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

by Eric Ries

Phase Two, which is for rapid scaling and deployment.

Phase Three: dealing with the deep systems of the corporation.

Everyone knows you can’t predict the future with that kind of accuracy. And yet many of the talented executives in the room had forged successful careers by doing precisely that.

Now the energy in the room was starting to shift. We’d gone from five years to one year for putting a real product into the hands of a real customer. But the team kept going.

“If we don’t need to learn anything, if you believe in this plan and its attendant forecast that we looked at a few minutes ago, then what I’m describing is a waste of time. Testing is a distraction from the real work of executing to plan.”

looks different depending on the organization, but I’ve noticed certain common patterns that recur in many different kinds of organizations: Start with a limited number of projects and build from there in order to create a comprehensive set of cases, stories, and results to show how the new method works in this particular organization. Create dedicated, cross-functional teams to undertake the pilot projects in order to embed functional diversity from the start. Create a growth board–type system that allows executives to make swift, clear decisions about the projects presented to them. Teach early teams how to design Lean Startup–type experiments that help them plot a course through uncertain terrain. Use the right startup-style metrics to measure the results of those experiments. Build a network of leaders in the organization who can help resolve problems that come up as the new way of working comes into conflict with entrenched methods. Work by exception at the start in order to move forward quickly and to defer deep changes to organizational structures until later phases. Translate the new concepts into company-specific language and tools.

CRISIS: Sometimes, a crisis forces change.

STRATEGY: Other times, a new organizational strategy clearly necessitates a new way of working.

HYPERGROWTH: Success can be its own form of crisis. When a startup achieves product/market fit, it can be forced to grow extremely rapidly.

What all three of those scenarios have in common is that they unleash a tremendous amount of energy.

destructive. Those who have a way to turn that energy into productive change are at a decisive advantage.

HOW THE SUCCESS OF SERIES X INFLUENCED GE The Series X workshop kicked off a transformation process. After its success, we continued to coach new teams until we had a critical mass that touched every combination of function, region, and business unit in the entire company.

What we did was start training more teams. First, one team at a time. Then four at a time, and then batches of eight, including both new products and new process projects.

1. Start Small This first phase is about looking at the results of early projects and asking what went well and what went poorly.

“The failure pattern is: as you scale your business, you stop applying what you had to do out of necessity when you were smaller. You stop experimenting the way you had to experiment because you didn’t have enough resources to go do a three-year project that goes nowhere. As you grow your organization, you need to make sure that you are able to still continue to experiment and try new things.”

Build Dedicated, Cross-Functional Teams The goal of building cross-functional teams is to harness and share collaborative energy from various disciplines within the organization, allowing functional diversity to grow over time.

FUNCTIONAL AMBASSADORS I want to highlight one additional critical aspect of cross-functionality. Functional team members serve not only as the team’s conscience in their particular area of expertise, but also as enthusiastic ambassadors. As the Startup Way of working starts to spread, it’s important to have people on board who can go back to their colleagues in each function and tell them about the new method.

Over the years, I’ve been repeatedly amazed at how many “impossible” problems could be solved by using the simple process I call the “Golden Sword” because it cuts through bureaucracy in one swift stroke.

A clear falsifiable hypothesis. Without a clear vision of what is supposed to happen, we can’t judge success or failure. And if you cannot fail, you cannot learn.

An obvious next action. Build-measure-learn is a cycle, which means every experiment should lead directly to a follow-on action.

Strict risk containment. What’s the worst that can happen? is usually a question we ask flippantly. But here we really need to know the answer—and make sure we can live with

A tie between what is measured and at least one LOFA.

As one team member summarized the value proposition, “What if we approached the customer and said, ‘Instead of waiting ten years for a turbine that’s 5 percent more efficient, what if we sold you one right now that is pretty good, the added value being that every year from now on, we’ll offer you an upgrade to replace the blades and fans, and tune the turbine to increase efficiency,’ ” the team brainstormed. “ ‘You’ll have the option, once a year, for us to install these parts, and we’ll have a pre-existing contract that says we get paid for every point of efficiency we drive with each new upgrade.’ ” We took this plan to the executives, who were excited about it. It offered a dramatically faster cycle-to-market time, and every iteration would provide greater efficiency.

When experimenting with business models,9 here are a few things to keep in mind: Whose balance sheet should the product be on? Does it really make sense to force a small business or a consumer to pay cash up front? Why make a distinction between product and service? If products are designed to require periodic maintenance, why not take responsibility for providing it? Should a company profit from a product that may not actually fulfill the customer’s needs? By charging only when the product performs—per-use or performance-based compensation—the company stays fully aligned with the customer’s needs. Cycle times are faster when the company controls every aspect of service delivery. Can we take responsibility for intermediate steps in order to bring new innovations to market faster? When a company puts itself on the customer’s side of the transaction (we profit only when they profit), we are able to discover more ways to add value. Are new competitive dynamics available to gain market share? For example, in GE’s commercial lighting division, they have building-maintenance contracts that charge per socket rather than per bulb. GE is responsible for keeping the socket filled and operational. Every socket covered by a long-term agreement of this type effectively shrinks the total available market that is eligible for old-fashioned competitors to pursue.

In Lean Startup terms, we understand cycle time as build-measure-learn, which means that sometimes nontechnical parts of the cycle can be collapsed through business model changes.

METRICS A little farther along on the path of experimentation, it’s important to create metrics to measure the success of entrepreneurial projects.

Dropbox’s two basic metrics were: Virality. “We did not want Paper to become a single-user tool. If someone was using Paper to replace [to-do list software] Evernote, we weren’t interested in that. We needed it to spread and be collaborative.” Week-two retention. “We invited someone, they tried it. Did they come back in week two?”

Work by Exception Every team that’s working in the Startup Way needs to have someone in company leadership they can call upon, when needed, to resolve the toughest problems they face when interacting with the wider organization.

After a few rounds of changes and feedback, they launched the GE Beliefs at the annual officers’ meeting in August of 2014: Customers determine our success. Stay lean to go fast. Learn and adapt to win. Empower and inspire each other. Deliver results in an uncertain world.

Transformation unleashes a huge amount of latent creativity and energy. It makes impossible-seeming things suddenly possible. The key is to be ready.

As with Phase One, there’s no “right” way to go about Phase Two. But there are key patterns and tasks common to organizations that are working their way through this next stage of change. Review and identify challenges faced by Phase One teams and projects. Develop and roll out a widespread system for working in the new way. Identify and make proper use of executive-level champions to reinforce the new methods. Bring internal functions into the transformation process. Create an internal coaching program. Establish growth boards and begin to use metered funding for resource allocation.

I am enormously proud of the fact that I was part of this journey, the really hard work—the behind-the-scenes arm-twisting and the mind-numbing logistics and political machinations—was done by employees of the company. They don’t get the glory in the magazines and business cases, but I witnessed their dedication firsthand. It continues to inspire me.

1. Identify the Challenges Faced by Pilot Teams

Because innovation is a form of positive variation, there is a built-in conflict that almost every manager in the organization will confront. Rather than view these managers as villains, we have to take their objections and skepticism seriously—and find ways to help them support the transformation rather than hinder it.

Identify and Make Proper Use of Executive-Level Champions

Train Representatives of All Internal Functions

Establish an In-House Coaching Program

In my work with organizations, I have generally recommended the term coach to refer to this role. I find it helps cut down on the misunderstandings common among other terms. Once the initiative cascades into Phase Two, developing a cadre of internal coaches who can help teams make the mental shift to the new way of working is essential.

“what mentors should consider if they want to build effective relationships with the entrepreneurs they’re working with.” Be Socratic. Expect nothing in return (you’ll be delighted with what you do get back). Be authentic/practice what you preach. Be direct. Tell the truth, however hard. Listen, too. The best mentor relationships eventually become two-way. Be responsive. Adopt at least one company every single year. Experience counts. Clearly separate opinion from fact. Hold information in confidence. Clearly commit to mentor or do not. Either is fine. Know what you don’t know. Say “I don’t know” when you don’t know. “I don’t know” is preferable to bravado. Guide, don’t control. Teams must make their own decisions. Guide but never tell them what to do. Understand that it’s their company, not yours. Accept and communicate with other mentors who get involved. Be optimistic. Provide specific actionable advice; don’t be vague. Be challenging/robust but never destructive. Have empathy. Remember that startups are hard.

At IBM, coaches assist teams not only in areas where they struggle, but also in organizing and reorganizing groups of people to be even more successful. The coaches focus on three areas: leadership practices, collaboration practices, and technical practices. Coaching isn’t mandatory, but each cross-functional team of eight to ten people is assessed every quarter, and the results are made public via a scoreboard, which provides incentive to take advantage of the program.

At Cisco, coaching is part of a program called My Innovation, which works alongside Cisco’s other innovation initiatives with the broad purpose of engaging, empowering, and enabling its 70,000 employees to experiment with new ideas. The program includes online resources and a go-to portal for people looking for training or mentors throughout the company. To date, two thousand people have signed up to go through coach training.

Mathilde Durvy, an innovation program lead, says the goal is to train coaches for three areas: innovation (design thinking and agile prototyping), business (sales and marketing), and technical.

We all understand what it means to found a company. It starts with a vision and, as we talked about in Chapter 3, a visionary leader.

I call this moment the second founding: It’s the period in a company’s growth when it goes from being just another organization to an institution that’s here to stay.

The innovation accounting process begins with a simple dashboard full of metrics that teams can agree are important.

Per-customer learning metrics include: Conversion rates (such as the percentage of customers who try a free trial of a product who subsequently become paying customers). Revenue per customer (the amount of money customers pay for a product on average). Lifetime value per customer (the amount of money the company accrues from an average customer over the entire “life” of his or her relationship with the company). Retention rate (what percentage of customers are still using the product after a certain amount of time). Cost per customer (how much it costs to serve a customer on average). Referral rate (what percentage of existing customers refer new customers to the product, and on average how many referrals they make per unit of time). Channel adoption (what percentage of the relevant distribution channels carry the product).

The second power of this dashboard is its focusing effect.

New customers come from the actions of past customers. This can happen in one of three ways: The “sticky engine of growth”—Word of mouth referral is higher than the natural attrition rate (and so growth compounds). The “paid engine of growth”—We can take the revenue we get from one customer and reinvest it into new-customer acquisition. The “viral engine of growth”—New customers can be recruited into the product as a side effect of normal usage, as in products like Facebook or PayPal, as well as fashion or other trendy products.

In Level 3 innovation accounting, the goal is to translate learning into dollars by rerunning the full business case after each new data point.

HOW GROWTH BOARDS OPERATE Apart from its legal and compliance obligations, a startup board has three primary responsibilities: To be a sounding board for the founders and executives, helping them plot strategy, and hosting the pivot-or-persevere meeting (see Chapter 4). To act as the central clearinghouse for information about the startup, taking on the burden of reporting on behalf of the founders to key financial stakeholders like general partners and limited partners of the investment firm (see Chapter 3). To be the gatekeepers of future funding, either by writing checks themselves or by encouraging (or vetoing) sources of outside funding