I don’t know about you, but I can't hear The Rolling Stones' Start Me Up without picturing Bill Gates and his Microsoft pals throwing some shapes at the Windows '95 launch. Aside from the second-hand embarrassment it gives me, it also goes some way to explaining why I hear strains of Keith Richards’ legendary guitar riff whenever the word “startup” is uttered.
In his 2011 book The Lean Startup, author Eric Ries defines a startup as: “any human institution designed to create new products and services in conditions of extreme uncertainty.”
Far from Microsoft territory, you might think, but doesn’t every tech startup dream of achieving Gates’ wealth, influence and dominance? When you reach Gates’ level, you really can dance like no one's watching. Yet the truth is that most startups fail. They’re a “cash bonfire” according to The New York Times:
Hopin, a start-up that raised more than $1.6 billion and was once valued at $7.6 billion, sold its main business for just $15 million. Last month, Zeus Living, a real estate start-up that raised $150 million, said it was shutting down. Plastiq, a financial technology start-up that raised $226 million, went bankrupt in May. In September, Bird, a scooter company that raised $776 million, was delisted from the New York Stock Exchange because of its low stock price. Its $7 million market capitalization is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, bought in 2021.
I wrote in a previous blog about the stark failure rates of startups and found that sadly, 20% of new companies don't survive past their first year, often succumbing to fierce competition and cost mismanagement.
So where can budding entrepreneurs go for guidance? Ries' book – something of a sacred text in entrepreneurial circles – is a great place to start.
In 2013, entrepreneur and educator Steve Blank wrote in the Harvard Business Review:
An important countervailing force has emerged, one that can make the process of starting a company less risky. It’s a methodology called the 'lean start-up', and it favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional ‘big design up front’ development.
Blank continues:
New ventures of all kinds are attempting to improve their chances of success by following its principles of failing fast and continually learning. And despite the methodology’s name, in the long term some of its biggest payoffs may be gained by the large companies that embrace it.
Maybe not so far removed from Microsoft, after all…
But to understand how the lean methodology has upended conventional wisdom about entrepreneurship, let's delve into three of its key principles: “minimum viable product,” “build-measure-learn,” and “innovation accounting.”
Minimum viable product
In American sports, MVP stands for Most Valuable Player, and Eric Ries has his own star performer: the “minimum viable product” (MVP). In the lean startup approach, an MVP is a product with just enough features to attract early adopters and gather valuable feedback for the initial testing phase. Launching something labelled "minimum" might seem risky, but for Ries, that's precisely the brilliance of the strategy.
MVPs require “a minimum amount of effort and the least amount of development time,” yet creating an MVP also demands extra work because “we must be able to measure its impact.” Much like a pilot episode for a TV show, an MVP is produced quickly and cheaply but embodies the creators' hopes and dream. It must be affordable and swift to produce, yet good enough to engage an audience and withstand thorough evaluation. Ries encourages us to embrace these competing pressures.
According to The Lean Startup, this approach “helps entrepreneurs start the process of learning as quickly as possible.” Note the emphasis here is on learning rather than making money or profit. For Ries, the early stages focus on gaining insights, and all metrics should be designed to support this goal.
Ries suggests we should embrace the counterintuitive aspects of the lean startup approach. While many entrepreneurs instinctively aim for their first product to be comprehensive and highly developed – a source of genuine pride – he considers this a mistake:
Most entrepreneurs and product development people dramatically overestimate how many features are needed in an MVP. When in doubt, simplify... Even a ‘low-quality’ MVP can act in service of building a great high-quality product. Yes, MVPs sometimes are perceived as low quality by customers. If so, we should use this as an opportunity to learn what attributes customers care about.
Summing up this ruthless pragmatism, he concludes: "Customers don’t care how much time something takes to build. They care only if it serves their needs."
Build-measure-learn
So, you’ve unleashed your MVP into the world. What next?
A “build-measure-learn” feedback loop is crucial for steering product development and ensuring new businesses are learning the right lessons. In Ries’ words:
The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere.
This feedback loop represents the “steering wheel” of a lean startup, guiding the direction of the new company. Rather than relying on assumptions or hearsay, it provides real-time visibility into bumps and turns in the road, allowing for immediate adjustments.
The process aims to prevent startups from sinking resources into products that nobody wants. While this might seem obvious, many startups fall into the trap of spending heavily without establishing if there’s actual demand for their product in the first place!
Ries argues that even giants like Google are guilty of this; launching apps or services under the Google brand before they’re fully ready (remember Google Buzz?!). It’s wiser to start small –maybe even under a different name – and make mistakes with a limited audience, before exposing your product to the unforgiving environment of the global marketplace.
For his own startup, IMVU, Ries split users between two version of his website, to test and measure its effectiveness:
We changed our entire website, home page, and product registration flow to replace ‘avatar chat’ with ‘3D instant messaging.’ New customers were split automatically between these two versions of the site; half saw one, and half saw the other. We were able to measure the difference in behavior between the two groups. Not only were the people in the experimental group more likely to sign up for the product, they were more likely to become long-term paying customers.
Innovation accounting
Now, in Ries’ own words, innovation accounting is “the boring stuff”. But even if we agree that measuring and tracking progress rarely gets the pulse racing, it’s the nature of what is being accounted for that sets his method apart…
Ries defines innovation accounting as "a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero."
Or, as keynote speaker and author Soren Kaplan puts it:
Innovation accounting quantifies the market value of new business opportunities that are fundamentally ambiguous and uncertain - the breakthroughs and disruptors.
Ries devised three levels of innovation accounting, each increasingly more sophisticated as a new venture or startup evolves: Level 1: Customer Focused Dashboards, Level 2: Leap of Faith Assumptions (LOFAs) Dashboards and Level 3: Net Present Value Dashboards. More information on each can be found here.
While the dashboards and tools for innovation accounting are valuable, I’m more intrigued by the mindset behind it: fostering the right culture and motivation. Simply pursuing quick profits won't lead to long-term success. Instead, fledgling entrepreneurs should be driven by a genuine passion for their product or service and the value it provides to customers. Ries writes:
Traditional accounting judges new ventures by the same standards it uses for established companies, but these indications are not reliable predictors of a startup’s future prospects. Consider companies such as Amazon.com that racked up huge losses on their way to breakthrough success.
Jeff Bezos' "breakthrough success" with Amazon stemmed from his vision to create not just a retailer, but the world's most customer-centric company. This commitment to exceptional service transformed Amazon into a global powerhouse and allowed Bezos to join Gates on the super-rich dancefloor.
While not every entrepreneur will become a billionaire, recognising that success is more about thoughtful, customer-focused improvements rather than quick financial gains can boost a startup’s chances (for more on aligning short-term ideas with long-term goals, check out my video).
And for those craving some quantitative insight, Ries delivers:
Only 5 percent of entrepreneurship is the big idea, the business model, the whiteboard strategizing, and the splitting up of the spoils. The other 95 percent is the gritty work that is measured by innovation accounting: product prioritization decisions, deciding which customers to target or listen to, and having the courage to subject a grand vision to constant testing and feedback.
But if you try sometimes…
Startup discourse is riddled with clichés like “effort and a brilliant idea are all it takes to make it big,” reflecting the dreams that often fuel new businesses. But Ries is having none of it:
The story of perseverance, creative genius, and hard work persists. Why is it so popular? I think there is something deeply appealing about this modern-day rags-to-riches story. It makes success seem inevitable if you just have the right stuff. It means that the mundane details, the boring stuff, the small individual choices don’t matter.
Instead, the lesson is that we should sweat the small stuff. Ries argues that startup success hinges less on individual heroics and more on systematic adaptation. Being overly attached to your “brilliant idea” can make you resistant to necessary changes, while excessive pride in your hard work can cloud your judgment about whether your efforts are directed in the right way.
Even over a decade after its publication, The Lean Startup continues to challenge preconceptions and offer valuable insights: learn quickly from your market, adapt, and repeat.
You can’t always get what you want, but by sticking to these principles and learning the right lessons, you might one day be cutting shapes like Bill Gates.
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