Most entrepreneurs work endless hours to create the best product they can muster before taking it to market. Eric Ries thinks that's the worst thing a start-up can do. Having failed several times himself--after putting everything he had into the products he was developing--Ries realized there had to be a better way. In his recent book, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, Ries spells out his strategy. We caught up with him to learn how to apply his lean start-up theory.

You've started several companies that have subsequently folded. What's the most important mistake that start-ups make?
Start-ups make so many mistakes that the challenge to identify the root cause of a failure is tough. But believing in your own plan is probably the worst. In our case, we were convinced that if we did a really good job developing and implementing a good plan (writing a business plan, doing focus groups--all the traditional stuff,) we would be rewarded with success. If I showed you the business plans, they were incredibly well written. The only problem is that reality didn't conform to our plan. We didn't bother to double-check our plan--we just assumed we were correct and that's where most of us go wrong.

So from this idea, you've formed the concept of the "Lean Startup." The basic idea is that companies should allocate their resources more efficiently. That's easier said than done given that start-ups are usually in a hurry and don't have the perspective of knowing what's efficient and what isn't. How can entrepreneurs actually employ your strategy?
The fundamental idea is to treat everything a start-up does as an experiment. Everything a start-up does should be a test--a hypothesis. You really want to organize your company so that it's built to learn. "The Lean Startup" idea is based on lean manufacturing--a management philosophy that we can easily adapt to the start-up culture. A key part is creating a feedback loop: build, measure, and learn. We want to get through that loop as quickly as possible. But it's not just failing fast, it's failing well. 

A big part of your theory is to engage the customers early on and to test things. How do you find customers or potential customers if you don't have a final product or a well known brand? 
Testing with only friends and family is a bad idea. Friends and family are more likely to give you positive feedback--and that's not helpful. But this part should be easy for entrepreneurs. One of the assumptions you've probably built into your business plan is how you will get customers after the product is done. You can follow that plan right now to get started on finding those customers. Most entrepreneurs don't need as many customers as they think. A lot of people think 10 is too few for a sample. But if all 10 refused a product, why is that not enough? If you want 100, 1,000 or a million customers, you first have to get 10. But the answer for every business is different. It will be a different size if you're selling a B2B product verses a product for teenagers.

So what sort of product do you create that allows you to test your concept without finalizing the product you plan to take to market?
What you want to do is create the "minimum viable product." That's essentially the smallest, simplest version of your product that allows you to begin that process of learning. What I mean by "minimal" is not just referring to features on a product, but also minimal in the number of people to show it to. The most common way to do it is to allow people to pre-order a product [doesn't have to be online] before it's ready. If your campaign fails, you never have to build the product. But that's just one technique. Concierge MVP is another idea in my book. You can do this with almost any business.

Can you give a couple of examples?
Food-On-The-Table, an Austin company, is an example I mention in my book. Today the company has one million customers and it has a way to automatically fulfill orders, but when it started it had only one customer. It was one parent. The company did the menu-planning by hand, and they met the customer in person once a week in the Starbucks in a parking lot of the grocery store where that person did their shopping. The customer had no idea that they were the only customer or the first customer. But they learned how to serve that customer and were able to get several other customers before they invested in automation.

Another example is Zappos. I often ask people how they would build Zappos. You need a good selection and customer service option, they'll say. You'd need to build a big call center, a big distribution center, etc. But the MVP for them was as follows: They went to local shoe store, took pictures of each of their products and put them online. If anyone bought shoes from them [at this early stage], they planned to go to the store, buy the shoes and mail them to the customer. There was no big business behind it; there was a website and a hope that they'll get so many orders that it will get annoying to do all the purchasing and shipping manually. It was all to test their big idea.

Sometimes entrepreneurs learn that their product is all wrong, but you think that's not a horrible thing. It can lead to what you call a 'pivot' in your business plan.
Yeah, Groupon is a great story of pivot. They spent the first million of funding building The Point, a product that no one has heard of. It was sort of like a collective action site for political stuff. The site got no traction. They were running out of money and their board wasn't very happy. So they decided to take their idea of collective action and apply it to commerce. But they didn't take another year. Instead, all they had was a wordpress blog for the original Groupon and they manually got a deal. They organized a two-for-one pizza deal for the pizza joint in their lobby. They sold like 20 Groupons. They gave away 20 free pizzas. Most people would not have thought much of it. But they had just failed for a year to get people to do something and this first deal got people to act. It was a classic pivot. Famous pivot stories are often failures but you don't need to fail before you pivot. All a pivot is is a change is strategy without a change in vision. Whenever entrepreneurs see a new way to achieve their vision--a way to be more successful--they have to remain nimble enough to take it.