By Eric Ries
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The Startup Way — released in early-October 2017 — is the continuation of the award-winning The Lean Startup — both written by Eric Ries. The Lean Startup introduced "lean manufacturing" techniques into the innovation community and is credited with institutionalizing "agile methodologies," "lean processes," and "A/B testing."
The Startup Way builds on the same topics and introduces new techniques to identify and develop cutting-edge products within large organizations. The book introduces: a "Metered Funding" model to add resources and funding to successful pilots, a model to create an entrepreneurial culture within an organization based on meritocracy, among other techniques. These techniques will shift your organization's culture towards one that is focused on innovation and positive financial outcomes.
To thrive in the coming century, every organization needs the ability to experiment rapidly with new products and new business models; to empower their most creative people; and to engage repeatedly in a process of innovation in order to unlock new sources of growth and productivity. A modern company must give every employee the opportunity to be an entrepreneur, recognizing entrepreneurship as a core discipline.
The lessons of the lean startup movement of Silicon Valley are the basis of The Startup Way, a series of tools and techniques that will unleash this entrepreneurial approach in any organization. The core of the approach is the small, internal startup team, a cross-functional group that is focused on testing leap-of-faith assumptions about potential new products with the use of minimum viable products. A repeated cycle of testing leads to an iterative process where failure becomes a key component in validated learning. Making use of growth boards and metered funding, the teams learn how to pivot or persevere on each project.
Embedding the entrepreneurial function in the organizational structure, creating career paths and assessment processes that value innovation, and making use of innovation accounting, ultimately leads to an organization that embodies the concept of continuous transformation.
The Five Principles
The principles of entrepreneurial management described in “The Lean Startup” (published in 2011) can be applied in any industry, size of company, or sector of the economy. Whether it is a large, established company like GE or a tech startup experiencing hyper-growth that wants to scale beyond their first, successful innovation, any organization can follow the same set of principles to find new sources of sustainable growth.
The “Startup Way” is a management system based on five principles:
- Continuous innovation that repeatedly finds new breakthroughs.
- The startup as an atomic unit of work.
- Entrepreneurship as the missing function in the organization.
- Unleashing entrepreneurship as a kind of second founding.
- Continuous transformation that rewrites the company’s DNA.
Creating a Modern Company
To thrive in the coming century, every organization needs the ability to experiment rapidly with new products and new business models; to empower their most creative people; and to engage repeatedly in an innovation process in order to unlock new sources of growth and productivity.
1. Old-Fashioned vs. Modern Companies
The world has become an incredibly unpredictable place and today all organizations operate in a marketplace of uncertainty. Time and again, business leaders and managers voice concerns about new global competition, the speed with which automation and information technology are rendering products and processes obsolete, and the onslaught of potential high-growth startups impacting every industry. In addition to these external sources of uncertainty, today’s managers also face the pressure of having to constantly launch new products, seek new sources of growth, or enter new markets.
At the same time, most organizations are operating a system of accountability that was designed in a very different time and context, with the goal of producing high-quality products on time, on budget, and at scale. The buzzwords were things like “standardization,” “mass production,” and “lean manufacturing.” In this old system, it was deemed important to meet a pre-decided forecast and failure was not an option. In fact, failure could be avoided with careful planning and proper execution.
A modern company, however, must have both the capacity to produce quality and reliable products and the ability to discover what new products to produce. It must give every employee the opportunity to be an entrepreneur.
An old-fashioned company is founded on steady growth, has experts in specialized functional silos, and operates huge programs. It uses internal functions like legal, IT, and finance to mitigate risk through compliance with detailed procedures. An old-fashioned company prioritizes all projects based on return on investment, traditional accounting, and market share. It is full of multitasking and meetings, with lots of middle managers, and a hierarchy of managers and subordinates. The company tends to pursue big projects, everyone is busy all the time, and “failure is not an option.” Barriers to entry protect an old-fashioned company from competition.
A modern company is founded on sustained impact via continuous innovation, and operates rapid experiments. It uses internal functions like legal, IT, and finance to help its employees meet their goals of serving customers. A modern company tries to maximize the probability and scale of its future impact and uses innovation accounting. It uses the internal startup, where a small number of passionate believers are dedicated to one project at a time, and is organized around leaders and the entrepreneurs they empower. The company pursues a portfolio of smart experiments, where efficiency means figuring out the right thing to do for customers, and “productive failures” are rewarded. A modern company leaves competitors in the dust through continuous innovation.
2. The Entrepreneurial Function
Established organizations usually lack the ability to act on new ideas, being encumbered with layers of bureaucracy that have built up over many years or even decades. No-one is explicitly in charge of grappling with uncertainty. Even hyper-growth startups can end up with big company structures. Instead, a modern company should recognize entrepreneurship as a core discipline.
Atomic Unit of Work
Not everything faced by a modern company can be managed by an internal startup unit, but it is the best way to respond to uncertainty. These internal units blend elements of research and development, sales and marketing, and engineering; they have no logical home in a traditional org-chart. The responsibility of the entrepreneurial function is to oversee these internal startups.
The atomic startup unit is a dedicated team that relentlessly pursues new ideas, stays true to the experiment, and is flexible enough to pivot when needed.
A New Style of Leadership
The entrepreneurial function also supports other functions in the organization in doing their work more effectively. Traditional management tools are focused on planning and forecasting. Identifying and managing entrepreneurs requires a new style of leadership. It is particularly important to realize that ‘entrepreneurship’ is not some special quality possessed only by a few people. In fact, you never know who the entrepreneurs are going to be; and even the non-entrepreneurs will benefit from this new way of working.
To take advantage of its latent pool of entrepreneurial talent, the organization has to make the entire employee base aware of the possibilities of entrepreneurship as a career path. This means meeting a series of challenges:
- Creating space for experiments but with liability constraints.
- Learning to make investments on the basis of evidence, experimentation, and vision, not just ROI forecasts.
- Creating milestones that can work even when there’s no accurate forecast.
- Providing professional development and coaching to help people get better at being entrepreneurs.
- Provide internal and external networks so that people know what it means to say, “I’m and entrepreneur.”
- Recognizing that high risk and uncertain projects need a separate and rational way to attract talent.
- Creating new incentive and advancement systems.
These are significant challenges. Fortunately, the structures and systems of Silicon Valley can provide the answers.
3. Lessons from Silicon Valley
Silicon Valley can best be described as a state of mind – a shared set of beliefs and values that have taken hold in dozens of startups around the world. The startup movement’s beliefs, systems, and structures can be replicated in other organizations.
The Importance of the Team
Silicon Valley investors make their decisions largely based on the quality of the team, looking first at the people and then at the idea. They see the team’s ability to come up with a good plan as an indicator of future success, even if the plan itself changes. What counts is the team’s ability to execute.
In addition, small teams are the most powerful, with members forming an intense bond and communicating easily. The team is adaptable; it’s almost impossible for bureaucracy to take over when the team only has a handful of members. And, almost by definition, a small team means a paucity of resources, which forces everyone to focus.
Finally, the small teams that create startups are inherently cross-functional. Everyone has to pitch in and solve the problems that come up.
Start With the Customer
The team has to start with articulating the problem to be solved from the customer’s point of view. Customers don’t care about market-share, they just want something that makes their lives better. Silicon Valley knows that the key word here is “better.” It’s not enough to just give customers a solution to their problem; the goal is to delight customers with a dramatic improvement.
Give Employees a Stake
Startups are usually for-profit companies. Nevertheless, an important component of the Silicon Valley ethos is to give every employee a stake in the company by offering them equity ownership. This gives employees a direct incentive to learn; it’s not a cash bonus, it’s a measurement of what the startup has learned about its future profits.
Focus on Leading Indicators
Concepts like gross profit, ROI (return on investment), and market share are trailing indicators. In contrast, leading indicators predict future success and include customer engagement, unit economics, and repeat usage.
Metered Funding from Investors
In Silicon Valley, whatever money the startup team raises is theirs to use as they see fit, with minimal oversight. But, without progress there won’t be another round of funding. Knowing that a board or group of investors will at some point need a progress report. This report gives the team accountability while also allows them the freedom to pursue their goal. Linked to this is the role of the board, which expects a report not on a fixed schedule, but when there is something to share.
One of the most widely-held Silicon Valley beliefs is that good ideas can come from anywhere, and that people should be given resources based on their talents, not on their pedigree. Related to this is the notion that, unlike in a traditional company, in a startup not everything has to be “figured out” before you can proceed.
A small team, operating on a meritocratic basis and backed with metered funding, can create experiments to try things out, without causing financial ruin for the larger organization. A culture that tolerates failure allows the organization to pursue a diverse range of ideas. Many may be dreadful, but a few will be truly groundbreaking.
Driven by the Mission
Silicon Valley is full of great visionary founders; they are an essential element in any startup. It is the vision that gives the team its guiding light and purpose, providing a deep sense of motivation and energy. Crucially, it also allows the team to pivot – to change strategy without changing the overall vision.
Entrepreneurship as Career
The ‘founder mentality’ is lauded in Silicon Valley; early employees at successful startups are sought after at other organizations and are given the kinds of opportunity for rapid advancement not typically found elsewhere. The entrepreneur is recognized as someone who can make things happen in a range of situations.
These lessons from Silicon Valley give us a common language to talk about the management practices that are the basis of the modern company. With the language and vocabulary established, we can now talk about the methods that are the basis of the startup way of working.
4. Lean Startup Tools and Processes
What are the basics of the Lean Startup method?
Leap of Faith Assumptions
Identify the beliefs about what must be true in order for the startup to succeed. In a traditional business, these assumptions are the company’s guess as to how its strategy will deliver on its vision. In a startup, these assumptions need to be made explicit, but keep it simple; list only those leap of faith assumptions that will have the most impact on the success or failure of the business plan.
Any startup will have two particular leap of faith assumptions that need to be tested: the value hypothesis (whether a product or service really delights customers once they start using it;) and the growth hypotheses (once the product has some customers, will it be able to get more).
Minimum Viable Product
Create an experiment to test the leap of faith assumptions as quickly and cheaply as possible. This Minimum Viable Product or MVP needs to be a real-life product that creates the maximum opportunity to be surprised by customer behavior and so allows the team to collect validated learning. The goal is to quickly turn an idea into something real, even if it is imperfect, in order to learn. It is not a first step toward scaling.
MVPs can take many forms, depending on the idea you want to test. It could be as simple as an online landing page designed to elicit a customer response; this can test marketing messages or be used to test how customers would respond to potential new product features. A pop-up shop is another form of MVP; a physical store or booth that allows you to interact directly with potential customers. However, it is very important to brainstorm multiple MVPs for any given project.
Think like a scientist. Treat each experiment as an opportunity to learn what is and is not working. The data gleaned from each MVP should lead to a report that has three components.
- It should be actionable: demonstrate a clear cause-and-effect that is related to changes in the product itself.
- It should be accessible: everyone involved in the project should have access to the report and be able to understand it.
- It should be auditable: in other words, the data should be credible.
Now, take what is learned from each experiment and start the loop over again. Building an MVP is not a one-off event. Once completed, the data will show where the idea has traction and where it doesn’t. With this information in hand, build the next MVP and keep learning. In this way, instead of a quest for perfection the focus shifts to a willingness to experiment and adapt the original idea, which eventually will lead to a better product.
Pivot or Persevere
Testing assumptions and learning from MVPs lay the groundwork for the key final step in the startup process. On a regular schedule, make a decision about whether to make a change in strategy – pivot – or stay the course – persevere. The decision to pivot may mean aiming at a different market for the product, or developing a different feature of the product, but it does not change the overall vision for the product. Each pivot creates a new set of assumptions to test, renewing the process all over again. It is important to schedule the pivot or persevere decision meeting in advance, say once every six weeks, so that everyone is focused on asking themselves, “Is our current strategy taking us closer to our vision?”
Nearly every successful startup has pivoted somewhere along the way, but not only startups can pivot. Netflix went from an established DVD mail rental service to streaming content. PayPal started life as a money transfer mechanism for palm pilots and is now a world-wide web-based payment system.
5. Management for Innovation
Entrepreneurial management does not replace traditional management; rather, it is a leadership framework designed for twenty-first century uncertainty. Although innovation is decentralized and unpredictable, it can still be managed. Doing so just requires different tools and safeguards than found in a traditional setting.
Accountability, Process, Culture, People
The systems, rewards, and incentives that drive employees make up the organization’s accountability; in other words, what are employees compensated for, rewarded for, and celebrated for? An entrepreneurial mindset must be recognized and rewarded.
Process means the tools and practices that employees use every day to get their work done. These habits and ways of working become the organization’s culture, its institutional muscle-memory. And, that culture in turn attracts a particular kind of person.
As these tools become used throughout the organization, a number of changes will occur. The existence of small startup teams creates more opportunities for leadership, and innovative people will be more likely to stay within the company. There is less waste of time and energy as management figures out in advance the best things to build, without spending significant resources on dead-end projects which can be killed off more quickly. Once failing with honor is seen as a skill, such ‘failed’ projects can be treated as the groundwork for future successes.
When the ability to experiment, learn, and pivot is embedded in the company culture, problems can be solved more quickly and efficiently, too. Ultimately, all of this will add up to more profit for the company.
How, exactly, to transform the paradigm of the traditional company into the entrepreneurial approach of the modern company is the focus of the next section.
How to Transform the Company
There are three phases to the company transformation: laying the foundation and creating the critical mass; rapid scaling and deployment; and dealing with the deep systems of the corporation. Each of these phases plays out across...