The Lean Startup Operating Manual

Steve Blank

Stanford School of Engineering /

UC Berkeley, Haas Business Schoolwww.steveblank.com

The Economy

Before

• Cash was readily available

• Follow on financing was readily available

Now

• Debt markets are tight

• IPO & M&A window closed

• most VC!s haven!t made money for a decade

State of Startups

• High burn rate

• Swing for the fences

• Full management teams

• Assume customer is known

• Assume features are known

• Assumes growth is by executionTraditional startups are fighting yesterday’s war

The Lean Startup

• Continuous customer interaction

• Revenue goals from day one

• No scaling until revenue

•• Assumes customer and features areAssumes customer and features are

unknownsunknowns

• Low Burn by Design - Not Crisis

Lean Startup Strategy

! Analyze Opportunity

! Validate Customers/Business Model

! Execute Agile

Analyze: Checklist

!Opportunity/Resources

! Market or Technology Risk

! Market Type

! Domain Experience

! Proof

Analyze

Opportunity/Returns

Do Capital Needs Match Return?

• Large VC = your deal = 3x their fund

• Angels = ?

• What’s the potential return?

• Size the market…

sizing up the market

SF

$123 billion tourismindustry inside the U.S.

$1 billion English travelguides sold annually

$210 million 20-35 yearold travelers

(Initial test market)

+Market Sizing

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OLED TV market will grow to $15.29

billion by 2015

Target products: Camcorders, DVD

players and recorder, digital cameras,

computer monitors, LCD and Plasma TV

YEAR 1 PROJECTIONS

Our target market is the Flat

Panel display market.

Units sold : 1,000,000

Price per unit : $700 - $1,000

Revenue from Royalties (assuming .5-1.0% of shelf price):

Worst case = $3,500,000 Best Case = $10,000,000

Apex: ! 3.5M

Target market = College Students

Analyze

Market/Technolgy Risk

Market/Technology Risks

• There are no average startups

• Startups do differ (sometimes dramatically)by vertical market

• Average advice is non-optimal

What Kind of Risk?

• Market Risk?

• Technology Risk?

• Customer + Technology Risk?

• What are the "fundamental drivers of

growth?”

A Plethora of Opportunities

Market Risk vs. Invention Risk

Execution: Lots to Worry About

Execution: Very Different byVertical

Market Risk Reduction Strategy

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Bird’s Eye View of our Business ModelHardware

($155)

Software (in-house)($1.00)

Target Market

MyNote($156.00)

Online Distribution• Own website ($208+.3x)• Amazon.com ($40+32x)• eBay ($300+25x)

Offline Distribution• College bookstores($0.02)

Viral

Marketing

$399.99

CustomerAcquisition

Cost:($41)

Demand Creation• SEO/SEM

• Blogs• Forums

• Bookstorepromotion

• Sales force• Viral marketing

• Website

3(%-4(5,-)"%6 IP '"7,)"8-9$% :2,("#.

C

1

D

2 patents owned by Apex!

• Technology patent - SOLED

• Long-Brite and inkjet printing process

Licensed Partners:

• Sony

• Samsung(Other possibilities - LG, Toshiba, Panasonic,

DuPont)

Partners’ distribution channels

• Sony

• Samsung(Other possibilities - LG, Toshiba, Panasonic,

DuPont)

Consumer electronics

• Flat Screen TVs through

Fry’s, Best Buy, Magnolia,

etc

Dollar flows:

License fees

Royalties

.

C

1

D

Wages: founders &

Consultants

IP Costs: Lawyer

& Patent costs.

Premises: Dev’t labs.

Patents

C.

E-

F1

E;

END-USERS END-USERS

CITYBEATS.COMR

EVEN

UER

EVENUE

SER

VIC

E SER

VIC

ETwo Revenue StreamsTotal Revenue (year 1) = $ 90 KTotal Revenue (year 2) = $ 2.2 M

BUSINESS MODEL

iPhone Application Subscription Based Service

Nightlifevenues

Thirdparty

affiliates

$ 5/monthYear 1: $ 50KYear 2: $1.2 M

$ 2.99 (x.7)Year 1: $ 40KYear 2: $1M

March | 2011Critical Mass: 500,000 users

Analyze

Domain Expertise

Are You a Domain Expert?

• You’ve been an observer

• You’ve been a user

• You’ve built this before

+Pain Points in Inter-DistrictDevelopment of Curricula

What does the customer need?

65% of 315 respondents

said they would buy our product

Slide 29

• Current Team

• Skills Needed

– Technical Execution

» Ruby on Rails, Perl, AJAX,Html, CSS, Clean designer

• Future Team Members

– Programmers

– Sales Force

– Interns

Building the Team Incentives

• Equity

• Title and Responsibilities

• Culture

– Young, trendy atmosphere

– Connected

– Creative

Vision Execution

BusinessShruti

StephanGwen

TechnologyAmara

Horrace

TEAM ROLES AND CORETEAM ROLES AND CORECOMPETENCIESCOMPETENCIES

Analyze

Market Type

Market Type?

• Existing Market

• Resegment a Niche

• Resegment on Low Cost

• New Market

Definitions: Types of Markets

• Existing Market

– Faster/Better = High end

• Resegmented Market

– Niche = marketing/branding driven

– Cheaper = low end

• New Market

– Cheaper/good enough can create a new class ofproduct/customer

– Innovative/never existed before

New MarketResegmented

Market

Existing Market

Type of Market Changes Everything

• Market

– Market Size

– Cost of Entry

– Launch Type

– CompetitiveBarriers

– Positioning

• Sales– Sales Model

– Margins

– Sales Cycle

– Chasm Width

New MarketResegmented

Market

Existing Market

• Finance• Ongoing Capital

• Time to Profitability

• Customers• Needs

• Adoption

Slide 34

0

20

40

60

80

100

Number of Respondents Willing to Pay Per Service

$0

NightlifePromotions

95

75

$1-$5

58

71

$5-$10

15

30

$10+

612

FriendLocator

END USER WILLINGNESS TO PAYEND USER WILLINGNESS TO PAY

60% of respondents willingto pay for these services

Validate

Customer/Business Model

Customer Development and Product Development

Concept/

Bus. Plan

Product

Dev.

Alpha/Beta

Test

Launch/1st

Ship

Product Development

Customer Development

CompanyBuilding

CustomerDiscovery

CustomerValidation

CustomerCreation

Customer Development: Key Ideas

• Parallel process to Product Development (agile)

• Measurable Checkpoints

• Not tied to FCS, but to customer milestones

• Notion of Market Types to represent reality

• Emphasis is on learning & discovery before execution

• Stop selling, start listening– There are no facts inside your building, so get outside

• Test your hypotheses– Two are fundamental: problem and product concept

Customer Discovery: Step 1

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Customer Discovery: Exit Criteria

• What are your customers top problems?– How much will they pay to solve them

• Does your product concept solve them?– Do customers agree?

– How much will they pay?

• Draw a day-in-the-life of a customer (archetypes)– before & after your product

• Draw the org chart of users & buyers

Customer Validation: Step 2

CustomerDiscovery

CustomerValidation

CustomerCreation

CompanyBuilding

• Develop a repeatable and scalable sales process

• Only earlyvangelists are crazy enough to buy

Customer Validation: Exit Criteria

• Do you have a proven sales roadmap?– Org chart? Influence map?

• Do you understand the sales cycle?– ASP, LTV, ROI, etc.

• Do you have a set of orders ($’s) validating theroadmap?

• Does the financial model make sense?

distribution and demand creation

! Unique Idea: website and iPhone app formsymbiotic relationship

traffic

traffic

AdWords

Blogs (ex.Travelblog.org)

Magazines

TravelApp

Listing

TravelSpy.com

iPhone App

+Sales Ecosystem

Superintendant

IT Director

Dept. Head

TeacherTeacher

District

School

Discussion channel

Mandate channel

Sale

Engagement

(Early Stages) Another

school

in the

district

Another

district

+Demand Creation

" State-by-state rollout: educational standards

" Continuous iteration of feedback

" Hypotheses: Will

they adopt, use,

and pay?

" 10 schools f2f:

" Sales: $1,066

" Travel: $1,000

CA Pilot

" Hypothesis: How

well does it sell

itself?

" All telemarket

" $533/dist

GrowAdoption

" Hypotheses: Will

they buy hands-

off? Can it scale?

" CA telemarket

" F2f elsewhere

BroadAdoption

Distribution Channels

• Online Distribution (DIRECT SALES)

! Own website" Set-up and server cost = $1500

" Server maintenance = $200/mo

" Internet Merchant Fee = $8/unit

! eBay # Anchor subscription" Monthly Subscription Fee = $300

" Variable Fee = $25/unit

! Amazon.com # Pro Merchant seller" Monthly Subscription Fee =$39.99

" Variable Fee = $32/unit

Distribution Channels

• Offline Distribution (CHANNEL SALES)

! College Bookstores, e.g. Stanford Bookstore

" Booth/Stall outside – Free

" In-store vendor – $50 co-op dollars/mo! Shelley Hughes, Manager of Computer Sales

“I hope this project is actually realized…it sounds like a

device that would do well!”

• Future Channels/Partners

! Retailers such as Best Buy, Office Depot, Fry’s

Slide 49

Manufacturing PartnersManufacturing Partners

• Contacted original design manufacturers(ODMs) in Asia to determine our supplier:

• Lucky Light Electronics Co. Ltd. (Shenzhen, China)

• Hon Hai Precision Industry, ie. FoxconnElectronics (Taiwan)

• Compal Electronics (Taiwan)

• Hipsley Ltd. (Hong Kong)

Slide 50

Cost of Goods SoldCost of Goods Sold

Specification Cost/piece

Single light LCD panel $25

Motherboard (w/ WiFi and Bluetooth function) $60

RAM 512 MB $3

Wacom A5 (tablet sheet) $20

SDHC slot (expandable storage) $6

USB socket $0.50

Plastic casing (for panel and motherboard) $20

Rechargeable battery + ACDC power supply $15

Assembly cost $5

Software embedding $1

Shipping cost ($2000 for 5000 pieces in 20ftcontainer)

$0.40

Total Hardware Cost $155.5o

Execute

Agile Product Development

Problem: known Solution: known

Waterfall

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Problem: Known Solution: Unknown

“Product Owner” or in-house customer

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Problem: Unknown Solution: Unknown

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• Decide on business model

– What are the "fundamental drivers of growth”

• Create a decision loop (build-measure-learn)

• Write your hypotheses down (3 diagrams)

– Business model, distribution channel, demand creation

• Prove it in micro-scale

• Fact-based culture, built to learn

Further Reading

www.cafepress.com/kandsranch

Blogwww.steveblank.com