1: It was the summer of 2004. Three college sophomores traveled to Silicon Valley having recently started their fledgling college social network.
“It was live on a handful of college campuses. It was not the market-leading social network or even the first college social network; other companies had launched sooner and with more features, writes Eric Ries in The Lean Startup. “With 150,000 registered users, it made very little revenue, yet that summer they raised their first $500,000 in venture capital. Less than a year later, they raised an additional $12.7 million.”
The story of how Mark Zuckerberg, Dustin Moskovitz, and Chris Hughes created Facebook is now famous.
Our question today is: How were the entrepreneurs behind Facebook able to raise so much money when its actual usage was so small?
Two facts about Facebook’s initial growth impressed investors, Eric writes: “The first fact was the raw amount of time Facebook’s active users spent on the site. More than half of the users came back to the site every single day.”
This statistic is an example of what Eric calls the “value hypothesis,” essentially that customers find the product valuable.
“The second impressive thing about Facebook’s early traction was the rate at which it had taken over its first few college campuses,” Eric observes. “The rate of growth was staggering: Facebook launched on February 4, 2004, and by the end of that month almost three-quarters of Harvard’s undergraduates were using it, without a dollar of marketing or advertising having been spent.”
The speed at which Facebook was embraced is an example of what Eric calls the “growth hypothesis,” or the speed of adoption.
2: The value and growth hypotheses “represent two of the most important leap-of-faith questions any new startup faces,” he writes.
So, what is the takeaway from the Facebook story for want-to-be entrepreneurs?
“Is the lesson of Facebook that startups should not charge customers money in the early days? Or is it that startups should never spend money on marketing?”
Not so fast, Eric suggests: “These questions cannot be answered in the abstract; there are an almost infinite number of counterexamples for any technique.”
Instead, he believes the lesson to be learned is that “startups need to conduct experiments that help determine what techniques will work in their unique circumstances.”
3: Our strategy is based on a set of assumptions. Many entrepreneurs take these assumptions as a given. They rush forward in their efforts to achieve their vision.
This approach is a mistake, Eric warns. “Because the assumptions haven’t been proved to be true (they are assumptions, after all) and in fact are often erroneous, the goal of a startup’s early efforts should be to test them as quickly as possible,” he writes. “The first challenge for an entrepreneur is to build an organization that can test these assumptions systematically.”
Too often, entrepreneurs’ assumptions are based on what happened in a different market: “Previous technology X was used to win market Y because of attribute Z. We have a new technology X2 that will enable us to win market Y2 because we too have attribute Z,” the entrepreneur believes.
Analogies like these obscure “the true leap of faith,” Eric suggests. “That is their goal: to make the business seem less risky. They are used to persuade investors, employees, or partners to sign on.”
The better approach isto do some empirical testing to confirm there really are “hungry customers out there eager to embrace our new technology.” We do that by conducting often-times small scale experiments.
“The Lean Startup methodology reconceives a startup’s efforts as experiments that test its strategy to see which parts are brilliant and which are crazy,” Eric writes. “What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.”
More tomorrow.
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Reflection: Reflect on a new product or idea I am working on now or in the past. What assumptions did I make? Did I test these assumptions? What did I learn?
Action: Journal my answers to the questions above.
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