Fireside Chat with Ash Maurya - Understanding Lean Startups - Part 3

August 11, 2014

This is the third part the multipart series: “Fireside Chat With Ash Maurya” (Read part 2 here).

Madhuri: One thing that I've heard is that most of the business projects fail not because you've not defined the problem properly but because the goals are huge. And even in my previous project we were finding it very difficult to define the goals very objectively. Unless we can measure the goal, it is hard to know whether we're moving in the right direction. Do you have any suggestions on how to define an objective goal?

Ash: Sure. The question was about how to define a goal around the project. In the past, while you were defining goals, were they more revenue numbers or customer numbers?

Madhuri: Well, they were not in terms of numbers.

Ash: That's the first step. There has to be some number. What I like to do is just do a ballpark of success goals and success milestone. Imagining yourself 3 years into the future. Its not about being accurate, you need to come up with some ballpark. You spend 3 years of your life on this project using all these resources. What would make it worthwhile? What is that minimum success criteria? Some people work through revenue numbers - generating this much revenue per year or per month.

So, when I released my first book it wasn't about how much revenue I could make. It was more about how many copies I could sell or what kind of distribution I could have. If I can make 10,000 people buy this book, that will make me very happy. So, for me that would make it worthwhile. It needs to be a measure of one of  those things.

But then, what's more interesting is that those are still big numbers. You know 10,000, what if it were 12,000 or 9,000, is that a failure? Again, that's more of a ballpark estimate. We can then bring that down by an order of magnitude or 2 orders of magnitude and make it something worth measuring. So if I have 3 years to get 10,000 books sold and I can't get 10 people who want my book today, then that's a big problem.

Lets take that business model working at scale. Its about systems thinking. Business models can be scaled down. What works at scale should also be demonstrated at a smaller scale.

A good extreme example of this is Facebook. Facebook was able to convince their investors that they could provide good Facebook in every college campus just on the basis of 5 or 6 college campuses. Because, they could get in 30 days, almost the entire college population using Facebook every single day. And they had done this by clock work. They had a whole system in place, that knew what to do. They were just repeating this, one after the other. Finally the investors said that they have cracked it for all the colleges. So the evaluation went up.

Then, they went to companies and said let’s see if the grown ups will also be interested in Facebook and they did the same thing. They went to a few companies first and demonstrated that they can get pretty much anyone. And, that's what an evaluation chunk is. But the idea in it is that you can take that concept and bring it down. So, you can take that success call and bring it down.

In the Lean Startup body at work we have a bunch of metrics that are not revenue driven. When you are building a product you may not have, say Facebook did not have any revenue for 7 years, but what they did have were the engagement metrics. They used derivative metrics to serve as leading indicators.

So, if we have 1000 people in the college campus and about 80% of the people are signing up every single day, that's super valuable to advertisers and if we can grow that number out to billions and billions of people now, that's going to be very very valuable.

There is innovation metrics that you can use that are not revenue based, but they are more engagement, acquisition and activation based, where you can see if you are moving in the right direction. And if you aren't, magically things are not going to happen and there will be mistakes that will be made. That's the whole process.

Again with the book example, I did a bunch of tests. I announced the book at my blog, and I said I wanted to sell 10,000 books. So I said if I can't put up with 1000 email addresses in a few months, then there's going to be a problem. Because there is no way that I can reach my goal without a lot of effort. And that was my criteria for moving forward. When I announced it and only when I got a 1000 email addresses, did I say I have the permission to go to the next level.

So that's where the 10X model also comes in. I would like to say, take your final goal and break it down in orders of magnitude and start demonstrating it and start battling up. The first goal is to get 10 customers and then get a 100 and then get a 1000. And each of those battles is not going to be linear, and it's going to bring in some non-linear challenges and you're going to be casting different risks along the way. That's the way that I see you can work top down and bottoms up to get there.

Vaidy: Its not sexy to think of billions anymore, right? You have to think in terms of trillions. Instagram selling for a Billion is not newsworthy today. What with WhatsApp going for so much more. And now every startup out there seems to be aiming for a Billion. My question is, shouldn’t there be some measure of the quality of the goal? Some kind of a general guideline?

Where do you draw the line? Yes, it is up to each individual, but there still has to be something which can be used as some kind of feedback for people that it could be a pipe dream.

Ash: If you ran into the Google founder back in time, like taking a time machine and going back to the day when they were building their startup and you asked them how big of a company it was then, they wouldn't have thought of a billion out there. When you look around, the way you get those numbers are from analog. So, they would have said, if they were super wildly successful- a million dollars. The best acquisition for a search engine back then was a million dollars. Google even tried to sell themselves for a million dollars. For several years Google didn't make any money. They had a very high engagement but low revenue because they were very minimal, not portal based like Yahoo, not putting ads, their banner ads were not working as well. Yahoo was making more money.

The number also changes according to time. And so, when I tell people to get their success milestones, there’s nothing wrong in ambition, there are people who say, because WhatsApp is now sold at close to 20 billion I will set my goal to 40 billion or 50 billion. Great! now lets just work backwards and show the same metrics.

Its something about looking at the analogs. But the other thing that I find is that for most of them its looking at the analogs but its again working grounds up. People don't get the idea of grounds up. Then the project kicks back.

Vaidy: So, I guess the bottom line is to use the feedback and re-adjust to reality.

Ash: But also, when you are setting your success milestone, I don't tell people. If you want to be overly ambitious, its fine. But I tell people to look at their minimum success criteria.

Even with entrepreneurs, there's a point where money does not make a difference. So, in Google’s case again their minimum success criteria was a million dollars. At that point, that was a lot of money for them. They would have been happy and Google would have been something else. But that changed over time. So that's the thing to keep in mind.

You need to say, “in 3-5 years what is that minimum success criteria?” And when you hit that you want your numbers climbing upwards.