Lean startup refresher

Tonight:
Lean Startup Refresher
Bernhard Kappe (Pathfinder)
6:00 Pizza and Beer
6:45 Introductions
7:00 Lean Startup Refresher
8:00 Questions

Upcoming Meetups:
April 18th – TBD
May 16th – Mark Achler (Redbox)
Members:
3101 June 20th – Chuck Templeton
(OpenTable and Impact Engine)
chicagoleanstartup.com ©2013 Pathfinder Software

NOTE: Slides borrowed liberally from Steve Blank’s Lean Launchpad. Thanks,
Steve!

©2013 Pathfinder Software

Lean Startup Refresher
©2013 Pathfinder Software 3

Agenda
1. What we used to believe / What we now know
2. Business Models and Customer Development
3. Examples
4. Questions?


Part 1

What We Used to Believe

What We Now Know


Startups are a Smaller Version
of a Large Company


What We Now Know


Startups Search
Companies Execute



Strategy


Start With an Operating Plan
and Financial Model


All I Need to Do is Execute the Plan


All I Need to Do is Make the Forecast


What We Now Know

Strategy


Plan Meets
First Contact
With
Customers


Previous
5-Year Plans


No Business Plan survives first
contact with customers


Planning comes before the plan


Business Models


Search Execution

Business Model Operating Plan +
Strategy
Hypotheses Financial Model



Process


We Built Startups by
Managing Processes
Product Management

+

Waterfall Engineering


Product Introduction Model

Product Alpha/Beta Launch/
Concept Dev. Test 1st Ship


Tradition – Hire Marketing

Product Alpha/Beta Launch/
Concept Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand
Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”


Tradition – Hire Sales

Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship


• Hire Sales VP • Build Sales
Sales Organization
• Hire 1st Sales Staff


Tradition – Hire Bus Development

Concept Product Alpha/Beta Launch/
Dev. Test 1st Ship


• Hire Sales VP • Build Sales Channel /
Sales • Pick distribution Distribution
Channel

Business • Hire First • Do deals
Development Bus Dev


Tradition – Hire Engineering

Concept Product Alpha/Beta Launch/
Dev. Test 1st Ship

- Create - “Branding”
Positioning
• Hire Sales VP • Build Sales Channel /
Sales • Pick distribution Distribution
Channel

Business • Hire First • Do deals for FCS
Development Bus Dev

Engineering • Write MRD • Q/A •Tech Pubs

• Waterfall


Product Introduction Model

Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship


Waterfall / Product Management
Execution on Two “Knowns”

Requirements
Product Features: known
Design

Implementation

Verification

Customer Problem: known Maintenance

Source: Eric Ries ©2013 Pathfinder Software
http://startuplessonslearned.blogspot.com

More startups fail from
a lack of customers than from a
failure of product development


Customer Development


Search Execution

Strategy Business Model
Operating Plan +
Hypotheses
Financial Model

Process Customer & Product Management
& Waterfall Development
Agile Development



Organization


Hire and Build a
Functional Organization


What We Now Know

Organization


Founders run a
Customer Development Team

No sales, marketing and business
development


Search Execution

Operating Plan +
Hypotheses
Financial Model

Customer Development, Product Management
Process
Agile Development Agile or Waterfall Development

Customer Functional Organization
Organization
Development Team, by Department
Founder-driven


Putting Search first is a
radical change

It’s not just one more methodology



Education


Entrepreneurial Education was about
execution


What We Now Know

Education


Entrepreneurial Education begins with
the Search for a business model


Search Execution
Operating Plan +
Hypotheses
Financial Model

Process Customer Development, Product Management

Organization Customer Development Functional Organization
Team, Founder-driven by Department

Education Business Model Organizational Behavior, HR
Design, Customer Mgmt, Accounting, Modeling,
Development, Startup team Strategy, Operations,
Leadership, Marketing,
building, Entrepreneurial
Manufacturing
Finance, Agile Development,
Customer Funnel:
Get/Keep/Grow Market



Instructional Strategies


Cases and a Business Plan were good
teaching tools


What We Now Know

Instructional Strategies


Experiential Immersion

~100 GOOTB connections


Business Model Patterns
Replace Cases

Nespresso
club
production
Nespresso
machines

Nespresso
pods
distribution
channels Nespresso
.com

production
coffee
facilites

B2C 1 x machine
distribution sales
57

Search Execution

Operating Plan +
Hypotheses
Financial Model

Process Customer Development, Product Management

Organization Customer Development Functional Organization
Team, Founder-driven by Department

Education Business Model Design, Organizational Behavior, HR
Customer Development, Mgmt, Accounting, Modeling,
Startup team building, Strategy, Operations, Leadersh
Entrepreneurial Finance, Agile ip, Marketing, Manufacturing
Development, Marketing

Instructional Experiential, constructivist, learn Case, Lecture, Small Group,
Strategies er-centered, Mentorship
inquiry-based


Get Out of the Building
Join the 14-week Lean Startup program designed to get
your company on the path to success
• Lean Startup Classes
• Great Mentors
• Essential Startup Tools
• $75,000 Cash and Prizes
June 17th: Entry Deadline | June 29th: Bootcamp
October 3rd: Finalists Pitch

http://chicagoleanchallenge.com


Part 2

Business Models and



What’s A Company?


What’s A Company?

A business organization which sells a product or service in exchange for
revenue and profit


What’s A Startup?


A temporary organization
designed to search
for a repeatable and scalable business model


A temporary organization
designed to search
for a repeatable and scalable
business model
A Startup aims to become a
company


How Are Companies Organized?


How Are Companies Organized?

Companies are organized around Business Models


What’s a Business Model?


Value Proposition

What Are You Building and For Who?


Customer Segments

Who Are They?

Why Would They Buy?


Channels

How does your Product
Get to Customers?


Customer Relationships

How do you Get, Keep and Grow Customers?


Revenue Streams
How do you Make Money?


Key Resources
What are your most important Assets?


Key Partners

Who are your Partners and Suppliers?


Key Activities

What’s Most Important for the Business?


Cost Structure

What are the Costs and Expenses


But,
Realize They’re Hypotheses


9 Guesses

Guess
Guess Guess
Guess

Guess
Guess Guess

Guess Guess


Test the Problem, Then the Solution



The Minimum Viable Product



The Pivot



Details


Customer Development is
how you search for the model


How to Build A Startup

Idea
Business Model
Size Opportunity



Business Size of the Customer Customer
Idea Model(s) Opportunity Discovery Validation



Size of the
Business Size of the
Business Customer Customer
Idea Opportunity
Model(s) Opportunity
Model(s) Discovery Validation

Theory Practice



Size of the
Idea Opportunity



Size of the
Idea Opportunity

• First test the problem
• Next test the solution


Part 3
Does this really work?

12 Weeks From an Idea to a Business


CONSUMER OUR
PAIN POINTS: SOLUTION:
Lack of
UNIQUE
Centralized
VARIETY Collection

Low ACCESS to COMMUNITY
Independent of Independent
Design Designers

Low AFFORDABLE
VALUE Pieces


DESIGNER OUR
PAIN POINTS: SOLUTION:
Manage
Lack of BUSINESS
BUSINESS
SKILLS OPERATIONS

NETWORKING Online
in a fragmented COMMUNITY
community

Regular VOTING &
FEEDBACK COMMENT


LOW-FIDELITY
MVP

HIGH-FIDELITY
MVP


physical
LEAN PRODUCT DEVELOPMENT
1 Generate idea
Discovery

2 Create renderings

3 Obtain customer validation Iterate
4 Identify product value

5 Build CAD drawings
Development

6 Value engineer design Iterate
7 Select manufacturing partners

8 Evaluate manufacturing processes

9 Source materials
Execution

10 Optimize packaging
11 Select delivery methods
12 Develop overall fulfillment strategy

INDUSTRY EXPERTS
+
CRAIGSLIST
+
CUSTOMER INTERVIEWS

= INITIAL PRICE POINT

70 Manufacturers Contacted

35 Responded and Bid

4 Offered to Partner

1
Selected

OUR FIRST
PRODUCT

49%
COST
REDUCTION

10 DAYS OF OFFLINE SALES…

$3,200

3 MONTHS
AGO

Idea Design
Community

Network of Physical
Manufacturers Product

Paying
Active Website
TODAY
Customers


Menu Expenses


SEM Email

Not a dire problem
Better Closer

Bad Good
COMPANY
Lots of competition

Only 1 signup

Getting a fair price


PIVOT


Expenses Expenses Expenses


Top problem
Better Closer

Bad Good
COMPANY
Manual solution

12 signups

They still need to do negotiations


ITERATE


Restaurants love it
Better Closer

Bad Good
COMPANY
Vendors hesitant

No signups

Quote restaurants specifically


Requirements


Restaurants like it
Better Closer

Bad Good
COMPANY
Vendors like it

Both willing to pay


Concierge MVP
Electronic interfaces for
customers
Manual processes behind
the scenes
Test hypotheses fast
without investing in
development
Also known as
“flintstoning”


Lean Startup
Data Driven Process to Find a Scalable Business
Model
Reduce Risk Through Rapid Hypothesis Testing
Get Out of the Building (Genchi Genbutsu)
Eliminate Waste through Minimal Experiments
(Build-Measure-Learn Loops)
Growing Body of Knowledge, Lots of
Techniques


Build your next great product
http://pathfindersoftware.com

T: 877.548.7248 F: 312.803.1941

info@pathf.com


But can we use it in our enterprise?


Wherever There’s Extreme Uncertainty


Uncertainty in Your Product Portfolio
Existing New

Share of Wallet
New Product
Development New
Rev/Customer
Products

High Uncertainty

Low Uncertainty
New Customers
Loyalty
New Customer Existing
Churn LTV
Revenue

Customers

Are any enterprises using Lean Startup?


Who’s Applying Lean Innovation?


Protect the Startup from the Enterprise …
Enterprise Startup
Execute Search

Financial Accounting Innovation Accounting

Short Term Results Long Term Results - Maybe

Risk Intolerant – Failure is not Risk Tolerant – Fail Early and
Tolerated Often


… and the Enterprise from the Startup!
Enterprise Startup
Valuable Brand Must Be Brand? What Brand?
Preserved!


Startups are high risk, high reward.

So don’t put all your eggs in one basket!


Portfolio Management
Example

$1MM total portfolio

$300K for initial funding
($75K/quarter)

If an EIR costs $100K, you could
fund 3 new projects/quarter.

This ratio would be adjusted
based on failure rate.


Lean Innovation Stages
Stage Activities
Brainstorming, Business Model
Generation, Hypotheses

Problem Interviews, Landing Pages

Solution Interviews, Wireframing, Proto
typing, MVP, Channel Testing, First Sales

Improve product - make it indispensable

Validate UVP, Full User Lifecycle Funnel
(AAARR), test channels, messaging,
scaling
Test pricing plans, optimize/reduce customer
acquisition costs, increase LTV, improve NPS

Scale sales and marketing, build
organization


Validated Customer & Problem
Goal: To have a clear understanding of your target
market and what problem that you solve for them
Metrics Exit Criteria
• Total # of customer interviews • Have validated customer archetypes
• Weekly # of customer interviews • Can depict a day in the life of a
(trend graph) customer
• # validated hypotheses • Have organizational and customer
• # invalidated hypotheses influence maps
• Understand how customers solve
this problem today
• Are solving a “must have” problem


Problem/Solution Fit
Goal: To have a clear understanding of the minimum
solution to your target customer’s problem
• Total # of customer interviews • Identified the demographics of an early
adopter
• Weekly # of customer interviews (trend
graph) • Defined the minimum features to solve this
problem
• # validated hypotheses
• Understand the value the product provides
• # invalidated hypotheses
the customer
• Understand the price a customer is willing
to pay
• Back of the napkin financial model looks
promising
• For indirect sales, show each channel
partner’s business model


10 Customers
Goal: To have 10 engaged, paying customers
Metrics – each project will be Exit Criteria
different
• Identified what an engaged
• # of engaged customers customer means
• Funnel Metrics (example) • Determined the actions of an
• Acquisition engaged customer
• Unique visitors • 10 engaged, paying customers
• Time on site
• Activation
• Average # of visits
• Average conversion
time
• Conversion by channel
• Engagement Metrics


100 Customers
Goal: To have 100 engaged, paying customers

All of the metrics for 10 • Identified best channels
Customers plus: for customer acquisition
• Cohort analysis for churn • Recognize the highest
and engagement events risks for the project and
what to do to mitigate
• Customer acquisition them
cost & cycle time
• 100 engaged, paying
• Lifetime value customers
• Referral rate


1,000 Customers
Goal: To have 1,000 engaged, paying customers
All of the metrics for 100 Customers • Identified best channels for
plus: customer acquisition
• P&L • Recognize the highest risks for
the project and what to do to
• Breakeven projection mitigate them
• Time to recover CAC • The Business Canvas is
completely validated
• Net promoter score (quarterly)
• The product has a repeatable,
• Product issue rate scalable sales and marketing
model
• 1,000 engaged, paying
customers


Transfer to Execution

Products that have 1,000 engaged, paying
customers are transferred to Execution


Lean Innovation Stages
Stage Risk Cost
$
*******
****** $$

***** $$$

**** $$$$

*** $$$$$

** $$$$$$

* $$$$$$$


The Four Ps of Lean Portfolio Management
Pivot - change hypotheses, go back and
validate
Persevere - keep optimizing, stay in stage
Punt - Kill the project
Promote - Move up a stage/investment level


Managing the Funnel with the 4 Ps
Pivot Persevere Promote Punt

Projects Stage
100

50

25

12

8

6

3


Portfolio Management
Goals/Metrics
Goals - Get projects to move from idea to
handoff as quickly and inexpensively
as possible
- When they fail, fail fast

Metrics - Ultimately, IRR
 But that takes 3-5
years
- Average throughout by
stage and overall
 Use cohort
analysis for this
- Mean time to failure
- Mean cost of failure


Process Roles


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