A lean startup uses innovation accounting to properly measure the effect of design changes on customers. A startup can fail if it is measuring the wrong things. The chapter "Measure" is about strategies we can use to make sure we are measuring the right things.

We discussed the concept of a Minimum Viable Product (MVP) in the last blog ("Test") of this blog series on Eric Reis seminal book The Lean Startup (2011). One property of an MVP that I didn't discuss was the use of an MVP to gather initial baseline measurements of the Key Performance Indicators (KPI). When designing your MVP, keep in mind that one important role that it can serve is to kick off the process of measuring baselines for key performance indicators like the number of registrations, number of downloads, number of customer logins, number of payments, and so on (sales funnel behaviors). Once you gather this baseline data for your key performance indicators, then you can verify whether any future design changes you make actually have a significant effect on the levels of these key performance indicators.

The term Innovation Accounting refers to the repetitive 3 step process of gathering baseline measurements, making a design change intended to improve KPIs, and then using these measurements to help you decide whether to pivot or persevere in your present course. The more times you can successfully complete this cycle, the more actual value-adding innovation is happening.

Lots of startups measure the performance of their business but you can still fail if you are measuring vanity metrics rather than actionable metrics. Vanity metrics are numbers that portray the startup in the best possible light but which don't actually give us much insight into what is working or not. These graphs often look like increasing sales graphs measuring gross numbers of users registering or performing some other desirable action on a website. While those numbers look good, it may be masking problems with other more critical metrics like conversions and sales. Ultimately the problem with a vanity metric is that it is not fine grained enough to inform us about what is working and what is not working. If we want to figure out what is working or not, then we need to apply scientific/statistical techniques to the design process.

If we made the effort to measure baseline performance with our MVP we are in a position to conduct A/B testing on some feature to see if it affects our baseline numbers or not. A/B testing involves presenting the potential customer with two versions of the product with one major factor made to differ across the two versions. If we find that version A delivers more sales than version B, and that A delivers more sales than our previous baseline sales, then we can start to develop a causal understanding of what factors are important to the success of our startup and which ones are not.

Eric unashamedly uses the term "cause-effect inferences" (p. 135) to describe the goal of measurement in the lean startup. He believes that A/B Testing and Cohort Analysis are both readily available techniques startups can use to achieve such understanding. He provides a detailed case study of how the educational startup Grockit applied A/B testing to figure out what was working and what was not working on their learning platform. They believed that peer learning was an underutilized aspect of learning and developed lots of platform features to support it but eventually realized the new features weren't producing improvements in their KPIs. This lead to the realization that learners also want a solo mode for learning which resulted in pivot in their design approach to more fully support both peer-based AND solo modes of learning.

I've discussed the book Getting to Plan B as an important influence on Eric's thinking. Chapter 2 of Plan B, Guiding Your Flight Progress: The Power of Dashboards, offers more useful ideas and techniques around measuring what matters. Plan B advises using Dashboards what list out what leaps of faith you are testing, how they are translated into hypothesis, what metrics you'll use to decide if the leap of faith is true or not, what your actual measurements are, and what insights and responses are appropriate given the results. Here is a simple dashboard for a lemonade stand which illustrates the basic ideas and format/layout they advocate.

What Eric did was add many useful details about the need for baselines, MVPs, innovation accounting, split testing and cohort analysis to this framework. These techniques help the lean startup more reliably find a value proposition and business model that works.

I'll conclude this blog by asking you to think about whether these ideas can be applied to developing new songs? Should a musician begin by develop a Minimal Viable Song that they expose to audiences to get baseline feedback? What key performance indicators might they measure? What variations might they experiment with to see if a change makes the song better (e.g., same lyric but different melodic delivery)? Could they achieve a cause-effect understanding of what elements of the song are contributing to the success of the song? What vanity metrics might mislead them about the success of their song?

This weekend I will be going to a Seedy Saturday event where I will invest in some veggie seeds to plant out this year. It is my plan to try to get an earlier start on the growing season this year by transplanting veggies into a cold frame I started building. I got to this stage before winter fully set in.

The cold frame sits on the site of a previous failed attempt to build a cold frame using hay bales in an 8 foot by 4 foot layout. I decided to build a more traditional cold frame this time. I dumped alot of plum seeds here after I processed them to make 5 gallons of plum wine and 5 gallons of plum port (see the reddish dots in the soil). One option would be to see if I can get plum seedlings to start growing in the cold frame and, if any of them take, plant them out to the farm this summer and give some away. I'm quite impressed with the productivity I got from 1 plum tree (10 gallons of drinkable wine) and the natural health and vigor of the tree (left to grow on its own) so I am interested in planting out plum seeds that come from this plum mother tree. I also started a more formal experiment on the farm where I planted 30 plum tree seeds harvested late season from under the plum mother tree. I hilled two rows of soil, made a trench in the middle with my hand, planted the seeds roughly equidistant from each other, then put soil back over the seed. When you are growing trees from seeds in cold-temperate climates, your tree seed planting ideally takes place in the late fall so the seeds cold stratify properly.

On the topic of planting seeds, Urban Market Gardener, Curtis Stone, has a new video on using the Jang Seeder to plant out a bed of radishes. That seeder looks pretty impressive as is Curtis' technique in seeding out a bed.

Seed investors might want to look into a new type of grain seed called Kernza that could be coming to a town near you soon. Check out the Land Institute Vision for perennial agriculture. The Kernza seed is in the initial stages of commercialization.

Maybe not what you were expecting under title of seed investment but the financial use of the term "seed" is a metaphor for the functions and roles of actual seeds.

In Lean Thinking the notion of quality is often used to define the type of product an established organization is trying to deliver to the customer. It doesn't work so well for an innovative startup that doesn't yet know what quality is or exactly who their customers are. In such cases, you have to be less concerned about quality and more concerned about learning. Startup products and services are designed to maximize learning, not quality.

That is the main idea in the chapter Test in Eric Reis' seminal book The Lean Startup (2011). Here he advocates developing low cost facsimiles of the product and/or service you envision that the customer will want or agree to use. A mental roadblock we might encounter is that the facsimile is too cheap in appearance and quality or too much of a kludge to want to expose a customer to it. We have to resist this urge so that we can test the assumptions, or leaps of faith, that your startup vision implies.

It is in this chapter that Eric discusses the idea of developing a Minimum Viable Product (MVP) as a means of testing your core value proposition and to acquire useful customer feedback. Think up the simplest version of your product or service that might work to test your idea and gather user/customer feedback. Don't let the notion of "quality" hinder you in this effort because you goal is not to deliver a quality product, it is to try to test your main leaps of faith as early as you can with users/customer so you can maximize learning.

In the case of web-based startups, developing a minimum viable product is often easier to do because you can create a demo that offers the minimum number of features that solves the customer problem and release that to a potential user/customer for their feedback. You can then quickly iterate on that demo adding new features based on customer feedback and your vision. When setting up a bricks and mortar business creating a minimum viable product is more difficult but possible. In farming, before you scale up to being a market gardener, you might create a smaller version of your garden that replicates essential elements of your growing system and the types of plants you intend to grow. You might even take the produce from that garden and agree to supply a neighbor or two with a veggie box over a period of time. Each growing season offers an opportunity to test your growing capacity and value proposition and you might learn that you cannot reliably grow certain vegetables, that you need to plant more of this or less of that, that some piece of equipment might make your life alot easier, that your initial customers are asking for more of this and less of that, etc... Only after you have verified that you have a viable and potentially scalable market gardening business model should you start to invest in alot of the equipment, land, seeds, fertility and labor that would be required to be a commercial market gardener. This is the type of progression that Eric is advocating in the Test chapter - verify then scale.

It takes creativity to create the simplest and smallest version of a product or service that tests your value proposition. E.F. Shumacher observed that "any intelligent fool can make things bigger, and more complex. It takes a touch of genius - and a lot of courage to move in the opposite direction". Some of the most important work a startup will ever do will be done early on at a small scale, searching for, refining, and verifying the business model that you will scale with.

After you read the "Test" chapter, two books that you might want to browse to dig deeper on this topic are:

• Value Proposition Design (2015) by Alexander Osterwalder, Yves Pigneur, Patricia Papadakos, Gregory Bernarda, and Alan Smith.
• The Startup Owner's Manual: The Step-By-Step Guide for Building a Great Company (2012) by Steven Blank and Bob Dorf.

Value Proposition Design is worth checking out because of the authors involved (check out Alexander Osterwalder's blogging) and because it uses a unique Info Graphics presentation format to express concepts. It offers visual tools and leap testing strategies you might want to use in the early stages of validating your startup vision.

The Startup Owner's Manual is also worth checking out because of the authors involved and the useful startup ideas and techniques discussed. Entrepreneur, educator and author Steve Blank invested in Eric's successful startup company IMVU on the condition that the co-founders attend his Stanford startup class where he applied Steve's ideas about Customer Development to his own company and to the book the Lean Startup. This book is a good resource for learning about customer development and many other ideas that a startup might want to be familiar with in the early stages of their venture.

It is important to recognize that what lean thinking looks like can vary quite significantly depending on context. In the case of early stage startups, lean thinking requires that a higher priority be assigned to learning than quality during the "search" phase of the business (but not the "execution" phase where quality becomes more important). What is produced by the startup in the early stages are products and/or services that are cheap, easy to assemble, and which can be used to test some important aspect of the business model. Startups that are too focused on launching a high quality product may end up releasing a high quality dud into the market place. If you wait to long to engage in the Build-Test-Learn feedback loop, you can end up building something of high quality that no one wants. That is the fatal danger a startup might avoid by engaging in early testing of assumptions via minimal viable products and customer validation techniques. In the early stages of a startup concerns about product or service quality have to take a back seat to concerns about learning. You need to setup a build-test-learn feedback loop as soon as you can to maximize validated learning.

I'll conclude this blog with the observation that Lean Thinking is often associated with the notion of quality but that quality can be sacrificed in certain contexts such as the early stages of releasing your product or service so that you can maximize learning. Ian Flemming in his book Lean Logic (2016) toys with the notion of sacrificing efficiency under certain circumstances. He believes that a lean economy should allow for and encourage a certain amount of slack so that other values beyond minimum prices/maximum productivity are operative. Creativity often occurs when a certain amount of slack time is given to employees to play around with ideas. Just as we need to resist the urge to maximize quality early on a startup, perhaps we should also resist the urge to maximize efficiency because learning and creativity are not necessarily or prototypically efficient activities. In addition to not worrying about quality as much, perhaps we also need to slack off a bit so that we are in the proper frame of mind to begin testing our business model. I don't think Eric would necessarily agree with me that a lean startup should be slack as the lean startup seems to be about being hyper efficient at honing in on a validated business model. Can that be accomplished, however, without introducing the ping pong tables, recreational outings, flex time and other elements of slack required to ensure a certain level of creativity happens?

This is the sixth blog in my anticipated 13 blog series dedicated to each chapter of Eric Ries' seminal book The Lean Startup (2011).

The fifth chapter is titled "Leap". It is the first of four chapters in Part Two of the book (the "Steer" chapters).

To understand the importance of the "Leap" concept we need to downplay one immediate association you might have; namely, the idea that you have to screw up your courage and launch your business. The "Leap" chapter is not a motivational chapter on the courage required to be an entrepreneur. Rather "Leap" is about identifying the "Leap of Faith" assumptions that are inherent in starting any innovative business. You are betting that people are going to respond positively to your value proposition, that they will pay you for your value proposition, that the value they are willing to pay for it is more than sufficient to justify the effort to deliver it. As a startup you don't know if the answers to any of these questions are true.

The concept of "Leap" is not about "just doing it" and seeing what happens. Rather, you have to strategically figure out where you should attempt to leap to first. In my blog on the excellent book Getting to Plan B: Breaking Through to a Better Business Model (2009) by John Mullins and Randy Komisar, the idea of engaging in ongoing testing of leap of faith assumptions is central to how they propose that you will find a better business model. For them, the Plan A business model is only there to help you identify the "leaps of faith" in your business model and consequently what business assumptions you need to test first. The result is generally Plan B (or C, or D, etc.). The objective is to get to the Plan B that ultimately works as quickly and efficiently as possible.

An example of testing leap-of-faith assumptions comes from my own experience in trying to start a farm mini-winery. The first major leap of faith assumption that I needed to test was whether I could grow viable wine grapes in this northern climate. There is no point creating a detailed business plan for the farm mini-winery until this foundational assumption is answered in the affirmative. I would like to say that it is a clear affirmative but after 5 years of growing I still have alot to learn about keeping grape vines alive and thriving. The vineyard has reached two acres and now the challenge is to improve the quality and density of vines on these two acres.

I harvested grapes last year and this will be my second year making wine from them. The first year, I wasn't as careful about controlling the environmental conditions of my wine and produced a wine that was not very drinkable. So this year, in an effort to test another major leap of faith assumption - that I can produce a drinkable wine from my grapes - I built a fermentation room in my garage so that I could better assess the quality of the wine I might produce. I tried to perform all the wine making steps when it was appropriate to do so, kept my wine topped up and sealed to prevent oxygen from spoiling the wine, managed sulfite levels so the wine will keep better, etc... I'll be doing some tasting in the next month to see if I have a drinkable red wine (most of my wine is red until more of my white grapes mature).

This idea of testing your most important leap of faith assumptions first is something that many entrepreneurs do already, but it is useful to have a language for talking about this process so we can formalize it a bit more in the form of dashboards used to measure and test the leaps of faith that our business model implies. If you verify a leap of faith assumption, you should double down and go in that direction; if you fail to verify a leap of faith assumption then you need to make either a smaller course correction or a major pivot. A successful company is one that has verified a series of leap of faith assumptions. Each verification becomes the vantage point from which you can search for the next leap of faith assumption you might test to grow your business further.

Even successful businesses will find the need to keep making leaps to improve their business model (or keep it from going stale). This is why I cautioned against viewing the "leap" concept as a motivational concept imploring you to start your business today. It is more of an analytical framework to think about how you might hone in on a successful business model or expand upon your current one.

Eric Reis chapter on "Leap" owes alot to the "Getting to Plan B" book which is why I have focused on that book to discuss what the significance of the "Leap" concept. I encourage you to watch this video of Randy Komisar explaining role of "Leaps" in guiding startups towards better business models.

I do want to leave Eric with the last word. For Eric, a Leap is a component of the Build-Measure-Learn feedback loop that he argues is critical to "Steering" a startup towards success. A leap in his framework is driven by what you need to learn about the most:

The Lean Startup method builds capital-efficient companies because it allows startups to recognize that it's time to pivot sooner, creating less waste of time and money. Although we write the feedback loop as Build-Measure-Learn because the activities happen in that order, our planning really works in the reverse order: we figure out what we need to learn, use innovation accounting to figure out what we need to measure to know if we are gaining validated learning, and then figure out what product we need to build to run that experiment and get that measurement. ~p 78.

If you want to maximize validated learning in your startup you need to test the most critical leap(s) of faith first by building something to test the assumption(s) and measuring the responses to it (Build-Measure-Learn).

I attended a "Backyard Forestry" workshop over the weekend at The Deanery Project. The workshop was led by Jamie Simpson author of Restoring the Acadian Forest (2015).

The workshop was a combination of lectures and round table discussions. About half was practical learning outdoors in the woods and in a workshop where we went over chainsaw maintenance and operation.

A critical decision any woodlot owner needs to make is what trees to promote and what trees to thin out. We revisited this question many times first by learning to identify the various tree species and then learning what tree species tend to dominate in native old growth forests and favoring those species in our thinning practices. This is how you can "Restore the Acadian Forest" (or any native forest for that matter). The Acadian Forest concept also involves an appreciation for standing and fallen dead wood as habitats for birds, small mammals, insects, frogs, etc... and as a way to replenish the soil. One point that Jamie made frequently was that you always have to be looking up when trying to determine what trees to keep or remove in your forestry management. You are often looking for signs that the tree is dead or on the way out and this will affect your decision to remove or not. I will be looking up alot more when I walk through my own small woodlot.

Here is Jamie (to the left) amused by what Tom Rogers (My Acadian Forest) was saying. Jamie spotted a yellow birch hardwood amidst mostly softwood trees and was advising us to actively promote that tree by thinning a few trees around it, but not too many because lack of density when young can encourage bad form.

Jamie also picked out a few Red Spruce and advised us to promote that species as well. He advised us that it wouldn't hurt to remove some Balsam Fir (aka Christmas Trees) because many factors are conspiring to make that species over represented in the local forests. The Acadian Forest concept celebrates the diversity of native species that this forest system can support as it straddles the southern range of the massive Boreal Forest system and the northern range of southern forest systems. Over time, selective harvesting from a diverse and uneven aged Acadian Forest can potentially be more lucrative and more sustainable than clear cutting approaches (especially if we take into account non-timber products and services) but it takes more time and patience than the plantation mentality of forest management.

In the evening Jamie and a few of the participants played guitar. Jamie also plays fiddle and during one of his tunes this big old Alaskan Malamute dog started to howl along. I managed to capture a bit of his howling towards the end.

I've been building up alot of short nature videos and decided to share a few around the topic of outdoor adventure in wintertime. For some of us this is the heart of the winter season. Many fly South this time of year such as my sister who will be staying in the warmer climes of Florida for a couple of months. Myself, I still enjoy the many adventuresome activities that winter has to offer. Having good gear makes it easier to get around under all different types of winter conditions.

When I'm not working at my computer or reading, I'm often looking for an outdoor adventure. I prefer not to walk on sidewalks. I like to walk in local park trails to get some exercise. This year I discovered Icers which is a studded shoe sole that I can strap onto my rubber boots and not slip when I'm walking on Ice (see www.icers.ca). It has made a huge difference in my ability to get around on the local park trails. I am often alone on parts of these trails for obvious reasons if you watch my journey to Victoria Park falls:

Another outdoor activity that I like to do if I'm in the right area is explore the woods for Chaga Mushrooms. I already have some Chaga that I hope to brew into tea to boost my immune system so no there is need for me to harvest any more. I like to find Chaga trees and revisit them to see if I can learn anything more about this strange species of mushroom. Winter time with lots of snow down is the best time to hunt them because the contrast is better. Below is a Chaga tree I visited last weekend. Only 2 of the 7 mushrooms growing on it are shown.

Another outdoor adventure is visiting my farm to explore the property and see how my vineyard is doing. A window at the top of my barn blew out in a wind storm so I had to repair it. Fortunately there is lots of hay in the barn so I was able to climb up to it easily and fix it. I was also able to take a clear video of the vineyard with the dirty window removed. The video starts with the oldest vines and ends with my younger vines.

This weekend I will be attending a workshop on "Backyard Forestry" so that I might better manage and appreciate the forests you see behind the vineyards. I am supposed to bring rain gear and extra layers for warmth so there will be some outdoor learning. Also have to bring a flash light. I won't be camping outside in the snow (which is an option), but I'll be bringing my sleeping bag and pillow for an overnight stay in the dormatory.

Woo! Woo! as Jake would say in the Reality TV series Bering Sea Gold. I'm reminded of Jake because Pomrenke Mining, LLC is raising capital for Gold Mining on our Texas Investment Network site. Reality TV meets the Texas Investment Network to raise capital for a project that you can see unfold on TV!

I'm re-reading Eric Reis book The Lean Startup (2011), specifically the chapter titled Leap which I will be the title of the next blog in that series. I wasn't fully getting why Leap was a critical idea so I did some recommended background reading for this chapter, specifically the book Getting to Plan B: Breaking Through to a Better Business Model (2009) by John Mullins & Randy Komisar. At the time, John Mullins occupied Entrepreneurship chair at the London Business School and also served as mentor and advisor to over a 100 active startups (also on the board for some of them). Randy Komisar had a long and successful career first as a lawyer at Apple working on licensing and technology acquisition, he then left Apple and sold a company to them, then he became CEO of Lucas Arts Entertainment, then became a "Virtual CEO" in many startups, wrote a well-received business book The Monk and the Riddle: The Education of a Silicon Valley Entrepreneur (2000), and became a partner in 2005 at the famous venture capital firm Kleiner Perkins Caufield & Byers. The writers have apparently done some homework to get to the point of writing this book about achieving better business models.

I do recommend reading this book as background reading to the Lean Startup (published 2 years later). In Plan B the importance of testing "Leap of Faith" assumptions are mentioned frequently along with dashboards, the importance of experimentation, steering and pivoting your business to Plan B, and other themes that you will find in the Lean Startup.

The title of the book is based on the observation that between 60 to 66 percent of funded startups stated that they had to abandon their original plan, Plan A, and that it was Plan B (or C or D, etc..) that actually ended up working for them. The book is about how to achieve a better business model. The term "lean" is not used in this book which was Eric's contribution to finding better business models - how to do it without so much waste or muda.

There are two things I have come away with from the book so far - the importance of searching for analogs and antilogs of your business model, and the 5 types of models that comprise a business model. These will be discussed in turn.

Analogs and Antilogs

An analog is a predecessor company that does something you want to emulate. An antilog is a predecessor company that does something you want to do differently. You arrive at a business model by discovering a unique set of such analogs and antilogs that represent your vision for the company. This perspective on business model development is based on the idea that we shouldn't expect to completely re-invent the wheel when it comes to business models. Investors reviewing the startups business model will naturally compare the business to other businesses in an effort to understand their business model. We are just being more proactive as a startup in acknowledging these analogs and antilogs so we can share them with investors and can identify where the leaps of faith in our business model lie (i.e., no predecessors for that part of the business model).

My initial feeling is that this process of searching for analogs and antilogs is similar to case-based reasoning (PDF link) and this literature might help formalize how business model learning and inference takes place.

Mimicry is also something humans are good at and it starts at a young age. Here is a baby expressing analogs and antilogs to Beyoncé's moves and music :-)

5 Types Of Models

Another take-away from this book is that idea that a business model actually refers to 5 different types of models. Directly from the book (p. 9) these models are:

• Your revenue model: Who will buy? How often? How soon? At what cost? How much money will you receive each time a customer busys? And how often will they send another check? This set of questions will not result in one, tidy number. It will produce many elements that should be supported by an analog or, if not, become a leap of faith and properly considered.
• Your gross margin model: How much of your revenue will be left after you had paid the direct of costs of what you have sold?
• Your operating model: Other than the cost of the goods or services you have sold, what else must you spend money on to support the sale?
• Your working capital model: How early can you encouragte your customers to pay? Do you have to tie up money in lots of inventory waiting for customers to buy? Can you pay your suppliers later, after the customer has paid?
• Your investment model: How much cash must you spend up front before enough customers give you enough business to cover your operating costs?

If you want to "break through to a better business model" then you wouldn't just create one big model called the business model, instead you might create 5 sub-models to represent different critical aspects of your business.

Where things can get interesting is when you combine the notion of analogs/antilogs with these 5 types of models. What predecessors have a revenue model that I want to emulate, and what predecessors have a revenue model that I want to avoid using? Ditto for your gross margin model, operating model, working capital model, and investment model. So analogs and antilogs can be found at the big picture level or at the level of these more detailed types of models. The book goes into alot of detail on analogs and antilogs used in the business models of 20 different companies. For more info, you may find this review of the book helpful.

Often when a startup develops a business model they find that they don't have an analog or antilog they can use as a reference point. This marks a point where the business model expresses a "leap of faith" and it is at these points that the model has to be immediately stress tested with experiments and metrics. We will discuss the concept of "leaps of faith" more when I discuss the Eric's Leap chapter, but it is worth noting how the concept arises in Plan B (i.e., when you lack an analog or antilog for some part of your business model).

PENNSYLVANIA INVESTMENT NETWORK

Home

Contact

Entrepreneurs | Investors | About | Our Privacy Policy

© 2015-2024, Dealflow Solutions Ltd. All rights reserved.

Connecting Pennsylvania Entrepreneurs and Investors.