available ahead of time. Data that supports or rejects an assumption you’ve made, or an assertion you wish to prove. What does that mean? It could be a lot of different things! A launch page that collects e-mail could be enough to prove that there is a population potentially interested in your services. A new feature made available to a small portion of your userbase might increase their referral rates. A new homepage that emphasizes your features in a novel way might increase the number of users that signup to try your services. I’m describing these questions in terms of software development, because that’s the world I’m most comfortable with. That doesn’t limit the scope of Lean Startup techniques.
A T E The most important element of the MVP is that it goes to prove one of your two primary hypotheses: the value hypothesis and the growth hypothesis. We’ll deal with the two in turn. Typical MVP’s that target the value hypothesis show that you can do something paying customers want. Not all business models require actual monetary exchange. In the book, Ries highlights a program within a large bank attempting to assemble a team of volunteers to service non- profit requests. I find it fascinating that a project that makes so little sense with a standard financial analysis can be evaluated according to the same framework. In this case, the value generated is via goodwill from the community. Management would want to create more, and more meaningful projects with the same or possibly fewer resources.
B U S I N E S S G E N E R A T E The other important hypothesis about your undertaking is the growth hypothesis. After proving that you can satisfy customer demand, how can you satisfy more of it? How can you grow your market? How can you commit your employees to commit to more non-profit projects, or to get more employees to commit? Value is about worth. Growth is about expansion and scale. This is the core of startup managerialism. If there are more worthy frameworks for understanding how to manage startups or any young enterprise, let them come forward now. The equation for value of a firm used by corporate financiers to determine “book value” for stocks is in terms of cash flow from business operations and growth projections. Huh! (Did you see how those were the same concepts?)
principal of your business is dedicated to proving it makes money. These days, you do hear stories about businesses having other principals. That seems bizarre to me. I find the focus refreshing.
does this mean at OtherScreen? Our value hypothesis is that we can capture one of the information economy’s most valuable resources: attention. And, actually, quite a lot of it. What’s the relationship between using our software and receiving revenue? you might ask. How can you make money on free? This is the challenge that will generate our next clause in our value hypothesis! I’m confident that OtherScreen will be able to choose among many possible additional hypotheses there, ask me after class if you’d like to hear more. It is the concept of progressive learning and meaningful improvement that mark the lean startup. Layer proven hypotheses on top of each other until you’ve demonstrated exactly how you make money. That’s an attractive prospect in today’s uncertain capital markets.
OtherScreen, we want to demonstrate viral growth. As our users have fun with the main event, we expect them to have more fun joining private groups where they can chat with their other sports buddies. If we achieve certain levels of group creation and membership, we will achieve viral growth. Here you see the effects of a recent software change on the direct measurement of the hypothesis. In-game acceptance of invitations has already had a profound effect on our viral growth co-efficients. This may indicate to us that other, similar changes could also have dramatic effects. Or they might not! But if they don’t, we’ll still return to proving that we’re capable of showing viral growth without paying (too much) to acquire customers.
Work Montage is the parent company of Mocksup, which I founded with Adam Howell over two years ago. Work Montage is bootstrapped, and so its costs and profits are still quite small. Adam and Jim as owners are now in the difficult situation of having Adam and Jim the employees be rarely available for principal development. That will make it even more crucial in 2012 to stick to activities that we believe validate our business, particularly our growth hypothesis.
concepts as well, and for good reason. Many times, validating an effort of your hypothesis is easier than you think! Proper conception of an MVP is one of the practices of the Lean Startup where I feel improvement with practice. For example, your pitch is a form of an MVP already. If you can’t prove the concept is attractive to potential teammates, it’s also going to be a hard sell to customers who won’t be lining up at your door on day one. There are seemingly dozens of startups focused on creating landing pages to acquire email addresses. This is an example of a single, not-too- difficult action that can help support almost any value hypothesis. By organizing a team to drive at questions like this over and over again during the course of a weekend, you might be shocked at what you achieve as a result.
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