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

by Eric Ries

If I selected an employee of the company at random, from any level or function or region, and that employee had an absolutely brilliant idea that would unlock a dramatic new source of growth for the company, how would he or she get it implemented? Does the company have an automatic process for testing a new idea, to see if it is actually any good? And does the company have the management tools necessary to scale this idea up to maximum impact, even if it doesn’t align with any of the company’s current lines of business? That’s what a modern company does: harnesses the creativity and talent of every single one of its employees.

This setup flips Karl Marx’s old dictum on its head. What he called the means of production can now be rented. Entire global supply chains can be borrowed at little more than the marginal cost of the underlying products they produce. This dramatically lowers the initial capital costs required to try something new. In addition, the basis of competition is shifting. Today’s consumers have more choices and are more demanding. Technology trends reward businesses that have the broadest reach with near-monopoly-type power. The basis of competition is often design, brand, business model, or technology platform.

Sometimes, failure to hit the forecast means a team executed poorly. But sometimes it means the forecast itself was a fantasy. How can we tell the difference?

One of my favorite stories about Sheryl Sandberg, Facebook’s dynamic COO, comes from a company meeting in which employees were complaining about the “unfairness” of having their performance evaluated based on the success of the projects they had worked on, rather than just their individual contribution to those projects. Sandberg acknowledged these concerns, but her reply has stuck with me for years. She asked the employees to imagine a favorite company of theirs that had been disrupted. Kodak, say, or RIM. Imagine all the employees of that doomed company, in the months and years leading up to the disruption. Think of all the people who got positive reviews, got promoted, got paid bonuses for their excellent functional contribution—all while the company went down to ignoble defeat. Do you really want to be one of those managers?

“This is the missing half of the Toyota Production System. We have a system that is outstanding at producing what we specify, with high quality, but we don’t have a corresponding system for discovering what to produce in the first place.”

A modern company is one that has both halves, both systems. It has a capacity to produce products with great reliability and quality, but also to discover what new products to produce.

“Think big. Start small. Scale fast.”

The scarcity of resources most startups deal with argues for more, not less, financial discipline.

The organization must eradicate the many forms of bias that prevent people from bringing their ideas forward or from having their ideas taken seriously. It must invest in systems and processes so that employees know what to do the moment a brainstorm strikes. And, since most ideas are actually bad, it must give employees the platforms for experimentation to discover this on their own.

By giving employees access to equity, startups directly incentivize learning in the most dramatic way. Equity ownership is not a cash bonus. It’s a measurement of what the startup has learned about far future profits. It’s a way to financialize learning.

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.

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. (We’ll go over this in more detail in Chapter 4.)

Among its leap-of-faith assumptions, a startup has two that are fundamental: the value hypothesis,4 which tests whether a product or service really delights customers once they begin using it; and the growth hypothesis, which tests how, given some customers, it’s possible to get more.

In today’s marketplace of uncertainty, whoever learns fastest wins.

“The thing about Minimum Viable Products is that while you decide what’s Minimum, the customer decides if it’s Viable,” writes David Bland,

ACCOUNTABILITY: the systems, rewards, and incentives that drive employees’ behavior and focus their attention. What are people compensated for, promoted for, celebrated for, or fired for in the organization? What performance objectives really matter for employees’ careers at the end of the day? Accountability systems must be aligned with the goals—both long- and short-term—that the company wants to achieve.

PROCESS concerns the tools and tactics that employees habitually use every day to get work done, such as project planning, management, team coordination, and collaboration. Process flows out of accountability, because every company’s accountability systems constrain its choices.

CULTURE: the shared, often unstated, beliefs that determine what employees believe to be possible, because “that’s just the way things are around here.” Culture is the institutional muscle memory, based not on how the organization aspires to operate but on how it really has in the past.

PEOPLE: the ultimate corporate resource. A toxic or old-fashioned culture repels innovative talent. Ultimately, the success of any organization depends on the caliber of the people it is able to attract and retain.

To incubate a new culture requires individual teams to self-organize. New cultures come from the lived experience of seeing a new way succeed.

If you can’t fail, you can’t learn. Experimenting rapidly, teams learn for themselves what’s important, and the lessons teams learn—about customers, about the market, about themselves—are much more profound than they would be otherwise.

Leading indicators come in many forms. Their purpose is to track signs that the process is working at the team level. The goal is to show that the probability of something good happening is increasing.

emphasizes standardization and the elimination of variance. Because innovation is a form of positive variation, there is a built-in conflict that almost every manager in the organization will confront.

The pathological case is the manager who realizes that, by pushing ship dates and accountability deadlines far enough into the future, he or she might be promoted out of his or her current position before ever being held accountable. In that case, his or her successor will be forced to deal with the consequences. If things go well, credit is easy to share. If things go poorly, the successor tends to get the blame.

the key antidote to entitlement funding is what I call metered funding. This is the deal with metered funding: absolute freedom to spend the money, with extremely strict criteria for how to unlock more, denominated only in validated learning.

They’d gone from being gatekeepers to being entrepreneurs,

“In our old way of working,” Beihl explains, “we would have told them they were doing it ‘wrong’ and helped them ‘fix’ it. Now we understood how they were actually acting and pivoted the approach to meet that.”

Innovation Accounting (IA) is a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero.

The key piece of data in this process is the per-customer input, something that can be measured in a sample of any size; it’s the same currency whether you’re looking at one customer, ten customers, or ten times that many. And, critically, you can show changes to it over time much earlier than you could show other significant gross numbers. 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).

it’s essential that the dashboard encompass the value hypothesis and the growth hypothesis (from Chapter 4). Making these two concepts quantitative is a big improvement over the common way investors and entrepreneurs alike talk about product/market fit. For the value hypothesis: What is the specific customer behavior that indicates delight with the product?5 In Level 1, we might use a proxy variable for this, like net promoter score (NPS)6 or GrowthHackers founder and CEO Sean Ellis’s “very disappointed” survey.7 These are good indicators of customer satisfaction, but they are hard to translate into dollars and cents. How do we know what NPS score is “good enough” to convince people to invest more time and money into a project? By contrast, a Level 2 value hypothesis indicator should measure a behavior like repeat purchase, retention, willingness to pay a premium price, or referral. What threshold is “good enough”? That’s easy to answer now: whatever number is required to make our business plan’s spreadsheet add up.

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.

good description of viral growth

A growth board is simply the purely internal version of a startup board: a group of people who meet on a regular basis to hear from teams about their progress and to make funding decisions.

it’s the context in which you work that makes you an entrepreneur, not any surface quality.

There is the striking evidence that the inhibiting effect of uncertainty about health insurance is more than just anecdotal. For example, a RAND study examined the rate of entrepreneurship in the United States population by age cohort. The rate holds steady for most ages, but here’s what happens among older Americans: The rate of entrepreneurship spikes as soon as people turn sixty-five and become eligible for government-sponsored insurance in the form of Medicare.

Every organization owes this simple bill of rights to its every member: The right to know that the work I do all day is meaningful to someone other than my boss. The right to have my idea turned into a minimum viable product and evaluated rigorously and fairly. The right to become an entrepreneur at any time, as long as I’m willing to do the hard work to make things happen with limited resources. The right to stay involved with my idea as it scales, as long as I am contributing productively to its growth. The right to equity ownership in the growth I help to create, no matter my role or job title.