You thought founding a company was all about disrupting incumbents, or scaling up, or getting rich? Eric Ries’s 2011 book, The Lean Startup, said no—a startup is a lab. Its purpose is to conduct experiments in a business environment where the only certainty is extreme uncertainty.
Actually, there is one other certainty: That popular business books will introduce rafts of new acronyms. According to The Lean Startup, a startup’s purpose is to launch MVPs—“minimum viable products”—into the world to discover whether the founders’ LOFAs—“leap-of-faith assumptions”—pass the reality test. If so, your startup might have a shot at achieving PMF—“product-market fit”—and unleashing exponential growth. If not, you’ve failed early enough to keep your losses small, and you’re free to pivot—to fulfill your original vision with a new plan.
Borrowing ideas from agile software development and lean manufacturing, Ries’s book found its own PMF, and it kicked off a movement that’s still working its way through the tech industry. Now the author is back with a follow-up book, The Startup Way, aimed at propagating lean startup thinking inside General Electric-size corporations, government institutions, and nonprofit organizations that covet Silicon Valley-style nimbleness. He’s also unveiled a new project called the Long Term Stock Exchange, aimed at creating a different kind of capital market that rewards long-view strategies over quarterly profits.
Affable and voluble, Ries is a fast talker who puts each new sentence forth tentatively, as if the words themselves are an MVP he’s testing out on his listener. Over a recent brunch in San Francisco’s Cole Valley, he spoke with me about how people inside large organizations can be motivated to work with the initiative and drive of startup acolytes.
Scott Rosenberg: The Startup Way argues that you can transplant the stuff that drives founders—the motivation and passion, and the openness to experimentation and learning from failure—into big old companies and institutions.
Eric Ries: Absolutely.
That feels so counterintuitive.
It can’t possibly be true. I know.
Everybody knows founders are motivated by ownership, belief in a mission—things that are a function of independence, self-determination, and the absence of a boss. How did you come to this alternate view?
Accidentally. I come at this from product development. The reason I became an entrepreneur was none of those things you listed. Having to build a company—that was a burden. But I was like, “At least I can have this impact.” I wanted to build knowledge. I’m an engineer. I make software.
And so when people started asking me to work with their product development team, to use these principles, it didn’t even occur to me to ask, “Is this a startup or not?” This is entrepreneurial management. Yes, it works in a startup. But there’s nothing foundational about it that requires it to be a small company, or to have equity, or any of that other stuff—the surface characteristics of a startup. I committed myself to the theoretical proposition that anyone could use these ideas.
Then what kept happening over and over again is, I’d see these incredible transformations take place, and wonder, “What am I witnessing?”
Can you give me an example?
It especially started happening in the government. Before the presidential innovation fellows, before US Digital Service, [the government] had this program that they were calling Entrepreneurs in Residence. An early project had to do with the way that INS [Immigration and Naturalization Services] grants visas. It was before there was a startup visa category, so if you were an entrepreneur, you’d apply for a visa in some existing category.
It wasn’t that the law said you shouldn’t get it. It was just that the examiners didn’t know what to do with that application. You’d have someone who’s got a $10 million investment from Sequoia and they’d be asking, “What are your salary prospects?” Those were the wrong questions.
We met with this team [who was tasked with helping fix things inside INS], and we had the conversation: Who’s the customer here? At first, they were very standoffish. To them, the examiners were the enemy—they’re the ones who get this wrong. I said, the examiner is your customer. You’ve got to sit with them, and bring them on the team. The energy that got unlocked, the passion that they had, the speed in which they got it done, was just crazy. So much for my preconceptions about people who work in the immigration service.
So what goes wrong when you try this? What gets in the way?
You put this magic bubble around this team, and they become entrepreneurial, and then someone will come in and start mucking with their budget or inject politics into it, or force them to work in functional silos. You’d see that bubble pop. That’s when I realized, it’s not enough to teach this to teams. We have to teach the executive structure around them, that they’ve got something special here and not to ruin it.
How do you do that?
Everything Silicon Valley believes in: Start with the customer in mind, work in small cross-functional teams, stage risk with metered funding, iterate and experiment, and so on.
The work I was doing at GE and other big enterprises provided a unique perspective. I watched teams move in and out of this startup domain. Silicon Valley we never see that. We only ever stay in our one domain. We never go back and forth.
The one other piece of evidence that sealed it for me was the people who are in charge of the transformation, the women who built FastWorks at GE [the program Ries worked on that promoted entrepreneurial thinking], they started to call themselves cofounders. At first, I thought, “That’s odd. That’s not a business title.”
But there’s a reason why they’ve been able to do this thing. One of my interviewers when I was on tour in D.C. said, “Come on, you can’t compare what they’re doing to how hard entrepreneurs work.” But they worked every bit as hard as any founder I have ever met. They’re just as committed to their vision. In fact, in some ways, their work is more impressive to me because they’re not going to become billionaires, but they’re going to have the impact. That’s what they care about. I think when you start to look at it that way, you have to realize that we already know this, because we admire nonprofit entrepreneurs, too.
As the founder mythology has it, you start a company thinking, “I’m going to be the next Mark Zuckerberg.” But a lot of people in tech today doubt there will be another Mark Zuckerberg—the incumbents are too strong. Is “found a startup” still an effective way to make an impact?
A lot of those conversations are about, “Is the opportunity over?” Maybe the opportunity to get rich quick is gone. So what? It was only going to happen to a few people. But I don’t think that was ever really the motivation. It wasn’t even Mark’s motivation, as best I can tell, in the conversations I’ve had with him.
The entrepreneurial path is certainly not for everybody. But I think it’s for more people than we currently think. By limiting it only to problems that could plausibly return a Facebook-sized outcome, we prevent ourselves from tackling a huge range of problems that are still important but don’t lend themselves to venture economics. For a lot of businesses, the reason they can’t get venture economics is that you can’t build a moat [and keep everyone else from competing]—once you show that it can be done, you can’t capture all the value for yourself. But from a social point of view, those are terrific outcomes.
The book’s centerpiece example is the FastWorks project at General Electric that you advised. GE dared you to show that you could get small teams inside a giant corporation working entrepreneurially, along Lean Startup lines, testing minimum viable products and pivoting as needed. They challenged you with this massive gas turbine project, and when that succeeded, they wanted to teach the approach company-wide.
The number of people I worked with at GE was in the thousands—maybe even 10,000. But that’s a drop in the bucket at a 300,000-employee firm.
When we did the GE training, beginning in 2012, we did it not only for every business unit for the company, but also for every functional area. We trained HR, we trained IT, we did all the headquarters. The training for the scientists at the global research center was my favorite. At first, they asked, “Why do I have to do this training?” You could see how skeptical they were. So I said, “Hey, why do you do astrology?”
“How dare you suggest that! We’re scientists!”
“Then why, when you go into the business domain, do you start predicting the future?”
They were like, “But, but, but…” And because they had real grounding in the scientific method, they had the easiest time making the transition.
This gets at a larger question: For your Startup Way ideas to work, top executives have to make it possible, either by providing the right incentives, or providing air cover for people who are introducing change. And those executives are operating within their own constraints—capital markets, quarterly earnings, all of that. I guess that’s where your Long Term Stock Exchange project comes in?
Yeah. As a society we have serious challenges, no matter how good your management system is. That’s why I’m working on LTSE. One company I was working with asked me to a meeting with one of their largest, traditional investors. The investors wanted to learn about the company’s innovation efforts. Now, every company says they’re doing innovations, and most of them are total BS. But what drives a company’s stock price, much more than anything you do in the current period, is expected future growth. If they don’t believe your innovation story, then even if you succeed in innovating, you don’t get credit for it. They’re like, “Well, it’s a one-off.”
Having a system like Lean Startup that allows you to tell a story about a rigorous and systematic practice affects the share price much more. After my conversation with them, they said, “This is the first time we’ve ever heard a story that we believe. Forget this company! Will you come in and help us?”
I got a preliminary taste of something that’s going to be really important in the future: How do we tell these narratives in a way that builds trust and mutual engagement between key stakeholders? I had that exact same conversation at another company. They asked me if I’d help them with their labor relations. They were having this acrimonious negotiation with their union, and they used Lean Startup.
And the union was resisting the whole approach?
No. This guy worked in HR on labor relations at one of these companies that had said everybody has to do Lean Startup.
That sounds challenging. You’re not testing a website, you’re inside a company trying to reach a contract with your own employees—how do you take a Lean Startup approach to that?
Right. So he’s asking, “What am I supposed to do?”
I was like, “Well, who’s the customer? What do they want out of it?”
“The union reps. But they don’t really represent what the workers really want.”
“Well, is that true? How do you really know?”
And he’s like, “Well…”
“Let’s go find one factory and try it.”
Like a minimum viable product test, but with a contract arrangement.
And the HR guy says, “They’ll never allow that.”
“Well, I’ve spent some time with unions, also. I think they think you’d never do it.”
I’ve gotten to play diplomat in those situations a lot. People tried something that, at the beginning, they would have said, “We would never.” I feel there’s all this room in the economy to do things better.
Have you ever worked in one of these big companies you’re talking about?
I was an intern at Microsoft back in the day. Summer in college. This is the old Microsoft, not the warm and fuzzy Microsoft under Satya Nadella. I was the least important person in the company. You could not be any lower on the totem pole and still be a full-time employee. That’s my actual big company experience.
One of the biggest differences between those companies and the startup world is how accountability works. At a startup, you’re accountable to investors, but other than that, you’re a free agent. At a big company, even if you’re on some sort of internal startup-style team, you still know that your paycheck is going to keep coming even if the experiment fails.
The concept that helps the most here is what I call “career equity.” In an organizational context, your true compensation is not your salary and bonus. Your true compensation is your perception of your future career prospects in the organization. This can be financial, but in a lot of organizations, what people really crave is autonomy. The issue that people don’t get fired and they don’t lose their paychecks is dwarfed by the opposite, and equally bad, problem: that people feel like, “If I’m perceived to have failed, my prospects will be damaged.”
People want impact. They want to believe that they’re working toward that. For a lot of projects, the technology is not ready for a stand-alone startup to raise money to do this thing. Maybe eventually 3D printing will allow you to make these things, but not yet. You have to control a supply chain to make the thing you want, so you have to do it in the context of a large organization. And very entrepreneurial people join these organizations thinking they’re going to have this impact—and then they get stymied.
Your whole argument has an underlying long-term perspective, and yet our vision of startups certainly is that they are evanescent and ephemeral—they come and go. How do you reconcile that?
There’s an old lesson from lean manufacturing where they say, OK, you’re doing lean manufacturing transformation. If it’s successful, you will unlock massive productivity savings. You have to promise people up front that you won’t use that for layoffs. Otherwise, they won’t help you. Why would they help you undermine their own job? For a management team that’s only thinking about the current quarter, they would never make that kind of promise. They want the layoffs. Well then, you don’t really want the productivity savings.
The Lean Startup method has the same issue. Sure, we can use it for new products, but we can also use it for productivity gains. If you’re not committed to see it through, and guarantee people they’re not going to get laid off from this, you can’t do it.
Even among the very short-term Silicon Valley folks, there’s a pretty much universal agreement that companies that are built to flip don’t succeed. Yes, we do often see these crazy, short-term payoffs, but it just doesn’t work if you’re just trying to make money. First of all, it’s irrational. It’s not a good way to make money on average. You’re much better off in investment banking.
This is why vision turns out to be so central. If you study medieval warfare, there’s this concept called Schwerpunkt—the shared vision of what a military unit is trying to accomplish together, and whichever side has the stronger version of that prevails. I always thought that was some kind of mystical thing. No, it’s actually a very specific organizational need: You can’t do decentralized decisionmaking if people do not have a common sense of where you’re going. If you don’t have a vision, you can’t pivot. Because a pivot is actually a change in strategy without a change in vision. If you don’t have a vision, you wind up running around in circles.
But now “pivot” has become this all-purpose joke meaning—“Oops, that didn’t work, let’s try something else.”
It’s a cautionary tale. I got this wrong myself. I was really into A/B testing and iteration and spreadsheets that could turn the crank and magically solve my problems for me. I was working with one of the very early companies I was advising on Lean Startup. It was doing a Facebook dating app and they were more hardcore about A/B testing than anyone I’d ever seen. I told them, “You guys are going to do great.”
A few months later, they were selling porn. They wondered, “Why are we selling porn?” All they cared about was anything that makes the numbers go up. They were horrified. It was by increments. There was no vision that was organizing what they were doing. In the short term you make the numbers go up, but it’s actually like cutting down the trees in the forest. Maximize current returns by destroying the asset.
A lot of your stories involve old, ossified management systems that people do by rote and that stand in the way of adaptive change. Can you see that happening to all these Lean Startup ideas down the line?
That’s our highest aspiration. To me, that’s success. When you imagine an idea, you hope it is not just some fad, that it becomes so successful it’s causing problems due to its ubiquity, and therefore people discover new edge cases that you didn’t consider.
This is going to be the craziest century in human history. We are going to look back on what we’re living through right now as the good old days. It’s going to get so much weirder and faster. Do you think that we’re not going to have any better ideas about management? A lot of companies now are effectively already human-machine hybrid. If you’re an Uber driver, who’s your boss? Your algorithm is your boss. Who makes the algorithm? A human being. But you don’t have any appeal. And we’re not even very good at it yet.
So how do we prepare for that?
We have to build a management system that contains within it the seeds of its own evolution. As part of the overall theory of entrepreneurship, we have to treat experimenting with the organizational form itself as a distinct responsibility. That’s actually pretty avant garde.
I think our grandkids are going to look at us and say, “That’s how you managed companies? Really, grandpa?’ You read about scientific management a century ago—those guys were running machine shops, okay? By modern standards, a very simple business. And they couldn’t figure out which products were marginally profitable and which ones cost money. They didn’t have statistics or the theory of marginal profit. You read the books and think, “These people were really dumb.” Modern managers would eat that problem for lunch.
They weren’t dumb—they just didn’t have the right conceptual framework. How dumb are we going to look? We hope the work we do now makes it possible for our grandkids to make us look foolish. That’d be great.