CS419 Technology Entrepreneurship

1. CS419Technology Entrepreneurship Fall 2012 – Fall 2013 Emre Oto Building a Lean, Scalable Startup

2. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» What is theLeanStartup?Why is the Lean Startup «Lean?» • Methodology inspired from Lean Manufacturing principles developed by Taichi Ohno and Shigeo Shingo • The Toyota Production System (TPS) • Throughout the course we will see many reflections of the TPS on startup product development: • Eliminating waste (muda) • Genchi Gembutsu (go and see) • Just-in-time manufacturing and Kanban (push vs pull) • The Andon Cord • Principle of Small Batches

3. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» The Lean StartupPower of small batches • Idea inspired from the Toyota Production System • Just-in-time systems in Toyota Production System • Reduce in-process inventory • Translation to startups: Just-in-time scalability • Conduct experiments without making massive up-front investments in planning and design • Reduce Work-in-progress (WIP) Inventory

4. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupEnvelope folding.. • We will start with a small experiment..

5. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupSingle-piece flow • Batch-size = what moves from one stage to the next at a time • One envelope = Batch size of one • = single-piece flow • Why is stuffing one envelope at a time faster? • Reason 1: Extra time needed to sort, stack, move around large piles of half complete envelopes (WIP Inventory) • Reason 2: Less error prone (what if letters don’t fit the envelopes?) = Reduce potential rework

6. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupSingle-piece flow • The small-batch approach finishes a product every few seconds • The large-batch approach must deliver all the products at once, at the end • What if it turns out customers don’t want the product? • Which one allows us to find out sooner?

7. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupSingle-piece flow • Biggest advantage of working in small batches = quality ptoblems can be identified much sooner • Andon cord = Any worker can stop the production line. • Benefits of finding and fixing problems faster outweigh the cost of stopping the production line.

8. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBenefits of reducing batch size • Reducing batch size reduces cycle time • Size of the shaded area is the size of the queue • Queue size is proportional to • batch size • Reduce cycle time without changing either demand or capacity

9. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBenefits of reducing batch size • Reducing batch size reduces variability in flow • 100 people entering a restaurant at the same time • Reducing batch sizes accelerates feedback • Fast feedback provides disproportionate economic benefits because the consequences of failures usually increase exponentially when we delay feedback • The number of dependent decisions generally grows geometrically with time • A single incorrect assumption can force us to change hundreds of decisions

10. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBenefits of reducing batch size • Reducing batch size reduces risk • Risk of failure is significantly reduced • Reducing batch size reduces overhead • 300 open bugs, we enter #301 vs 30 open bugs, we enter #31 • Large batches reduce efficiency • Reviewing 200 drawings with incorrect assumptions vs reviewing 20 drawings and getting feedback

11. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBenefits of reducing batch size • Large batches inherently lower motivation and urgency • Delivery of one module in 5 days vs 100 days until integration point • Lack of rapid feedback leads to dismotivation • The entire batch is limited by its worst element • Batch size slippage principle: • Large batches cause exponential cost and schedule growth • High slippage of long-duration projects

12. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBatch size slippage principle Percent Slippage Original Planned Duration

13. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBatch size optimization Transaction cost: Cost of sending a batch to the next process Holding cost: Cost of not sending the batch

14. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBatch size optimization • Optimal batch size function is continuous • Batch size reduction is reversible

15. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small batches in the Lean StartupBatch size optimization • Key idea from the TPS: • Reduce batch size before you attack other bottlenecks • Reducing batch size reduces variability, and with lower variability we may find current capacity is sufficient

16. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Entrepreneurial Connection • The goal is not to produce more stuff efficiently • The lesson is not about manufacturing • The key question is: • What if it turns out the customer doesn’t want the product we are building? • Better finding out sooner than later • Working in small batches, a startup can minimize the expenditure of time, money, and effort that could potentially be wasted.

17. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Entrepreneurial Connection • Release small • Test small with automated tests • Integrate small • Create «andon cords» to detect integration failure • Deploy small and deploy continuously • = Continuous deployment

18. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Entrepreneurial Connection • The essential lesson is not to ship/deploy 50 times per day • By reducing batch size, we get through the Build-Measure-Learn feedback loop more quickly than our competitors • The ability to learn faster from customers is the essential competitive advantage that startups must possess

19. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Large Batch Death Spiral • Large batches tend to grow over time • Moving the batch forward results in additional, work, rework, delays, and interruptions Everyone works to reduce this overhead • Unlike in manufacturing, there are no physical limits on the size of the batch

20. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Large Batch Death Spiral • It is possible for the batch size to keep growing and growing • Since the product has been in development for so long, why not fix this one more bug, or add this one more feature? Why risk the success of thisrelease by failing to address this potentially critical flaw?

21. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupWIP Inventory in a Startup • When factories have excess WIP, it piles up on the factory floor • Startup work is intangible • All the work that goes into designing the MVP • Incomplete designs, not-yet-validated assumptions, and most business plans are WIP • Lean Startup techniques convert push methods to pull and reduce batch size Reduce WIP

22. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupWhat the Lean Startup is NOT • Lean Startup is not applying pull to customer wants • The pull signal to product development is not what the customer tells us to build as a product • This is not the way the Lean Startup works because customers often do not know what they want

23. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Pull Signal in a Lean Startup • Our goal in building products is to be able to run experiments that will help us learn how to build a sustainable business • The Lean Startup responds to pull requests in the form of experiments that need to be run

24. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Pull Signal in a Lean Startup • We formulate a hypothesis we want to test • Product dev. Team designs and runs the experiment, using the smallest batch size that will get the job done • Build-Measure-Learn loop actually works in reverse order

25. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Small Batches in the Lean StartupThe Pull Signal in a Lean Startup • We figure out what we need to learn • We work backwards to see what product will work as an experiment to get that learning • The caveat: • It is not the customer, • but rather our hypothesis about the customer • that pulls work from product development • Any other work is waste

26. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Wisdom of the 5 Why’s Regulation of speed • Speed is the only strategy in a startup • But speed alone can be destructive • Startups require built-in speed regulators that help teams find their optimal pace of work • Remember the andon cord: • Stop production so that production never has to stop • You cannot trade quality for time

27. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Wisdom of the 5 Why’s Regulation of speed • It is OK for the initial MVP to have bugs, missing features and bad design • When you start building products customers want, low-quality products inhibit learning when customers cannot fully experience the product due to defects • We need an adaptive process that allows us to invest in preventing the problems that waste time and resources

28. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Wisdom of the 5 Why’s5 Why’s Analysis • Allows us to make incremental investments and evolve a startup’s processes gradually • Asking Why? 5 times to get to the root cause and understand what has happened • At the root of every seemingly technical problem is a human problem • 5 Whys provides an opportunity to discover what that human problem might be

29. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Wisdom of the 5 Why’s5 Why’s Analysis • Why did the machine stop? (There was an overload and the fuse blew) • Why was there an overload? (The bearing was not sufficiently lubricated) • Why was it not lubricated sufficiently? (The lubrication pump was not pumping sufficiently) • Why was it not pumping sufficiently? (The shaft of the pump was worn and rattling) • Why was the shaft worn out? (There was not strainer attached and metal scrap got in)

30. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Wisdom of the 5 Why’s5 Why’s Analysis • The real cause is hidden behind more obvious symptoms • The root cause moves away from a technical fault = a blown fuse • Toward a human error = someone forgot to attach a strainer • Typical of most problems startups face

31. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Wisdom of the 5 Why’s5 Why’s Analysis • Acts as a natural speed regulator • The more problems you have, the more you invest in solutions to those problems • With startups in particular, there is a danger that teams will work too fast, trading quality for time in a way that causes sloppy mistakes • Five Whys prevents that, allowing teams to find their optimal pace

32. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Wisdom of the 5 Why’s5 Why’s Analysis • Ties the rate of progress to learning, not just execution • Startup teams should go through Five Whys whenever they encounter any kind of failure • Technical faults, failure to achieve business results, or unexpected changes in customer behavior • Small batches + 5 Whys analysis: • Provide the foundation a company needs to respond quickly to problems as they appear without overinvesting or overengineering

33. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Growth Drivers in a StartupEngine of Growth • Mechanisms that startups use to achieve sustainable growth • Sustainable excludes all one-time activities that generate a surge of customers but have no long-term impact • e.g. A single advertisement or a publicity stunt that generate jump-start growth • Characterized by one simple rule: • New customers come from the actions of past customers

34. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Growth Drivers in a StartupSources of sustainable growth • Four ways past customers drive sustainable growth: • Word of mouth • As a side effect of product usage • Inherent awareness created by product use • E.g. Luxury products • Through funded advertising • Paid through revenue generated through other customers • Through repeat purchase or use

35. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Growth Drivers in a StartupEngines of Growth • Feedback loops powered by the four sources of sustainable growth • Faster the loops turn, faster the company will grow • Each growth engine has an intrinsic set of metrics that determine how fast a company can grow when using it

36. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» Growth Drivers in a StartupThe 3 Engines of Growth • The Sticky Engine of Growth • The Viral Engine of Growth • The Paid Engine of Growth

37. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» The 3 Engines of GrowthThe Viral Engine of Growth • Relying on awareness of product to spread rapidly from person to person similar to a virus becoming an epidemic • Different from simple WoM • Virality is an inherent property of the product itself • Customers are not intentionally acting as evangelists • Growth happens automatically with product use • Viral engine can be quantified = Viral loop and Viral coefficient

38. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» The 3 Engines of GrowthThe Viral Engine of Growth • Viral coefficient = Measures how many new customers will use a product as a consequence of each new customer who signs up • How many friends will each customer bring with him or her? • E.g. Viral coefficient of 0.1 not sustainable • Used mainly by products targeting advertisers

39. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» The 3 Engines of GrowthThe Paid Engine of Growth • Invest Customer Lifetime Value in user acquisition • CLV = Revenue – Variable Costs • Company grows if customer acquisiton cost < CLV • May be subject to competition and may require bidding at some point

40. CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II» The 3 Engines of GrowthThe Paid Engine of Growth • Using the right engine of growth is important for attaining product / market fit