Today, we're going to talk about the lean approach to startups. Now, the lean approach is just one of many methods that have been developed over the years for thinking about how as a startup you can act quickly and learn as you act. So as with the lean approach because it's very common right now to discuss that in Silicon Valley and it's circles. But this is just one of many potential approaches that you could use in order to make sure that you're experimenting and learning even as you're biased towards action. So this is some results from some data that I gathered of survival time of startups. So on the y-axis, you can see the percentage of startup surviving over a period of time, on the x-axis the amount of time that has elapsed. So these are survival curves essentially. This is the survival curves of working startups that were founded by people who went to Wharton and then divided into two groups; people who changed their business plan radically, which is the red line, versus people who kept the business plan basically the same as they originally launched their business idea, the blue line. What you can see here is the lines look pretty similar. In almost any other field when people change their business radically, when a large company tries to change their business radically, their failure rate increases. But startups somehow seem to be able to change a lot without failing and the secret to that is something like the lean method. So let me show you how the lean method works as described by Steve Blank and Eric Ries. Again, I'll show you they had some thoughts about how you can adapt this method if you don't want to take all of the parts of lean startups and use it. So this is Steve Blank's original slide. Steve Blank is an adjunct professor at Stanford, who has started seven different companies and he was a business person at these companies. He realized that there was a standard model of product development that described how products were created in theory. On the top, you can see the step-wise approach to marketing a product. You come with a concept, you go through product development step, you do some Alpha and Beta testing, and then finally you launched the product. At the bottom, you can see the waterfall or BDUF, big design up front, approach to developing a product. You start with some requirements gathering, you go through a design phase, you start to put all that together, and then you go through some shipping. You'll notice that line in the middle in this waterfall approach, that's when the concept for the product freezes. Now, if we think about this way the products are created, you'll realize there's a few problems for you as a startup company if you're considering using these methods. One is, you spend all of your money at the very beginning of this process, but you make your money at the end. Most startups don't have a lot of money, so wouldn't it be great to have a method of making more money early on before you actually get to the end of the project. The second problem here is that you'll notice that you only gathering information of consumers at the beginning, but you don't know a lot when you're creating something new about what your customers want the market may be changing. So if you locked down your idea early on, you don't learn enough from customers. So both of these things mean that, it would be great to have another method to think about how we develop products and services, and that's what the lean method is. So let's take that first example of how a product is introduced to the market and take Steve Blank's insight which is that, all of these successful startups he worked for didn't follow that initial project introduction model, they followed a variation he called customer development, which has four steps: customer discovery, validation, customer creation, and then finally, company building. So let's walk through those. The customer discovery method is really one of the keys to this idea of lean startups. It means that, instead of going out there and telling customers what they want, you're showing customers products and you're listening to them. This has to be done by the founders outside of their building. You have to go out and actually talk to people. Talk to as many people as you can, show them your product and listen, hear from them about what they like and what they don't like. Test your hypotheses and assumptions which is something we'll be talking about in a future of course and thinking about continuously learning as you go. What are you looking for when you do this customer discovery? You're looking to validate your customers, you're looking to achieve product-market fit. What's product-market fit? Two things define product market fit. The first is that you will demonstrated demand from early adopters in your early market. That demonstrated demand usually means, customers are willing to spend money on your product and that those customers represent some larger market that there's potentially interests from. Also, you want to find that customers are passionate about your solution. Why do you need passionate customers? Well, you want these customers to act as references for other potential customers again in the future, but also, because your startup, you won't necessarily be able to offer all of the services and solutions, and backup that customers might otherwise be used to. So if there is this passion, then customers will be willing to go with you even if your product doesn't solve all of their needs, because it solves the needs that are most critical to them. If you don't have customers that are passionate, if you don't have customers that demonstrate demand, if those customers don't represent a larger potential market for you, you don't have product market fit, and you go back to the first stage. That going back to the first stage is called the pivot. So if you've heard the word pivot, this is what pivoting is. It means you're changing direction based on feedback that you're hearing outside of the building, that you're being fast, agile, and opportunistic and that you are almost celebrating failure. When you're learning that you've done something wrong, you're going to go back and change it. You might have to go through this loop many times to be successful. Only when your product market fit, do you move on to the next phase, the customer creation phase. Customer creation is simply the phase of marketing. It's where you start to generate new customers and make customers aware of your product by selling your product through marketing, advertising, and other methods. You only do this after your product market fit, because after your product market fit, you actually know the reasons why it's time for you to start scaling your product. Before that, you're just guessing. After your product market fit, you know why customers are buying your product, you know what customers you're aiming for and then, you can start to scale up your company, and only after all of that, in the lean approach, do you start building your company. So only after your product fit, only if you're marketing, only if sustainable, ongoing business idea, do you start to build your company out. Now, if you've listened to any of our prior discussions about building your company, you'll know that at Wharton, we actually don't recommend company building goes last. You actually need to be building your company simultaneously as you find product market fit and launch your idea, which is hard because you're doing many things at once. But we've learned that companies that don't pay serious attention to building company culture, hiring the right people, building out their team, actually run into trouble later on. So you want to make sure that you are building your company as you go, but it's usually lean method that comes at the end. So Steve Blank had a student who was also successful entrepreneur called Eric Ries. Eric Ries had a realization also he said, "Hey look, what's happening when we build products now is, we're rarely using this waterfall based approach, instead we follow approach called Agile." In Agile development, rather than just to come with a design, and then going through a huge effort, and releasing a product at the end, in Agile methods, we're constantly releasing products. So you're always going through these series of short sprints, and in those sprints what you're doing is, coming up with customer requirements, adapting a product, getting feedback from a live version of the product, and then going back out and adapting it further. A continuous cycle of updating and changing products. So this has been happening in software for a while, but it's happening increasingly in other areas like hardware development, services development, where you're constantly modifying your product. So if you take this idea of agile development and you take this idea of customer development together, that is lean startup. So lean startups is about constantly altering your product using agile methods, and altering your market that you're going after using these lean methods, customer validation methods until you find a mash, until we find product market fit between your customers on one end and your product on the other. This is the lean startup approach that has helped change the way startup development has happened. So there's some positives and negatives to this approach as well. On one hand, any flexible approach is good, but it doesn't need to be lean. If you want to use another approach that encouraged experimentation that's great also. So don't necessarily fall for the idea that the lean approach is the right one. Discovery driven planning, which is something I discussed in the first module of this class is another method that you can use to do lean experimentation without adopting the lean approach overall. Also, there are some industry areas where you can't use lean approaches. If you're developing a new drug or a new car, lean is not necessarily great where you need to do a lot of optimization testing up front, big design up front or waterfall approaches still work best. Also, Lean can be hard, lean is exhausting. You're constantly out there talking to customers, you're constantly adopting your product, you're not giving yourself a lot of time to do other things. So that means that building a startup is very hard using the lean approach, you only wanted to as lean as you need to be. So if we don't have to adopt a lean overall, what can we do? Well, here's a idiosyncratic model adopted by Wharton from the work of Eric Ries and Tom Eisenmann, and others. In this approach, we're going to experimentation, but without adopting the full lean approach. So we start off in this approach with a business idea which is what you've come up with in module one, and now you're going to create a series of hypotheses testing assumptions which we'll discuss in the upcoming module. Uses to generate minimal viable products which we'll discuss in the next module, and then you do a series of tests to find out whether or not you've found product market fit or going to pivot. So in the future modules, we'll discuss exactly these issues.