The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth

by Eric Ries

I want to talk about the distinctive management structures the startup movement has pioneered that—though rarely explicitly acknowledged—are key to its success.

Through many years of trial and error, we have worked out a novel system for managing risk, enhancing productivity, and finding new sources of hypergrowth. That system has, in turn, produced a culture supportive of long-term vision rather than immediate results.

So let’s dive in. How does the startup movement work? What are our universal beliefs? How can its systems and structures be re-created in other organizations?

“IT’S ALL ABOUT THE TEAM.” The most commonly held belief in Silicon Valley is that “it’s all about the team.”3 Beneath this catchphrase is a lot of deep thinking about how investors make decisions concerning which startups get funding and the chance to realize their founders’ vision. Most corporate managers are looking for good ideas, sound strategy, and a solid business plan. Once they determine what is to be done, they then try to find the right person or people within the organization to get it done. Personnel are evaluated by traditional criteria: past performance, résumé, and pedigree. (And, if we’re being honest, a fair bit of politics.)

if a strong team has a solid idea and a seemingly sound strategy, the team is more likely to succeed—but not because the investors necessarily agree with the idea or strategy. In fact, most experienced investors believe that a team is likely to change its idea and strategy along the way. Rather, investors see the ability to formulate a good plan as a marker of future success even if the plan changes.

a team that shows promising traction in terms of revenue, the reactions from its first groups of reference customers, and validated learning (insights based on real data) is more likely to prove a good investment. But again, not because of the traction itself but because of what the traction reveals about that team’s ability to execute.

We demonstrated fast cycle time, rigorous scientific decision making, product/design savvy, and good use of limited resources. He made a bet that if there was an opportunity in this space, we were the team to find it, and he turned out to be correct. This is the most prized attribute among professional startup investors: conviction, the ability to form independent judgments based on limited but revealing early information.

SMALL TEAMS BEAT BIG TEAMS This is one of the startup movement’s most cherished, universal beliefs. We believe in the power of small teams—whereas in traditional corporate structures, the size of the team equals the importance of the project.

There’s something uniquely powerful about a small, dedicated team trying to change the world. I speak from experience, of course, having had the privilege of being part of startup teams many times. There’s a reason why everyone in the startup ecosystem venerates this special kind of team structure: We’ve seen it accomplish the impossible time and again.

Many management problems that in a large organization make accountability difficult are solved by physical and emotional closeness, which is why startup teams are well suited to execute the Lean Startup concept of the pivot—a change in strategy without a change in vision

But there’s another important factor: scarcity. If you passionately believe in a mission but lack the resources to make it unfurl in every possible way, you’re absolutely forced to focus. There’s simply no extra time and no extra money, and corporate death threatens at any moment.

That’s why, in the tech industry especially, small teams put a huge premium on reusing existing technology and assembling products out of preexisting components. More than at any other time in history, these components can be combined without requiring explicit permission or a business-development relationship.

“The Internet is an open system: It works because you don’t need to ask anyone’s permission to be creative and because every address is equally accessible.”

Startups are distinct from small businesses; most startups resolutely do not want to stay small. Startup teams are like hunting parties, desperately searching for product/market fit. Once they find it, they must quickly reconfigure themselves into a full-on army. This metamorphosis brings with it new problems.

Startups are inherently cross-functional. Even if they begin with, say, a team of all engineers working on a hot new product, they inevitably face problems beyond engineering: financing, customer acquisition, marketing, customer service.

Sometimes startups have enough success and funding to be able to hire experts in these other domains. Often, though, the founders and early team have to dive in and solve these problems themselves.

Many of my own early experiences with techniques that would later become core to Lean Startup came about because I was forced to act as m...

That’s why Silicon Valley prioritizes cross-functional teams. The team may look different, depending on what the project is and which resources and people are available to it, but the organizing principle remains the same.

For an industrial project, the team might bring together a product designer and someone on the manufacturing side who can determine what the customer truly values, along with a salesperson who has experience in the field.

For an IT project, the team might consist of an engineer, a product person, a marketing person, and an accounts person. There are endless permutati...

When asked to present their problem statement, they said, “The problem is, our company doesn’t have sufficient market share in this market.” This is ludicrous: Customers don’t care about our market share; they only care if we make their lives better.

Amazon uses a method called “working backward” to make sure that discovering a true customer problem is the very first thing a team focuses on.

Until the team can truly articulate the problem from the customer’s point of view, nothing gets built. This hypothesis is crucial to keep the focus on learning.

The key word in this process is better. It’s not enough just to solve the customer’s problem. Silicon Valley–style companies aspire to delight customers by providing a solution that is dramatically better than anything they’ve seen before.

Despite all the talk of mission alignment and changing the world, startups are most often for-profit companies. However, this is not a requirement. I’ve worked over the years with what I lovingly refer to as “intentional not-for-profits.” In Chapter 9, we’ll explore the reasons why impact is a better way of evaluating startups, since the early years of almost every startup require working without profits. An essential part of Silicon Valley’s way of working is to make sure that every employee has a stake in the outcome,7 which, in for-profit and venture-backed startups, means that employees are offered equity ownership.

Startup equity is a complex financial derivative that powers the entire venture/startup ecosystem. It’s not profit-sharing. It’s not a union. But it is the greatest tool of employee empowerment I’ve ever seen.

Every time a startup raises money, investors and founders negotiate a valuation. Although this is expressed as a single number, it’s really the product of two components. One is the asset value of what’s been created so far: product, team and vendor relationships, and revenue. This is easy to assess. The more difficu...

So what can make a startup more valuable? Acquiring valuable assets, such as developing new products, hiring new people, and gaining more revenue. Changing the probability of future success (the 1 percent that achieves $100 billion above). Changing the magnitude of future success (the $100 billion above).

You can only see the asset value from the outside. But a rapidly growing startup is a double win from the investors’ point of view: the asset value is increasing at the same time as what the startup is learning is clarifying the probability and magnitude of future success. The value of an innovation lies in the future impact it might have.

Equity ownership allows for compensation, risk-taking, and investment in whatever is necessary. This means that during the early life of a startup, its management looks like that of a nonprofit organization: it’s all about impact and future impact.

Financial incentives aren’t everything; research has shown that offering bonuses and other financial inducements to enhance productivity are often counterproductive.11 Most people don’t join a startup for the money, anyhow. They join because of their commitment to the mission and their desire to make an impact by fulfilling the startup’s vision.

equity ownership is the least distortionary set of incentives. It allows employees’ intrinsic creativity, commitment, and motivation to flourish.

Startups become more valuable when they learn important things about their future impact. Though different for every company, these metrics are specific and serve as guardrails at every stage to mitigate risk.

What Silicon Valley has learned the hard way over the past few decades is that “no business plan survives first contact with customers,”12 as Steve Blank says (paraphrasing Prussian military strategist Helmuth von Moltke).

if you prefer General Eisenhower: “Plans are useless, but planning is indispensable.”

Every modern startup possesses a metrics dashboard that the team and board revisit on a regular cadence (schedule). The even more recent trend is to post real-time versions of this dashboard up around the office, on large flat-screen monitors that are visible to everyone. This is part of the transparency that startups tend to favor and that many large enterprises find frightening. But as a coordinating device, it’s extremely helpful. There can be no question about how well the company is doing when everyone shares the same set of facts.

Inside was the typical duality you’d expect of a tech startup: inexpensive secondhand furniture and floor-to-ceiling stacks of Costco snacks and quick calories alongside extremely high-end, sleekly designed computer hardware. It was quite a culture clash for the executives in suits.

Instead, we in the startup movement favor a system that encourages the flow of information in a way that doesn’t hinder progress, so that employees and managers can focus on producing results instead of just reporting them.

The only way to win in this world is to take more shots on goal. Try more radical things. Pay close attention to what works and what doesn’t. And double down on the winners.

Outside of Silicon Valley, Mark Zuckerberg’s declaration that “We don’t build services to make money; we make money to build better services”20 was met with eye rolls. But in Silicon Valley, we really believe it. Silicon Valley is obsessed with vision and the visionary founder who can uniquely execute it. This focus has been a source of some controversy as Lean Startup has become more popular.

“The key reason for the success of empowered execution lay in what had come before it: the foundation of shared consciousness.”21 Vision provides a profound sense of motivation and energy and an unparalleled recruiting advantage.

the startup as the atomic unit of work is distinct from earlier management concepts such as the “cross-functional work cell” in lean or any number of functional team/committee “task force” structures that are common in corporate settings.

Without a vision you cannot pivot. The accuracy of that statement is baked into the very definition of pivot: A pivot is a change in strategy without a change in vision. The vision is the part of the team’s mission that is nonnegotiable. It’s what you’d rather go out of business for than compromise on. It’s the essential resistance against which teams can push in order to find unusual breakthrough strategies.

“You’re not going to get anywhere if you have a big vision but you’re not solving the customer’s problem. If you’re not solving a problem, you’re never going to be given the ability to implement that grand vision.” And the way to solve problems is to uncover them as you go and then pivot to meet them.

Vision is often discovered through the process of building a startup. As the process unfolds and the visionary is forced to confront difficult choices about what to change and what to stick with, she actually comes to realize which aspects of the original vision are expendable and which are essential.

Vision is often the reason that startup teams are able to pivot in a way that traditional product teams seldom can. The structure of the startup team forces it to confront reality in all its unpleasant p...

WE BELIEVE IN ENTREPRENEURSHIP AS A CAREER PATH It’s important to understand that the entrepreneurial way of thinking about vision applies across the board, to far more people than just the CEO and the original founders of a company. Silicon Valley has a deep appreciation for the “founder mental...

This rapid change doesn’t agree with everyone, but those who thrive in such an environment quickly develop reputations as more than just good engineers, marketers, or managers. They become known as key lieutenants who can make things happen in the highly uncertain domain where startups live.

The ability to both work in and lead these kinds of high-performance teams requires particular skills. They do not come naturally to everyone, and are absolutely distinct from most other business skills that lead to success in a corporate environment.

So the roles get deeply intertwined. It’s a reciprocal web of trust, expertise, and reputation that is an important part of why startup hubs drive so much entrepreneurial success.