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

by Eric Ries

AN OLD-FASHIONED COMPANY is founded on steady growth through prescriptive management and controls, and is subject to tremendous pressure to perform in short-term intervals such as quarterly reports. A MODERN COMPANY is founded on sustained impact via continuous innovation, and focused on long-term results.

AN OLD-FASHIONED COMPANY is made up of experts in specialized functional silos, between which work passes in a stage-gate or waterfall process that sends projects from function to function with specific milestones tied to each handover. A MODERN COMPANY is made up of cross-functional teams that work together to serve customers through highly iterative and scientific processes.

AN OLD-FASHIONED COMPANY tends to operate huge programs. A MODERN COMPANY operates rapid experiments.

AN OLD-FASHIONED COMPANY uses internal functions such as legal, IT, and finance to mitigate risk through compliance with detailed procedures. A MODERN COMPANY uses internal functions to help its employees meet their goal of serving customers, sharing the responsibility to drive business results.

AN OLD-FASHIONED COMPANY prioritizes even highly uncertain projects based on ROI, traditional accounting, and market share. To measure success, project teams track and share numbers designed to look as good as possible (“vanity metrics”)—but not necessarily to reveal the truth. A MODERN COMPANY attempts to maximize the probability and scale of future impact. Project teams report and measure leading indicators using innovation accounting. In a for-profit context, this goal often follows Jeff Bezos’s advice to “focus on long-term growth in free cash-flow per share” rather than traditional accounting measures.

AN OLD-FASHIONED COMPANY is full of multitasking: meetings and deliberations where participants are only partly focused on the task at hand. There are lots of middle managers and experts in the room to give their input, even if they don’t have direct responsibility for implementation. And most employees are dividing their creativity and focus across many different kinds of projects at the same time. A MODERN COMPANY has a new tool in its arsenal: the internal startup, filled with a small number of passionate believers dedicated to one project at a time. Like Amazon’s famous “two-pizza team”—no larger than you can feed with two pizzas—these small teams are able to experiment rapidly and scale their impact. Their ethos: “Think big. Start small. Scale fast.”

AN OLD-FASHIONED COMPANY is composed of managers and their subordinates. A MODERN COMPANY is composed of leaders and the entrepreneurs they empower.

AN OLD-FASHIONED COMPANY tends to pursue big projects that are expensive and slow to develop in order to make sure they’re “right,” using a system of entitlement funding that remains similar from year to year. A MODERN COMPANY pursues a portfolio of smart experiments and contains the cost of failure by investing more in the ones that work, using a system of metered funding that increases as success is proved.

AN OLD-FASHIONED COMPANY is one in which efficiency means everyone is busy all the time, making it easy to “achieve failure” by efficiently building the wrong thing. A MODERN COMPANY is one in which efficiency means figuring out the right thing to do for customers by whatever means necessary.

AN OLD-FASHIONED COMPANY believes that “failure is not an option,” and managers are skilled at pretending it never happens by hiding it. They may pay lip service to the idea of “embracing failure,” but their reward, promotion, and evaluation systems send a profoundly different message. A MODERN COMPANY rewards productive failures that lead to smart changes in direction and provide useful information.

AN OLD-FASHIONED COMPANY is protected from competition via barriers to entry. A MODERN COMPANY leaves competitors in the dust through continuous innovation.

Let’s try a thought experiment. Imagine for a moment what companies must have been like before the advent of marketing as a recognized discipline. There were no chief marketing officers, no product marketing or brand managers as we recognize them. There was no way to get promoted on the strength of your marketing skills alone. Back then, everyone—and so, in truth, no one—was responsible for what we now call marketing: advertising, sales collateral, even product management.

So by growing and hiring, successful startups inadvertently but inevitably transfuse an enormous amount of big company DNA into their company. Then comes the challenge of reorienting these people into a startup culture. And what tools do they have at their disposal? Training, compensation, team structure, physical environment—all the trappings of a traditional organization.

When I meet with CEOs, I often ask them: Who in your organization is responsible right now for the following two things? Overseeing high-potential growth initiatives that could one day become new divisions of the company. Infusing everyday work across the organization with an entrepreneurial, experimental, iterative mindset.

As we’ll see, great entrepreneurs can (and should) come from anywhere and everywhere within the organization. Great ideas sometimes appear in unexpected places. So the entrepreneurial function has to be integrated into the fabric of the organization very carefully.

They need the ability to consistently and reliably make bets on high-risk, high-reward projects without having to bet the whole company. And they need to find, train, and retain the kinds of leaders who can pull this off. After witnessing and working with many companies, large and small, grappling with this, I believe we should simply call this function “entrepreneurship.”

The first responsibility of the entrepreneurship function is to oversee the company’s internal startups. The company’s leaders need to understand the startup as an atomic unit of work, distinct from other kinds of project teams that companies typically employ.

The second responsibility of the entrepreneurial function is to manage the problem of success.

The path of one internal startup over time, within a division. It begins as part of a cohort of seed-stage experiments and, over time, grows. As many of its peers die for lack of traction, it continues. Over more time, the ratio of experimentation to execution shifts, until the startup is dominated by execution activities. Then and only then can the parent division take over full responsibility for managing it.

But even a newly created startup has to execute. Even a startup with only ten customers has to start asking itself how much energy to invest in serving existing customers versus acquiring new ones. And the laws of corporate gravity still apply: The scarcity of resources most startups deal with argues for more, not less, financial discipline.

Let’s be honest. Entrepreneurs are not the easiest people in the world to manage. Even the best entrepreneurs I know struggle to create an environment that other entrepreneurs would want to join. And everyone struggles with the basic question of how to tell the difference between an entrepreneur and a renegade who simply lacks the discipline and commitment to follow rules.

But this also points to another difficulty. The entrepreneurial function is not “just another function”—because it also impacts and supports the other functions in doing their work more effectively. It requires a level of integration with the company and its culture that is uniquely challenging even compared to other difficult corporate transformations. And this boundary-blurring behavior is just the beginning of the story, because…

Lean Startup—style tools are incredibly useful in a wide range of applications that don’t have the extreme uncertainty of a new product but still have some uncertainty.

Non-startup managers need to know what is going on. This is critically important, because there is no way around the fact that entrepreneurs cause trouble! They foment conflict.

You never know who the entrepreneurs are going to be.

We’ll return to these wide-ranging ideas of who is an entrepreneur in later chapters, especially Chapter 10. But, for now, I want to focus on the present reality facing most companies. Paradoxically, at the very moment in history when they critically need entrepreneurial talent, they are deeply confused about where to find

“THINK BIG. START SMALL. SCALE FAST.”

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.)

Silicon Valley investors, in contrast, make their investment decisions primarily based on the quality of the team: They look at the people first, then the idea. Of course, they believe that 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.

SMALL TEAMS BEAT BIG TEAMS

There’s something uniquely powerful about a small, dedicated team trying to change the world.

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.

EVERY TEAM HAS A CROSS-FUNCTIONAL STRUCTURE AT ITS CORE 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.

EVERY PROJECT STARTS WITH THE CUSTOMER IN MIND I can’t tell you how many times I’ve worked with teams in traditional enterprises that literally don’t know what problem they are trying to solve from the customer’s point of view.

For many internal projects—in IT, HR, and finance—as well as products sold via third-party distributors, people often don’t know what the word customer even means.

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

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.

SILICON VALLEY STARTUPS HAVE A SPECIFIC FINANCIAL STRUCTURE

Financial incentives aren’t everything; research has shown that offering bonuses and other financial inducements to enhance productivity are often counterproductive.

WE FOCUS ON LEADING INDICATORS 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.

Implicit in this focus on metrics is a clear understanding of the difference between trailing indicators (such as gross revenue, profit, ROI, and market share) and leading indicators that might predict future success (such as customer engagement, satisfaction, unit economics, repeat usage, and conversion rates). Business plans tend to be made up of forecasts and predictions, always denominated in gross metrics (what we call in the Lean Startup movement vanity metrics). What Silicon Valley has learned the hard way over the past few decades is that “no business plan survives first contact with customers,”

In Silicon Valley, the money you raise is yours. You can spend it on what you like with minimal oversight (especially in the early stages). But Lord help you if you try to raise more money and you haven’t made any progress.

WE BELIEVE IN MERITOCRACY This is one of the most widely held beliefs in the startup movement: Good ideas can come from anywhere, and people should be given resources and attention based on their talents, not their pedigree.

There’s a now-famous interview with Mark Zuckerberg, back when he was building what he called “TheFacebook.com,” in which he’s very passionate about his idea, but also not very clear about it. In a traditional business setting, people wouldn’t have invested in his idea after listening to his description. He said, “I really just want to create a really cool college directory product that is very relevant for students. I don’t know what that is.”17 But startup culture made it possible for investors to take him seriously, and it gave him a chance to experiment with his idea.

With the right structures in place, this kind of thing can happen as companies scale,

OUR CULTURE IS EXPERIMENTAL AND ITERATIVE

But it’s important not to take for granted just how much experimentation this system allows. The combination of pulling good ideas from everywhere, having strict limits on funding (and, therefore, on liability), and creating a culture that tolerates failure allows the resulting ecosystem to pursue a diverse range of business ideas—most of which are terrible, but a few of which can be truly disruptive.

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.

A STARTUP IS MISSION—AND VISION—DRIVEN

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.