Friday, January 7, 2011

Launching Tech Ventures: Part I, Course Overview

This is the first of four posts about Launching Technology Ventures (LTV), a new MBA elective course I'm developing at Harvard Business School to explore lean startup management practices. Part II will describe LTV's class sessions. Part III will list a set of tools and techniques that I think any MBA working in a tech venture should master. Part IV lists recommended readings for the course.

[Addendum, Apr. 10, 2011: if you are interested in lean startup concepts, you should also check out the LTV course blog. Students write blog posts instead of taking an exam. They've done terrific work.]

Most startups fail — usually due to lack of customer demand, not product development problems. These new ventures burn through their capital, wasting money on engineering and marketing before discovering they have built a product no one wants. Startups are more likely to succeed when they rapidly and iteratively test assumptions about a new venture’s business model based on customer feedback, then quickly refine promising concepts and ruthlessly cull the flops. New ventures that follow this approach are lean startups. “Lean” invokes the image of bootstrapping entrepreneurs, sustained by ramen noodles and a dream. Some lean startups fit that image. However, the term “lean” is derived from Toyota’s management philosophy. Toyota uses short production cycles to reduce inventory and eliminate waste. Lean startups similarly rely on short product development cycles to eliminate waste and gain rapid market feedback.

Lean startup practices are being pursued by firms in Silicon Valley and beyond. These practices have gained special traction in the information technology sector, where rapid “build/measure/learn” cycles are facilitated by the availability of open source engineering tools and Internet marketing channels. However, lean practices can also be applied by startups in other sectors and by large corporations launching new products.       

Launching Technology Ventures uses case studies to examine lean startup practices. LTV focuses on the integration of marketing and engineering functions and emphasizes implementation rather than strategy formulation issues. The course does not examine financing options or the composition of founding teams. LTV draws heavily on the ideas of Eric Ries, Steve Blank, Marty Cagan and other practitioners. Ries coined the term “lean startup” when he connected ideas from lean manufacturing and agile software development to Blank’s customer development process.  

Course Structure and Key Concepts

LTV is organized into two modules that explore execution challenges before and after a startup achieves product-market fit,  i.e., a match between its product solution and market needs.

The first module about challenges prior to achieving product-market fit covers the following core concepts:
  • The importance of well-structured experiments to confirm or disprove hypotheses about uncertain business model elements, thereby securing what Ries calls validated learning.
  • The benefits of what Ries calls a minimum viable product (MVP), i.e., the smallest set of product features and business initiatives needed to secure the next round of validated learning. MVPs can be counter-intuitive for managers and entrepreneurs, who often see fully-featured products as being better. However, building more features than necessary risks wasting time on functionality no one wants. It also compromises experimental designs, because it can be difficult to determine why a customer rejected a new version that incorporates many simultaneous changes.
  • The value of rapidly iterating the MVP based on customer feedback obtained through interviews, focus groups, usability tests, customer support interactions, etc.
  • Pivoting, i.e., changing a startup’s business model based on validated learning. When they pivot, startups retain some elements of their prior model to avoid waste. Lean startups may make many small pivots or a few big ones.
  • The need for metrics to gauge whether business model hypotheses have been validated, e.g., viral coefficients, customer retention rates.
  • The benefits of bootstrapping and avoiding big investments in marketing and infrastructure until business model hypotheses are validated.
In the first module, in addition to covering these core concepts, we’ll consider several issues of practical concern to marketing and product managers in early stage companies, for example:

  • When should a startup outsource engineering work?
  • How do firms design products for virality?
  • In a B2B context, how can an unknown startup with an unproven product identify potential early adopters and craft an effective sales pitch for them?
  • When does a “do-it-yourself” approach to public relations make sense, and how long should startups wait before they aggressively invest in PR?

The second module addresses challenges when scaling a business after achieving product-market fit. Topics include:
  • Approaches to customer conversion funnel analysis and optimization, e.g., usability labs, A/B testing.
  • Metrics for scaling startups, e.g., Net Promoter Score, Lifetime Value of a Customer.
  • Challenges in scaling a direct sales force; processes for prioritizing sales leads.
  • Tradeoffs for startups relying on business development partnerships with large companies.
  • Why, when and how startups should introduce formal product management processes, e.g., project prioritization and tracking systems, product roadmaps.


Boundaries

In addition to the issues described above, LTV will consider whether lean startup principles apply in three special contexts:
  • Platform-Based Businesses. "Do not scale until you validate your business model" is a core principle for lean startups. But does this make sense for platform-based businesses that harness strong network effects, such as Facebook, YouTube, and Twitter? All these firms scaled aggressively before they had proven business models; they subsequently relied on ecosystem partners to experiment with ways to monetize their big platforms.
  • Science-Based Businesses. For a class of capital- and/or science-intensive ventures—e.g., biotech, clean tech—the rapid iteration that is central for lean startups may not be a practical option. For such products, development and/or deployment inherently takes a long time due to fundamental uncertainty about engineering approaches or delays in deploying production capacity.
  • Large Corporations. Big companies have deep pockets and ample resources; that is their principal advantage over nimble startups. So, why should big companies constrain themselves unnaturally by running lean?
I'm eager to get feedback on the concepts covered in my course. What seems off target or missing?

9 comments:

  1. Seems pretty comprehensive to me Tom. You may want to touch on Crossing the Chasm a bit as it applies well to early stage startups. Chapter 7 of The Innovators Dilemma should also make the reading list as it parallels the customer development model quite nicely.

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  2. Tom,

    I would add a section on the History of Lean, and philosophy. What are the basic of Principles of the Toyota Productions System, and how they relate to the startup.

    Taiichi Ohno, one of the founders of the lean concept, idea was to reduce the time between the customer getting the product and the start of the production of a product. His ideas and methods I believe is very relevant to the lean start up.

    Steve Blank´s other concept is that the plan is a Hypothesis that needs testing, mirrors that of Karl Popper in his answer of what is science. Even though Popper never touches business, one of his student did. The student is George Soros, who went on to make billions by applying Poppers ideas.

    The other philosopher that has a bearing on the Lean start up is the friend of Popper's Imre Lakatos. Lakatos idea is that we don´t reject the Hypotheses when it has been shown to be wrong, but we ask the question is this Hypotheses better than any other theory. The question is that is our core theory growing and getting larger or it diminishing and been proved wrong.

    For example if we are a company producing ice, and the first trial customer is an Eskimo, under a strict Hypotheses we should reject the idea, but under Lakatosion scheme we would try keeping the Hypotheses.

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  3. Tom, I think what you may be missing out on is the issue of cash rotation among projects in a start-up firm.

    Often when a start-up team comes together it is not because they already have a product in mind but all they have is a set of capabilities and a fuzzy understanding of customer problems. Now they have to start working on those customer problems to develop the product a la Customer Development style. But a startup needs staying power so it has to choose (often forced) specific customer problems to work on. Doing this has two advantages 1: they get the opportunity to further their capabilities and 2: the cash they get allows them to stay afloat for the next Customer Development project. This staying afloat from project to project by cash rotation is sth I havent seen much discussed but seems to be critical for a start-up's survival and maturity. A financial module on this will increase the founder's survival/ staying power chances a lot.

    Along with the Customer Development part what would be great to combine is the work of the Sales Learning Curve by Mark Leslie.

    In all it looks like a great course is shaping up! And I appreciate the blog approach to it. All the best, Tom!

    ReplyDelete
  4. My site is already under development and it a huge project with lots of features.
    Omg. please tell me what to do now. I want to follow lean startop with the MVP, But my site is already under development and i cannot change anything now.
    please help. also i am in australia, how can i join your Launching Tech Ventures Course???

    ReplyDelete
  5. Ray: You should join a lean startup circle. There are groups emerging in Sidney: http://www.meetup.com/Lean-Startup-Sydney/ and in Melbourne http://www.meetup.com/Lean-Startup-Melbourne/ Good luck!

    ReplyDelete
  6. Thank you for this interesting material.

    Nowadays the most desired way is connected with android app development that allows to develop cutomized apps for mobile phone. All of them needs to be checked by quality control or quality assurance.

    ReplyDelete
  7. Lean (Toyota Production System) is about efficiency. A start up is about innovation and passion. Lean is about converging and creativity is about diverging. Innovation is about maximal thinking and lean is about limited resources. America is psychologically obese, and obsessed with Lean. Anything Lean is perceived like a woman with a size '0'. Lean is actually about speed. Waste was a means to get to the speed. Toyota Production System is about perfection not about Lean. Lean is a means to get to perfection. Thus, Start ups must focus on the passion, innovation, solution, divergence and perfection before thinking about lean. Lean has already hurt American businesses and cost so many jobs, Lean Start ups would be the killer of jobs before we even create one. It is not a criticism of a particular product, philosophy or book. This is about my experience with Lean, a misnomer for Just-in-time, or customer responsiveness at the cost of doing it right. As it used to be said.. speeding up before doing it right would produce crap faster. Leaning start ups would create more start up failures accordingly. I hope somebody at Harvard does some research rather than joins a fad.

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    ReplyDelete
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